BIOLOGICAL ASSETS: GROWTH INDICATORS OF QUOTED AGRICULTURAL FIRMS IN NIGERIA; CHM

Introduction Agriculture plays an essential role in the global economy but accounting for its activities has attracted less attention from researchers and accounting standard regulators until the International Accounting Standard (IAS) 41 - Agriculture (Herbohn and Herbohn, 2006) was adopted. Bearing in mind accounting choice and also contingency and agency theories, and based on 324 firms listed worldwide that have adopted International Financial Reporting Standards (IFRS) until 2011, this paper discusses measurement practices under the IAS 41 (or equivalent standards) in 2012. The main goal of this research is to identify the firm and the country-level drivers that could explain whether listed firms measure biological assets at fair value or at historical cost. The IAS 41 deals with the concept of "living assets", which represents the singular characteristic of natural biological growth that historical cost valuation is unable to manage (Herbohn, Peterson and Herbohn, 1998). As a basic rule, this standard requires biological assets to be measured at fair value less costs to sell on initial recognition and at subsequent reporting dates. This severe change from the traditional historical cost model (Elad and Herbohn, 2011; Lefter and Roman, 2007) has been responsible for the debate on agricultural accounting (Argiles, Garcia-Blandon, and Monllau, 2011). "IAS 41 has been criticized for being too academic and for introducing inappropriate measurement methods for biological assets" (Herbohn and Herbohn, 2006:179). Moreover, Aryanto (2011) has claimed that the accretion concept in the IAS 41 is overgeneralized, which means that this standard establishes the same treatment for all biological assets. In the particular case of bearer biological assets (such as trees from which firewood is harvested while the tree remains), the corresponding fair value is very difficult to achieve due to various factors: the absence of an active market; the difficulty in detecting the attributes of bearer plants; the incurred cost related to the fair value estimate that outweighs the benefit; the earning volatility and misleading; and the lack of relevant information and knowledge (Muhammad, 2014; Aryanto, 2011). Moreover, the single exception allowed to fair value measurement is only applied to initial recognition and in a particular context: a market-determined price is not available and the entity cannot assure a reliable estimate of fair value (paragraph 30, IAS 41). In such conditions, the entity uses the unreliability clause of fair value and recognizes the biological assets at cost less depreciation and impairment. At first glance, and regarding the obligation of the IAS 41 to measure biological assets at fair value, it may seem less reasonable to analyze it as a matter of choice. "We expect companies to use fair value measurement when required to do so by accounting standards. That is, we expect companies to comply with the mandatory fair value measurement requirements in IAS 39, IAS 41 and IFRS 2. Large companies (as included in this study) have both the available resources and necessary incentives to comply with accounting standards" (Cairns, Massoudi, Taplin and Tarca, 2011:7). Subsequently, if there are firms that use the unreliability clause of fair value, ideally this should mean that firms are unable to report biological assets at fair value. However, and according to some literature, it seems that there are other reasons related to country and firm environment that could explain the adoption of historical cost, even when the clause does not apply (Elad and Herbohn, 2011; Fisher, Mortensen, and Webber, 2010; Elad, 2004; Christensen and Nikolaev, 2013; Quagli and Avalone, 2010; Daniel, Jung, Pourjalali, and Wen, 2010; Muller, Riedl, and Sellhorn, 2008; Taplin, Yuan and Brown, 2014; Hlaing and Pourjalali, 2012; Guo and Yang, 2013). Therefore, to this extent, this research is developed under the accounting choice theory. On one side, previous literature concerning the cultural and institutional impacts of the IAS 41 in accounting harmonization in agriculture (Elad and Herbohn, 2011) has revealed that Anglo-Saxon countries have a straight relationship with this standard and are receptive to fair value measurement. For example, Fisher, Mortensen, and Webber (2010) have analyzed the adoption of the IAS 41 in New Zealand (classified as a common law country) and have concluded that listed firms operating in the agricultural sector follow fair value, even when there is no active market. Therefore, it seems that fair value measurement is not a problem in this country. In Continental Europe, historical cost is the mainstream method (Elad, 2004). On the other side, and due to the lack of studies concerning measurement drivers of biological assets, this study has relied on literature related to this discussion topic for other non-financial assets, such as investment property, plant, property and equipment. As far as non-financial assets are concerned, in general larger firms, which are more leveraged, and have more non-financial assets and higher expertise in fair value measurements, tend to choose the option of fair value accounting (Daniel, Jung, Pourjalali, and Wen, 2010). With regard to investment property: fair value is preferred when this measure tends to improve performance measurement (Christensen and Nikolaev, 2013); and information asymmetry, contractual efficiency and managerial opportunism are factors that also explain the adoption of fair value (Quagli and Avalone, 2010).