IAS 41, IFRS 13 certain disclosures, crops, poultry, milk and breeding cattle

AB Linas Agro Group – Annual report – 30 June 2021

Industry: agriculture

AB Linas Agro Group, code of legal entity 148030011, Smėlynės St. 2C, Panevėžys, Lithuania

Consolidated and Company‘s Financial Statements for the financial year 2020/21 ended 30 June 2021 (all amounts are in thousand euros unless otherwise stated)

2. Accounting principles (extract)

2.10. Biological assets

The Group’s biological assets include animals and livestock, poultry and crops.

Animals and livestock are accounted for at fair value less costs to sell. The fair value of milking cows is measured using discounted cash flows method (level 3). Other livestock is measured at comparable market prices (level 2).

Poultry is accounted for at fair value less costs to sell. The fair value of poultry is measured based on future value of chickens/meat broilers/eggs less costs to maintain (level 3).

Crops are accounted for at fair value less costs to sell. The fair value of crops is measured at comparable market prices prices based on expected yield (level 3).

Agricultural produce harvested from an entity’s biological assets is measured at its fair value less estimated costs to sell at the point of harvest. Such measurement is further the cost of inventories.

As at 30 June 2021 and 30 June 2020 the management of the Group treats all animals and livestock (excluding eggs and broilers) as non-current assets and all crops, eggs and broilers as current.

All changes in fair value of biological assets were accounted for under cost of sales caption in the statement of comprehensive income.

2.26. Fair value measurement

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either:

  • In the principal market for the asset or liability, or
  • In the absence of a principal market, in the most advantageous market for the asset or liability.

The principal or the most advantageous market must be accessible to the Group.

The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest. A fair value measurement of a non-financial asset takes into account a market participant’s ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use.

The Group uses valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximising the use of relevant observable inputs and minimising the use of unobservable inputs.

All assets and liabilities for which fair value is measured or disclosed in the financial statements are categorized within the fair value hierarchy, described as follows, based on the lowest level input that is significant to the fair value measurement as a whole:

  • Level 1 — Quoted (unadjusted) market prices in active markets for identical assets or liabilities;
  • Level 2 — Valuation techniques for which the lowest level input that is significant to the fair value measurement is directly or indirectly observable;
  • Level 3 — Valuation techniques for which the lowest level input that is significant to the fair value measurement is unobservable.

For assets and liabilities that are recognised in the financial statements on a recurring basis, the Group determine whether transfers have occurred between levels in the hierarchy by re-assessing categorization (based on the lowest level input that is significant to the fair value measurement as a whole) at the end of each reporting period.

Valuations are performed by the Group’s management at each reporting date. For the purpose of fair value disclosures, the Group and the Company have determined classes of assets and liabilities on the basis of the nature, characteristics and risks of asset or liability and the level of the fair value hierarchy as explained above.

2.27. Use of significant accounting judgments and estimates in the preparation of financial

Statements (extract)

Significant accounting estimates (extract)

Valuation of biological assets

As at 30 June 2021 and 30 June 2020 the Group did not have an independent appraisal of its biological assets. According to IFRS, such assets must be recorded at fair value. Biological assets mostly consist of three groups: animals and livestock, poultry and crops which are accounted for at fair value less costs to sell (Note 2.10).

The fair value of biological assets of the Group is determined on a recurring basis. The management determines key assumptions based on historical figures and the best estimate as at the reporting date. Applied unobservable assumptions are challenged on a regular basis and adjusted after back testing is performed. Other observable inputs used are based on publicly available sources (prices in the market). The management of the Group constantly analyses the changes in fair value and assesses what has the biggest influence on it – quantity produced, sales prices and etc.

Animals and livestock are valued in two ways: milking cows are valued using discounted cash flows method less costs to sell (level 3) and other groups of livestock at market prices less cost to sell at the reporting date (level 2). Crops are valued at market prices based on expected yield less costs to sell at the reporting date (level 3).

