IAS 41, certain disclosures of assumptions for poultry, sugar cane and bananas, level 3 valuations, post balance sheet events

RCL Foods Limited – Annual report – 4 July 2021

Industry: agriculture

ACCOUNTING POLICIES (extract)

BIOLOGICAL ASSETS

The fair value of the biological assets is determined on the following basis:

  • Consumable biological assets, comprising standing sugarcane, litchi fruit and bananas, are measured at their fair value, determined on current estimated market prices less estimated harvesting, transport, packing and point-of-sale costs.
  • Standing cane is valued at estimated sucrose content, age and market price.
  • Growing fruit is valued at estimated yield, quality standard, age and market price.

The sugarcane roots, litchi trees and banana plants are bearer plants and are therefore presented and accounted for as property, plant and equipment. However, the standing cane and fruit growing on the plants are accounted for as biological assets until the point of harvest. Sugarcane, litchi fruit and bananas are transferred to inventory at fair value less costs to sell when harvested. Changes in fair value of sugarcane, litchi fruit and bananas are recognised in the statement of profit or loss.

Live broiler birds and breeding stock are measured at fair value less estimated point-of-sale costs at reporting dates. Fair value is determined based on market prices.

The fair values of biological assets are level 3 fair values as defined in note 28 of the consolidated financial statements.

Breeding stock includes the Cobb grandparent breeding and the parent rearing and laying operations. Broiler hatching eggs are included in breeding stock.

Gains and losses arising on the initial recognition of biological assets at fair value less estimated point-of-sale costs and from a change in fair value less estimated point-of-sale costs are recognised in the income statement in the period in which they arise.

CRITICAL ACCOUNTING JUDGEMENTS AND KEY SOURCES OF ESTIMATION UNCERTAINTY (extract)

Fair value assessment of biological assets

The key assumptions used in the calculation of the fair value of chicken, banana and sugarcane stock and a sensitivity analysis are disclosed in note 28 of the consolidated financial statements.

8. BIOLOGICAL ASSETS

The financial risk management disclosures relating to the fair value estimation of the Group’s biological assets is included in note 28 of the consolidated financial statements.

Subsequent to year-end certain KwaZulu-Natal based sites in the Chicken and Vector Logistics divisions were impacted by civil unrest and resultant looting and vandalism of property. This is a non-adjusting, post-balance sheet event. Refer to note 33 for further information.

28. FINANCIAL RISK MANAGEMENT (extract)

FAIR VALUE ESTIMATION

IFRS 13 requires disclosure of fair value measurements by level of the following fair value measurement hierarchy:

  • Quoted prices (unadjusted) in active markets for identical assets or liabilities (level 1).
  • Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices) (level 2).
  • Inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs) (level 3).

The following table presents the Group’s assets and liabilities that are measured at fair value at June:

The fair value of trading derivatives is determined using valuation techniques. These valuation techniques maximise the use of observable market data where it is available and rely as little as possible on entity-specific estimates.

Specific valuation techniques used to value the derivatives include:

  • The fair value of forward foreign exchange contracts is determined using forward-exchange rates at the statement of financial position date with the resulting value discounted back to present value.
  • The fair value of options are determined using appropriate option pricing models which take into account the volatility of the underlying instrument.

The following valuation techniques and significant inputs were used to measure the level 3 inputs. These techniques are consistent with those of the prior year.

SENSITIVITY ANALYSIS

A sensitivity analysis is shown for the significant unobservable inputs below:

33. SUBSEQUENT EVENTS

Subsequent to year-end various KwaZulu-Natal-based sites in the Chicken and Vector Logistics business units were impacted by civil unrest and resultant looting and vandalism of property.

As the event occurred after the 2021 financial year-end cut-off it is considered to be a non-adjusting subsequent event in accordance with IAS 10, “Events after the Reporting Period”. The estimated impact on key financial statement line items is as follows:

The impact of the riots on business continuity has been considered in the going concern assessment. Refer to note 36 for further details.

36. GOING CONCERN

The Group’s Annual Financial Statements are prepared on the going concern basis. In assessing the ability of the Group to continue as a going concern, management has considered the following:

  • the Group’s ability to settle its obligations as they become due and payable in the 12 months following year-end;
  • the solvency and liquidity position of the Group, which included an assessment of key financial ratios against industry norms. Key financial ratios include return on invested capital, return on equity, cash conversion ratio and margin analyses;
  • the cash generation ability of the Group, including a historical view of cash flows;
  • the current and forecast debt utilisation of the Group; and
  • the adequacy of the Group’s resources to continue operating as a going concern.

No changes in financial, operational or general considerations are expected for the next 12-month period that would compromise the use of the going-concern assumption.

As part of its going-concern assessment, the impact of the COVID-19 pandemic on operations and liquidity was considered in preparing the forecasts and assessing performance against budget. During both the current and prior financial year, the Group’s results were materially impacted by the COVID-19 pandemic. However, forecasts for the 2022 financial year do not indicate further material costs associated with the COVID-19 pandemic.

In addition, management has considered the impact of the KwaZulu-Natal unrest on the future of operations and the total impact is not expected to materially affect forecasts. The impact of the unrest was limited to only a few sites within the Chicken and Vector Logistics divisions. These sites were temporarily closed and are not considered key operational sites. Refer to note 33 for further detail.

Based on this assessment management has concluded that the Group has adequate resources to continue operations as a going concern in the foreseeable future.