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

Australian Agricultural Company Limited – Annual report – 31 March 2018

Industry: agriculture

A FINANCIAL PERFORMANCE (extract)

A1 Significant matters (extract)

Herd Profile

The closing herd size increased by 2.5% or 13.6 thousand head (5.9 mil kg LW) in FY18. This included an 11 thousand head attrition adjustment. The Company’s ability to estimate attrition has improved due to the ongoing investment in individual animal identification systems. The closing herd position was also impacted by lower cattle purchases.

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 $71.1 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).

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; or
  • market prices, in markets accessible to us, for similar assets with adjustments to reflect differences; or
  • 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 cashflows 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)

(iii) 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 2018, we had forward purchased approximately 58% (31 March 2017: 62%) 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 $14.6 million worth of grain commodities as at 31 March 2018 (31 March 2017: $14.1 million) and forward purchase contracts for $21.5 million worth of cattle as at 31 March 2018 (31 March 2017: $42.8 million). The contracts are expected to be settled within 12 months from balance date.

Capital expenditure has been contracted in respect of property, plant and equipment for $0.5 million as at 31 March 2018 (31 March 2017: $2.9 million).

OPERATING AND FINANCIAL REVIEW (extract)

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