Poultry are valued in the following way:

Hatching chicken are valued based on the future value of the produced eggs less costs to maintain the chicken until end of its production period, slaughter costs as well as costs to sell at the reporting date (level 3).

Meat broilers are valued taking into account the average age of the chicken and its respective market value between the value range of day one and value at the moment of slaughtering the chicken (level 3).

Milking cows

The management of the Group decided to assess fair value of milking cows based on the discounted cash flows method because there is no active reliable market for such livestock and because this method is the most accurate estimation of the fair value of milking cows.

As at 30 June 2021 the key assumptions used to determine fair value of milking cows are the estimated milk selling price for the expected average productive life of a milking cow (EUR 0.33 for the year ending 30 June 2022 and EUR 0.33 for the year ending 30 June 2023) used to calculate the expected future cash inflows as well as pre-tax discount rate (5.27%). As at 30 June 2020 the key assumptions used to determine fair value of milking cows were the estimated milk selling price (EUR 0.33 for the year ending 30 June 2021 and EUR 0.33 for the year ending 30 June 2022) used to calculate the expected future cash inflows as well as pre-tax discount rate (5.27%).

The following table demonstrates the sensitivity of the fair value of milking cows to a reasonably possible change in key assumptions and its effect on profit or loss. There is no effect to other comprehensive income.

Crops

As at 30 June 2021 and 2020 the key assumptions used to determine fair value of crops are the estimated yield ranges depending on the type of crops (4,0– 8,0 tones/ha for the year ending 30 June 2021 and 4,0– 9,0 tones/ha for the year ending 30 June 2020) and the expected sales price, which was based on the estimated future grain and oilseeds sales price of the deliveries taking place September – December of the respective year.

The following table demonstrates the sensitivity of the fair value of crops to a reasonably possible change in key assumptions and its effect on profit or loss. There is no effect to other comprehensive income.

Poultry

As at 30 June 2021 and 2020 the main assumptions used to determine fair value of hatching chicken are the price of the incubation eggs (EUR 0.15-0.27 for the unit; EUR 0.16-0.26 for the unit in previous financial year) which was estimated based on publicly available yearly average market price and the average number of hatching eggs produced per hatching chicken in the lifetime (151.6 units for financial year and 151.6 units – previous financial year).

The following table demonstrates the sensitivity of the fair value of hatching chickens to a reasonably possible change in key assumptions and its effect on profit or loss. There is no effect to other comprehensive income.

As at 30 June 2021 and 2020 the main assumptions used to determine fair value of broilers are the market price of chickens (EUR 0.42 for 1 day old and EUR 2.25 for 36 days old) which was estimated based on actual purchases/sales taking place close to the 30 June 2021 and broiler weight of 2.22 kg as at 36 days old (as at 30 June 2020 – 2.21 kg as at 36 days old).

The following table demonstrates the sensitivity of the fair value of broilers to a reasonably possible change in key assumptions and its effect on profit or loss. There is no effect to other comprehensive income.

10.Biological assets

Fair value of the Group’s animals and livestock:

As at 30 June 2021 part of poultry amounting to EUR 2,394 thousand is disclosed as current assets (EUR 2,580 thousand as at 30 June 2020).

Fair value of the Group’s crops (level 3):

During the years ended 30 June 2021 and 2020 there were no transfers between the different levels of fair value hierarchy.

As at 30 June 2021, part of animals and livestock of the Group with the carrying value of EUR 6,241 thousand (EUR 7,582 thousand as at 30 June 2020) were pledged to banks as a collateral for the loans (Note 19).

23.Cost of sales

* Cost of inventories recognised as an expense includes previous season fair value adjustment to sold crops amounting to EUR 5,291 thousand which was expensed during the year ended 30 June 2021 (EUR 1,133 thousand recognized as an expense for the year ended 30 June 2020).

