Valuation of Biological Assets at Fair Value: A Technical Publication, Exams of Accounting

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VALUATION OF BIOLOGICAL

ASSETS AT FAIR VALUE

For purposes of compliance with

accounting standards

TECHNICAL TEAM

STUDY COORDINATOR

Agrº Engº Marcelo Rossi de Camargo Lima

STUDY DEPUTY COORDINATORS

Silvia Benati Bufalino, Rafaela Mazza, Camila Klock de Lima, Daniel Cifu, Talita Gonsales and Italo Brilha

STUDY COLLABORATORS

Carina Oliveira Reis, Cristiano G Pereira, Evandro Soares, Link Costa Liz Rabelo, Lucas Palamim, Maria Luiza Padilha, Paul Angst Sergio Fleury Dias, Vicente Parente, Marcelo Bezerra Machado and Lucimara Roncolato

Translation of the Portuguese version into English by KPMG

“Valuation of biological assets at fair value” is a technical publication of the IBAPE/SP Valuation Chamber.

THE BRAZILIAN INSTITUTE OF ENGINEERING VALUATIONS

AND EXPERT ASSESSMENTS OF SÃO PAULO (IBAPE/SP)

Affiliated to IBAPE – a National Federal Entity – traded association formed by Engineers, Archi- tects and accredited Companies operating in the area of VALUATIONS, ENGINEERING EXPERT ASSESSMENTS, BUILDING INSPECTIONS AND ENVIRONMENTAL SURVEYS in the State of São Paulo, incorporated on January 15, 1979.

The Institute is a not-for-profit entity engaged in bringing such professionals together for the exchange and dissemination of information and technical advances. It also promotes the pro- fessional and moral interests of its members and aims at the professional improvement in the areas concerned, offering courses, seminars, workshops, lectures, technical meetings, books, articles and standards.

With its own head office, the Institute offers a specialized library, meeting rooms and an audi- torium duly equipped for the technical events offered to its members and other professionals working in the areas of Engineering of Valuations, Expert Assessments, Surveys and Building Inspections.

ABOUT US

We would like to conclude by congratulating the Working Group, which was able to combine qualities that are sometimes opposing in this booklet: simplicity, practicality and depth. This publication has made an important contribution to bring the work closer to the needs of organizations and stakeholders in their financial statements.

Eng. Antonio Carlos Dolacio President

Eng. Luiz Henrique Cappellano Technical Director

CONTENTS

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VALUATION OF BIOLOGICAL ASSETS AT FAIR VALUE

1.1 TIMELINE - ACCOUNTING STANDARDS

Attention : The definitions and technical terms are explained in section 3.

a) 2001: The International Accounting Standards Board published the first standard in- tended for the agricultural sector: IAS 41 – Agriculture. b) 2009: The Accounting Pronouncements Committee (CPC) published the Brazilian stan- dard correlated to IAS 41: CPC 29 – Biological Assets and Agricultural Produce. c) 2014: : IAS published Agriculture: Bearer Plants (Amendments to IAS 16 and IAS 41), amendment that introduced the concept of bearer plant. d) 2015: Review 8 was then published, amending CPC 29 and introducing the concept of bearer plant. e) Pursuant to Law No. 11,638, dated December 28, 2007, and Law No. 11,941^1 , dated May 27, 2009^2 , Brazilian financial statements correlate with International Financial Reporting Standards (IFRS). In 2009, the Accounting Pronouncement Committee published the CPC 29 - Biological Assets and Agricultural Produce^3 with the purpose of defining the accounting treatment and the respective disclosures regarding biological assets and agricultural products. The corresponding international standard is IAS 41 – Agriculture. f ) Pursuant to CPC 29, biological asset is a live animal and/or plant.

g) According to CPC 29, the biological asset or agricultural produce shall be measured at fair value less costs to sell. For fair value purposes, CPC 46 – Fair Value Measurement 4 shall be referred, which provides that the fair value is the price received upon the sale of an asset or which would be paid by transfer of a liability of a non-forced transaction between market participants at the measurement date.

(^1) BRASIL, 2007. (^2) BRASIL, 2009. (^3) CPC 29, 2009 http://www.cpc.org.br/CPC/Documentos-Emitidos/Pronunciamentos/

4 Pronunciamento?Id=60 Check if this replacement is correct CPC http://www.cpc.org.br/CPC/Documentos-Emitidos/Pronunciamentos/Pronunciamento?Id=

1. INTRODUCTION

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VALUATION OF BIOLOGICAL ASSETS AT FAIR VALUE

h) The following are not biological assets: assets that are not intended to generate future income for the company, for example: bearer plants, fungi and racehorses.

i) In June 2014, the IFRS published an amendment that affects the accounting treatment of biological assets: Agriculture: Bearer Plants (Amendments to IAS 16 and IAS 41). Ac- cording to the International Accounting Standards Board (IASB), the body responsible for developing the aforementioned international accounting guidance, the dissocia- tion between the concepts of biological asset and bearer plant solves some of the questions that have been asked about mature plants that produced fruits (until that moment valued at fair value).

j) According to CPC 29, the bearer plant is a living plant that: (a) is used in the production or supply of agricultural produce; (b) is expected to bear produce for more than one period; and (c) has a remote likelihood of being sold as agricultural produce, except for incidental scrap sales.

k) Since the plant is already at its peak of development, not undergoing significant changes, such a determination of fair value was unnecessary. The bearer plant is within the scope of CPC 27 – Property, Plant and Equipment^5.

l) This amendment reached Brazil in 2015, through Review 8 of the accounting pro- nouncements. Thus, the accounting periods beginning after January 1, 2016 must com- ply with the changes in the standard.

