IAS 41 disclosures, cattle, IFRS 13 level 2 and level 3 valuations

Australian Agricultural Company Limited – Annual report – 31 March 2019

Industry: agriculture

A FINANCIAL PERFORMANCE (extract)
A1 Significant matters (extract 1)
Gulf flooding event
In February 2019, a significant flood event swept through the Gulf of Carpentaria Region of North Queensland. At its peak, flood waters extended 400km from the Gulf to Julia Creek, and reached approximately 70km wide in many areas. For much of the region that experienced this event, flood waters reached unprecedented levels.

The floods, running nearly half the length of the Flinders river, impacted four of AACo’s stations in the gulf region. Canobie, Wondoola, Carrum and Dalgonally experienced infrastructure and livestock losses.

Approximately 82,000 head of cattle were exposed to this event, with total losses estimated at 43,000 head. Additionally, fencing and water infrastructure on all four properties, as well as buildings at Wondoola station, were damaged.

Due to the significant nature and materiality of the event, Management have recorded estimates for the losses incurred on these properties.

Determining the extent of livestock losses, across these four stations’ 860,000 hectares of land, is inherently challenging. The losses recorded were therefore based on the best available information of the event and Management’s best estimates and judgement.

These estimates were performed on a station by station basis, using a combination of observations of surviving animals and damaged infrastructure, as well as applying expected survival rates by paddock against pre-event paddock records. Estimated survival rates were based on Management’s understanding of livestock vulnerabilities in these events, knowledge of the land’s topography, as well an in-depth understanding of how the event unfolded and how individual paddocks were impacted.

Livestock losses were estimated to be 43,000 head for a value of $45.6 million and recorded in the Income Statement as fair value losses on cattle due to attrition – gulf flood write-off (see note A3).

Costs to replace damaged infrastructure to a state that supports the externally assessed long-term carrying capacity of the properties were estimated to be $5.0m. This was adjusted against the Asset Revaluation Reserve in the equity section of the Balance Sheet. The estimate of losses recorded in the FY19 results is materially consistent with those announced to the market on 11 March 19.

A1 Significant matters (extract 2)
Herd Profile
The closing herd numbers are 32.6% lower than prior year, due to increased composite cattle sales following the 1824 and Livingstone decisions. Dry seasonal conditions have also lead to an increased sell-off of these composite herd animals, as the Company focuses resources on our core Wagyu herd assets. Wagyu herd numbers have marginally increased by 3% from the prior year.

The Gulf flood event resulted in approximately 43,000 head written off, as well as a reduced accrual for unbranded calves due to the gulf flood event.

Herd Valuation
Market value adjustments arising from market price changes to the herd values at the close of the period resulted in an unrealised cattle price loss of $89.0 million driven by a decrease in cattle market prices.

A3 Livestock

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(1) As a biological asset, AASB 141 Agriculture requires the livestock to be valued at fair value at all times prior to sale or harvest. As such, value increases occur through change in fair values rather than sales margin.
(2) Biological transformation in accordance with Australian Accounting Standard AASB 141 Agriculture, includes reclassification of an animal as it moves from being a branded calf and progresses through the various stages to become a trading animal and then as it ages. All these changes occur and are measured before the ultimate sale (cash realisation).
(3) Due to the Gulf flooding event in February 2019, the Company recognised an additional attrition reflecting livestock lost in this unprecedented natural disaster.

Accounting Policies – Livestock
Livestock is measured at fair value less costs to sell, with any change recognised in the income statement. Costs to sell include all costs that would be necessary to sell the assets, including freight and direct selling costs.

The fair value of livestock is based on its present location and condition. If an active or other effective market exists for livestock in its present location and condition, the quoted price in that market is the appropriate basis for determining the fair value of that asset. Where the Company has access to different markets, then the most relevant market is used to determine fair value. The relevant market is defined as the market “that access is available to the entity” to be used at the time the fair value is established.

If an active market does not exist, then one of the following is used in determining fair value in the below order:

  • the most recent market transaction price, provided that there has not been a significant change in economic circumstances between the date of that transaction and the end of the reporting period
  •  market prices, in markets accessible to us, for similar assets with adjustments to reflect differences
  •  sector benchmarks

In the event that market determined prices or values are not available for livestock in its present condition, the present value of the expected net cash flows from the asset discounted at a current market determined rate may be used in determining fair value.

Livestock fair value
At the end of each reporting period, we measure livestock at fair value. The fair value is determined through price movements, natural increase and the weight of the herd.

The net increments or decrements in the market value of livestock are recognised as either revenue or expense in the income statement, determined as:

  • The difference between the total fair value of livestock recognised at the beginning of the financial year and the total fair value of livestock recognised as at the reporting date; less
  • Costs expected to be incurred in realising the market value (including freight and selling costs).

Fair Value Inputs are summarised as follows:
Level 1 Price Inputs – are quoted prices (unadjusted) in active markets for identical assets or liabilities that can be accessed at the measurement date.

Level 2 Price Inputs – are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices).

Level 3 Price Inputs – are inputs for the asset or liability that are not based on observable market data (unobservable inputs).

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(1) Unbranded calves are assessed at each reporting date based on information available at the time. The Company does not track individual calves until such time as they have been branded and recorded in the livestock management system.

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D FINANCIAL RISK MANAGEMENT (extract)
D3 Commodity price risk
We have transactional commodity price risk primarily in the sale of cattle and beef. Other commodity price exposures include feed inputs for our feedlot operations, and diesel. Purchases of commodities may be for a period of up to 12 months and partial hedging of these inputs may be for periods of up to 24 months.

Our exposure to derivative commodity price risk is minimal. We do not currently apply hedge accounting to our beef commodity price exposures as the derivatives do not meet the accounting standard requirements for hedge accounting. However, we have a policy whereby we will forward sell a significant proportion of our feedlot cattle sales for a period of up to 6 months. These contracts are entered into and continue to be held for the purpose of delivery of feedlot cattle arising from our expected sale requirements; they are classified as non-derivative and are not required to be fair valued.

We enter into forward purchase contracts for grain commodities. This practice mitigates the price risk for the Company. As at 31 March 2019, we had forward purchased approximately 51% (31 March 2018: 58%) of our expected grain usage for the coming 12 months. These contracts are entered into and continue to be held for the purpose of grain purchase requirements; they are classified as non-derivative and are not required to be fair valued. At the reporting date we had no commodity price exposures on forward sales and purchase contracts that are not designated as cash flow hedges.

E1 Commitments (extract)
Other commitments
We have entered into forward purchase contracts for $19.3 million worth of grain commodities as at 31 March 2019 (31 March 2018: $14.6 million) and forward purchase contracts for $15.8 million worth of cattle as at 31 March 2019 (31 March 2018: $21.5 million). The contracts are expected to be settled within 12 months from balance date.

No capital expenditure has been contracted in respect of property, plant and equipment as at 31 March 2019 (31 March 2018: $0.5 million).

OPERATING AND FINANCIAL REVIEW (extract)

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