29.Financial assets and liabilities and risk management (extract)

Financial risk, arising from biological assets, management strategy

The Group is engaged in wholesale trade of milk, therefore, is exposed to risks arising from changes in milk prices. The Group’s wholesale agreements for milk not related with financial instruments but represent a significant price risk. The Group does not anticipate that milk prices will be in prolonged decline in the foreseeable future (at current period price increase noted) and, therefore, has not entered into derivative or other contracts to manage the risk of the decline in milk prices. The Group reviews its outlook for milk prices regularly in considering the need for active risk management.

Market price risk

The Group is exposed to the grain market price risk which is managed with the hedge accounting described in Note 15.

15.Other current financial assets and derivative financial instruments (extract)

The Group concludes forward agreements (with fixed price) with Lithuanian and Latvian agricultural production growers for purchase/sale of agricultural produce. For part of such agreements the Group does not have agreed sales/purchases contracts with fixed price. As at 30 June 2021 to hedge the arising risk of price fluctuations for the total amount of such unutilised purchase or sales commitments the Group concluded futures contracts that are traded on NYSE Euronext Paris SA exchange.

Consolidated Annual Report (extract)

7. Scope of risk and management thereof (extracts)

7.1. Market Risks

A market risk is understood as the risk of receiving a lower return than planned in the event of unfavourable market conditions. A market risk in the activities of the companies of the Group could occur through fluctuations in market prices of certain goods, emergence of new competitors in the market or a merger/formation of a group by competitors, relevant crop harvest quality/quantity in a given period, emergence of new goods and production technologies that lead to a fall in the market prices of specific goods, etc.

In order to manage the potential impact of a market risk, the employees of the companies of the Group:

  • Constantly monitor the market of specialised products;
  • Manage trading positions on the basis of permissible limits of open trading positions and criteria for their liquidation;
  • Use derivatives;
  • Etc.

In the financial year 2020/2021, due to high volatility of commodity prices and disruptions in the supply chain, the companies of the Group were exposed to market risk. However, the application of the above measures, diversification of activities and extensive experience have helped to manage the negative consequences of this risk.

The probability of the occurrence of market risk in future periods remains high due to the specifics of the Group’s normal business operations. However, due to complex forecasting of market movement trends, it is not possible to anticipate the consequences of encountering this risk.

7.3. Political Risks

In the European Union, agriculture is a highly regulated and supervised industry. Although this regulation and supervision is aimed at ensuring a sufficient income for those engaged in agricultural activities, political changes may affect the situation in the market in which the Group operates. Political risks could arise from the reduction of agricultural subsidies, the tightening of financial assistance-related requirements (which would have a negative impact not only on the activities of agricultural companies managed by the Group, but also on the enterprises supplying those companies), as well as the adoption political decisions such as embargoes, quotas, import or export bans.

To minimize the consequences of such risks, the employees of the companies of the Group monitor the economic situation in Lithuania and all other countries with which they trade and assess possible changes that would result from certain political decisions.

The Company and the Group did not encounter this risk in the financial year 2020/2021.

However, considering that in May of 2021, the Seimas of the Republic of Lithuania adopted for consideration the proposal of the members of the Seimas to set a 150 thousand Euro limit on direct payments for large farmers, the probability of the occurrence of political risks to the Group in future periods is assessed as moderate.

7.6. Risks of Change in Biological Assets

The risk of change in biological assets used in the operations of the Group (cattle, birds and crops) is related to improper maintenance of biological assets, possible outbreaks of diseases, and other factors that may cause the loss of such assets.

To minimise potential losses relating to the risk of change in biological assets, the employees of the companies of the Group monitor the condition of the soil, use plant protection products and fertilizers, carefully control the quality of cattle and poultry feed, continuously improve animal housing conditions, apply infection prevention measures and make use of insurance options.

In the financial year 2020/2021, the Company and the Group did not encounter these risks.

In the opinion of the Group, although the probability of occurrence of the risk of change in biological assets in future periods is low due to the systems implemented in the companies of the Group and a strict control, it is still possible to encounter such risk in case of extremely unfavourable weather conditions independently of the Group’s actions.