RCL Foods Limited – Annual report – 3 July 2022
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- sales 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 under the definition of IAS 41 Agriculture 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 8 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 29 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 29.
29. FINANCIAL RISK MANAGEMENT (extract)
FAIR VALUE ESTIMATION
IFRS 13 Fair Value Measurement 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:
10. DERIVATIVE FINANCIAL INSTRUMENTS
1 The interest rate collar hedge came to an end on 31 March 2022. In the 2021 financial year, the fair value of the hedge was determined using the appropriate option pricing model that takes into account the volatility of the underlying instrument.
The amounts above represent the fair value of the derivative instruments which represent the maximum exposure to credit risk at June 2022.
The financial risk management disclosures relating to the Group’s derivative assets and liabilities is included in note 29.
29. FINANCIAL RISK MANAGEMENT (extract 2)
COMMODITY PRICE AND PROCUREMENT RISK
Commodity price risk arises from the risk of an adverse effect on current or future earnings from fluctuations in the prices of commodities. To stabilise prices for the Group’s substantial commodity requirements, derivative instruments including forward contracts, commodity options and futures contracts are used to hedge its exposure to commodity price risk.
The overriding directive is to minimise commodity price volatility in order to meet forecast requirements, ideally at the lowest cost for both internal and for external sales. Call and put options are utilised within this framework to manage commodity requirements and supply. The use of written options is restricted to the purposes of fixing forward requirements.
The overall procurement strategy and net positions are reported monthly to the oversight committees and annually to the Board. The oversight committees are responsible for the setting of the monthly company view with regard to future price movements. The daily trading activities by the procurement teams are restricted to the company view, unless prior approval is obtained from the Procurement Committee.
WHEAT, SUNFLOWER, MAIZE, SOYA AND SOYA OIL1
Refer to the table below for sensitivity of future (post-tax) income statement impact arising on the maturity of wheat, sunflower, maize, soya oil and soya derivative contracts.
This analysis represents the impact on profit/(loss) as a result of a parallel shift in the forward curve (up and down) on the value of the hedged positions of the underlying commodities at June.
1 Certain of these contracts and options have a zero fair value at year-end as they are settled daily on SAFEX.
RCL Foods Consumer Proprietary Limited has entered into contract grower agreements with various counterparties to procure broiler chickens for the forthcoming financial year. Fees payable to the contract growers are accrued for based on the stage of completion of the broiler cycle at year-end. The commitment value as at June 2022 was R20,9 million (2021: R13,3 million).
Accounts examples 