Value relevance of biological assets under IFRS

Abstract

The aim of this paper is to examine the value relevance of fair value accounting of biological assets under IAS 41 -Agriculture -using 389 firm-year observations of listed firms in 27 countries worldwide that had adopted IFRS, for the period between 2011 and 2013. In order to operationalize it as the ability of book value to explain market equity value, this study adjusts the original Ohlson model. The results confirm that recognized biological assets are value relevant at fair value and they are more value relevant in firms that exhibit higher disclosure levels. The same results were obtained when this analysis was conducted for bearer biological assets, but when it was applied to consumable biological assets, the results suggest that investors do not value recognized biological assets in firms that exhibit higher disclosure levels. Bearing in mind the current adjustments to IAS 41, according to which firms will be permitted to choose either the cost or the revaluation models for mature bearer plants under IAS 16 -Property, plant and equipment -for annual periods beginning on/or after 1 January 2016, this paper seeks to help standard setters to better understand the market valuation implications of this standard.

The influence of mandatory adoption of IFRS in Argentina on value relevance of accounting information

“…The valuation framework provided by Ohlson (1995), which relates equity prices to Net Earnings and the Book Value of Equity, can be considered the main reference model in this area of research. The framework has been adapted to test different components of the financial statements; for example, in a recent paper, Gonçalves et al (2017) Khan, Bradbury, and Courtenay (2017) investigated the value relevance of comprehensive income and its components, with an emphasis on the asset revaluation reserve and the change in fair value of available-for-sale securities.…”

A review of the IFRS adoption literature

“…Huffman (2014) studies the value relevance of fair value accounting for biological assets and concludes that book value of equity and earnings are more value relevant for consumable biological assets (i.e., agricultural products such as crops or timber that realize value on a standalone basis and whose value to the firm is linked to what may be exchanged for the asset in the marketplace) measured at fair value and bearer biological assets (i.e., self-regenerating assets such as orchards or oil palm plantations that are used in combination with other assets in the ongoing operations of the firm) measured based on historical costs. 58 However, using a larger sample, Goncalves and Lopes (2015) find that fair values are value relevant for both consumable and bearer biological assets but do not reconcile their results with those 58 Effective January 1, 2016, IFRS require firms to account for bearer biological assets such as property, plant, and equipment.…”

Fair Value of Biological Assets: An Interdisciplinary Methodological Proposal

“…Despite the subjectivity implicit in the measurement of assets, it is believed that the disclosure in Explanatory Notes of the assumptions used in all variables, make the information verifiable, controlling the effects of subjectivity. This view is supported by the study by Gonçalves, Lopes, and Craig (2017) who verified that the fair value of biological assets is relevant, especially in companies with higher levels of disclosure. Therefore, what is proposed is to increase the reliable representation of the biological assets in the financial statements, giving greater emphasis on the quantity variable that is determinant in the measurement of these assets.…”