Fair Value and Farming — Turning Growth Into Numbers Without Guessing

10 Feb

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Fair Value: Uncomfortable, but Unavoidable

IAS 41 requires most biological assets to be measured at fair value. There is no clever workaround for this.

To help, IAS 41 relies on IFRS 13, which explains how fair value should be determined.

The principle is simple: use the best market information available.

When the Market Does the Work for You

If there is an active market, fair value is straightforward. Milk prices, meat prices, fruit prices, and timber prices often come from active markets. These prices provide strong evidence of fair value.

For agricultural produce, this is often the case. For biological assets close to sale or harvest, it may also work.

When the Market Is Helpful but Not Perfect

Sometimes there is no active market for the exact asset, but there are markets for similar assets. Recent sales of similar livestock or crops can be used, adjusted for age, weight, or condition.

This still relies on market data, just not perfect matches.

When the Market Is Silent

Most biological assets end up here.

Young animals, immature trees, and long production cycles often have no market price. In these cases, fair value is usually determined using discounted cash flow models.

A simple example helps. Imagine a business growing trees that will be harvested in five years. There is no market for five-year-old trees, but there is a market for mature timber. The accountant estimates future selling prices, estimates future growing costs, and discounts those cash flows back to today using an appropriate discount rate. That present value becomes fair value today.

What Goes Into the Calculation (and What Must Stay Out)

Only cash flows directly related to the asset are included. Feed, fertiliser, labour, veterinary care, and maintenance are all included.

Income tax and financing costs are never included. Fair value reflects how the market would price the asset, not how the business finances itself.

The Rare Moments Cost Is Allowed

IAS 41 allows cost only in limited situations, usually when very little biological transformation has occurred or when fair value cannot be measured reliably at initial recognition. These situations are rare and temporary.

Once fair value becomes measurable, the business must use it.

Why IAS 41 Is Difficult — and Why It’s Worth Mastering

IAS 41 forces accountants to accept unrealised gains and losses. But it also tells the truth. Growth has value. Risk matters. Agriculture is unpredictable.

For accountants advising agricultural clients, understanding IAS 41 is not about compliance alone. It is about credibility, better advice, and protecting clients from financial and tax surprises.

Accounting for life will never be neat, but it can be done well.

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