In summary, Chart 1 indicates the main Accounting Pronouncements (CPCs) involved in the valuation of biological assets and bearer plants.

Chart 1 – Main CPCs on biological assets

FAIR VALUE BIOLOGICAL ASSETS BEARER PLANT CPC 46 CPC 29 CPC 27 Fair Value Measurement Biological Assets andAgricultural Produce Property, Plant andEquipment

(^5) http://www.cpc.org.br/CPC/Documentos-Emitidos/Pronunciamentos/Pronunciamento?Id=

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VALUATION OF BIOLOGICAL ASSETS AT FAIR VALUE

i) The agricultural produce explained in ABNT NBR 14.653-3 does not meet the concept of biological asset and bearer plant. They are used in the valuation of real estate and must not be used for accounting purposes of CPC 29.

j) Review 8 of CPC 29 changed the scope of the fair value calculation of biological assets, since the concept of bearer plant was introduced, as defined in Section 3.

k) The CPC 29/IAS 41 pronouncement introduced major innovations in the treatment of biological assets, aiming to present:

1.3 OBJECTIVE AND SCOPE

a) Help the industry by promoting a greater standardization of the methodologies used to calculate biological assets;

b) Assist in discussions between clients and auditors;

c) Facilitate compliance with CPC 29;

d) Interpretation of standards (CPC 29 and CPC 46);

e) Adoption of Valuation techniques for fair value measurement of biological assets.

The following is not within the scope of this booklet: (i) measurement of bearer plants, (ii) re- productive improvements (ABNT) and (iii) Purchase Price Allocation (PPA).

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VALUATION OF BIOLOGICAL ASSETS AT FAIR VALUE

The general principles for valuing biological assets are discussed below according to the Ac- counting Pronouncements Committee (CPC).

2.1 GENERAL POINTS

Chart 2 lists the main points of the standards related to biological assets (CPC 29) and their measurement (CPC 46).

Chart 2 - Main points of the standards related to biological assets (CPC 29) and their measure- ment (CPC 46).

CPC ITEM PAGE TRANSCRIPTION GUIDANCE ON FAIR VALUEMEASUREMENT TECHNIQUES 29 3 2 “This Pronouncement is applied to agricultural produce, which is the harvested produce of the entity’s biological assets, at the point of harvest. Thereafter, CPC 16 – Inventories or another applicable Technical Pronouncement is applied. Accordingly, this Pronouncement does not deal with the processing of agricultural produce after harvest.”

After harvesting, CPC 16 – Inventories shall be applied; i.e., if the grain/fiber has already been harvested on the base date, it is not within the scope of CPC 29. At the point of harvest, the fair value can be measured using the market methodology (Market Approach). At this point, that is, at the point of harvest, there is no justification for the asset not being valued, since there is an active market. Before that, due to the lack of an active market, it is common to use the Income Approach methodology.

29 5 4 “A biological asset is a living animal or plant.”

The biological asset is only what is alive on the base date of the valuation; that is, still planted in the field.

2. PRINCIPLES

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VALUATION OF BIOLOGICAL ASSETS AT FAIR VALUE

CPC ITEM PAGE TRANSCRIPTION GUIDANCE 29 8 5 “Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. (See CPC 46 Technical Pronouncement – Fair Value Measurement).”

This item refers to CPC 46 – Fair Value, since it is applicable to the fair values of biological assets. Pursuant to CPC 29, fair value is “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.”

46 62 12 “The purpose of using a valuation technique is to estimate the price at which an orderly transaction for selling the asset or transferring the liability would be made between market participants on current market conditions at the measurement date. Three widely used valuation techniques are (i) market approach, (ii) cost approach and (iii) income approach. The main aspects of these approaches are summarized in items B5 to B11. The entity shall use valuation techniques consistent with one or more of these approaches to measure fair value.”

CPC 46, in line with asset valuation standards, outlines the approaches that can be adopted to measure fair value, such as: market approach, cost approach or income approach. Such approaches will be detailed in Chapters 4 and 5 of this booklet.

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VALUATION OF BIOLOGICAL ASSETS AT FAIR VALUE

CPC ITEM PAGE TRANSCRIPTION GUIDANCE 46 65 13 “Valuation techniques used to measure fair value shall be applied consistently. However, a change in a valuation technique or its application (e.g. a change in its weighting when multiple valuation techniques are used or a change in an adjustment applied to a valuation technique) is appropriate if the change results in a measurement that is equally or more representative of fair value in the circumstances. That might be the case if, for example, any of the following events take place:” (a) new markets develop; (b) new information becomes available; (c) information previously used is no longer available; (d) valuation techniques improve; or (e) market conditions change.

CPC 46 indicates the valuation techniques, but it is not the source/ bibliography for this matter. We refer to the current and established valuation standards and methodologies. However, it is clear from CPC that improvements in valuation techniques may occur and shall be considered in the fair value calculation.