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

Australian Agricultural Company Limited – Annual report – 31 March 2020

Industry: agriculture

A FINANCIAL PERFORMANCE (extract)

A1 Significant matters (extract 1)

Herd Numbers

The closing herd head count is 19.1% lower than prior year, as Management responded to continued dry seasonal conditions and changes to the supply chain through strategic destocking.

Herd Valuation

Improvements in cattle market prices since 31 March 2019 have resulted in an unrealised gain in the fair value of the herd of $104.1 million.

A1 Significant matters (extract 2)

Impacts of Coronavirus (COVID-19)

Valuations included in the financial report such as the valuation of Pastoral property and improvements and Livestock are based on information available and relevant as at 31 March 2020, which is the Company’s balance date. As market conditions are changing daily particularly due to the uncertainty surrounding COVID-19, the values of these assets may have changed after the financial year-end and the related impact on the Company’s FY21 results cannot be reasonably estimated at this stage.

A3 Livestock

(1) As a biological asset, AASB 141 Agriculture requires the livestock to be valued at fair value less costs to sell at all times prior to sale or harvest. As such, value increases occur through changes in fair value 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, grows, ages, and progresses through the various stages to become a trading or production animal.

(3) Due to the Gulf flooding event in February 2019, the Company recognised 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 profit or loss. 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 less costs to sell. The fair value is determined through price movements and movements in the weight of the herd due to growth, attrition, natural increase, harvest or sale.

The net increments or decrements in the market value of livestock are recognised as either gains or losses in the profit or loss, 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).

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 2020, we had forward purchased approximately 56% (31 March 2019: 51%) 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

We have entered into forward purchase contracts for $7.3 million worth of grain commodities as at 31 March 2020 (31 March 2019: $19.3 million) and forward purchase contracts for $39.5 million worth of cattle as at 31 March 2020 (31 March 2019: $15.8 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 2020 (31 March 2019: $nil).

F12 Significant Events After Balance Date

COVID-19 was declared a global pandemic by the World Health Organisation on 11 March 2020. The impact of the virus has seen an unprecedented global response by governments, regulators and numerous industry sectors. The Company’s financial results for FY20 have not been materially impacted by COVID-19 due to changes in the Company’s supply chain and sales falling after the end of financial year.

Following the financial year-end, the Company has taken several steps to manage impacts of COVID-19, including accelerating our allocation of products to the retail markets, modifying sales and marketing priorities, and reducing salaries of Directors, Executives and corporate staff.

Valuations included in the financial report, such as the valuation of Pastoral property and improvements and Livestock, are based on information available and relevant as at 31 March 2020, which is the Company’s balance date. As market conditions are changing daily, the values of these assets may have changed after the financial year-end.

The Company continues to monitor developments in the COVID-19 pandemic and the measures being implemented on the economy to control and slow the outbreak. Given the dynamic nature of these circumstances and the significant increase in economic uncertainty, the related impact on the Company’s go forward consolidated results of operations, cash flows and financial condition cannot be reasonably estimated at this stage and will be reflected in the Company’s 2021 interim and annual financial statements.

There have been no other significant events after the balance date which require disclosure in the financial report.

OPERATING AND FINANCIAL REVIEW (extract)