Unraveling the differences of IFRS16 in agricultural partnerships in 2024

IFRS 16, promulgated by the International Accounting Standards Board (IASB), introduced substantial changes in lease accounting, affecting a variety of sectors, including agriculture. Agricultural lease operations present specific nuances that require a deep understanding of the differences brought about by this accounting standard. In this article, we will explore the significant differences for agricultural lease operations in 2024.

Recognition of Biological Assets:
One of the crucial distinctions in agricultural lease operations concerns the accounting treatment of biological assets, such as crops and livestock. The IFRS 16 addresses this complexity by guiding entities to recognize biological assets in accordance with the specific standards of IAS 41 (Agriculture), ensuring accurate accounting aligned with the unique nature of agricultural assets.

Challenges in Asset Identification:
Agricultural lease operations often involve a combination of assets, including land, facilities, and machinery. Correctly identifying these assets and separating tangible and intangible components can be challenging. IFRS 16 requires entities to disaggregate leases, highlighting each component and assigning appropriate costs to each one.

Agricultural Cycles and Lease Term:
Agricultural cycles add complexity to determining the lease term. IFRS 16 requires entities to consider the expectation of lease renewals, especially when the agricultural cycle is longer than the initial contractual term. This approach aims to ensure that the lease term reflects the operational reality of agricultural activities.

Variable Expenses and Production Costs:
Agricultural operations often involve variable expenses associated with production, such as irrigation, fertilization, and crop treatment. IFRS 16 requires a careful analysis to determine which costs should be included in the recognized balance value, considering whether these costs are or are not linked to the use of the leased asset.

Impact on Financial Metrics:
Financial metrics, crucial for assessing agricultural performance, can be significantly impacted by IFRS 16. The recognition of lease assets and liabilities can influence efficiency, profitability, and solvency ratios, requiring a thorough review of the financial metrics traditionally used in the sector.

Necessary Adaptations in Information Systems:
The effective implementation of IFRS 16 in agricultural lease operations requires adaptations in accounting information systems. These systems must be capable of handling the complexity of biological assets, tracking agricultural cycles, and ensuring accuracy in accounting for variable expenses and production costs.

Differential Payment Methods:
Payment methods in agricultural partnerships, especially in sectors like grain production and sugarcane, often involve specific terms such as sacks, TRS (Total Recoverable Sugar), and Consecana (Council of Sugarcane, Sugar, and Ethanol Producers of the State of São Paulo). These terms are essential for determining the financial compensation between the parties involved.

1. Payment in Bags

• Agricultural Context: Many agricultural partnerships involving the production of grains such as soybeans, corn, and wheat use sacks as a unit of measurement to determine payment. The quantity of grains produced is converted into sacks, and the value is established based on market conditions and contractual agreements.
• Negotiation: Payment in sacks often involves negotiations between the parties, taking into account expected productivity, grain quality, and market prices. This form of payment can offer flexibility, allowing adjustments according to seasonal and market variations.

2. Payment Based on TRS (Total Recoverable Sugar):

• Sugar Cane Context: In the sugar and alcohol industry, especially in partnerships involving sugarcane production, TRS is a crucial metric. It represents the total amount of recoverable sucrose in sugarcane and is used to calculate the producer’s compensation.
• Payment Calculation: Payment is generally calculated based on the TRS of the delivered sugarcane. The higher the sucrose content, the higher the payment to the producer. This method aims to incentivize the production of higher-quality sugarcane to optimize sugar and ethanol production.

3. Consecana (Council of Sugarcane, Sugar, and Ethanol Producers of the State of São Paulo):

• Price Standardization: In the state of São Paulo, Consecana is an entity that establishes standards and criteria for determining sugarcane prices. This standardization aims to bring transparency and fairness to the relationships between producers and mills.
• Pricing Formulation: Consecana defines a formula for calculating the sugarcane price, taking into account factors such as sucrose content, weather conditions, and production costs. This creates an objective basis for producer compensation. Payments to Multiple Owners and Cost Center Allocation in Agricultural Partnerships:

In agricultural partnerships, especially when involving multiple owners or producers, financial management becomes a significant challenge. The context of payment and cost center allocation becomes crucial to ensure fairness and transparency in transactions, particularly in agricultural partnerships with multiple owners or producers. Let’s explore how these aspects apply in the described scenario.

1. Multiple Owners and Payment Methods:

• Proportional Division: In agricultural partnerships with multiple owners, the payment method can be determined based on each owner’s share in the venture. This implies that the compensation is distributed proportionally to each owner’s contribution, whether in terms of land, financial investments, or other assets.
• Specific Contracts: It is common to establish detailed contracts that clearly delineate the responsibilities and shares of each owner, as well as the criteria for determining the distribution of gains obtained from production.
• Allocation of Risks and Gains: In addition to payment, it is important to consider the allocation of risks and gains. This means that if a particular owner assumes more risks, such as those related to climatic variations, their share of the gains can also be adjusted.

2. Cost Center Allocation:

• Cost Identification: Cost center allocation in agricultural partnerships involves the fair allocation of expenses among the various owners. The costs may include inputs, machinery, labor, and other operational expenses.
• Allocation Methods: There are different methods for cost center allocation, such as proportional allocation based on each owner’s land area, the quantity of inputs used, or other relevant metrics. The chosen method depends on the specific characteristics of the partnership.
• Integrated Information Systems: The use of integrated information systems is essential to facilitate cost center allocation. This enables detailed accounting, facilitating the accurate identification and allocation of costs to each owner, contributing to more efficient financial management.

3. Transparency and Communication:

• Meetings and Reports: Maintaining transparent communication is fundamental. Regular meetings and detailed reports on the finances and operations of the partnership help keep all owners informed about the performance, costs, and results achieved.
• Adjustments and Negotiations: In some cases, it may be necessary to make adjustments to payment agreements and cost allocation over time. This can occur in response to changes in market conditions, variations in each owner’s contributions, or other relevant factors.

The IFRS system from MakeValue provides an effective solution for managing IFRS 16 in agricultural partnerships. Dealing with specific nuances such as the recognition of biological assets and cost allocation, the MakeValue platform facilitates compliance, transparency, and efficiency in financial management. Its collaborative approach and ongoing support ensure that agricultural partnerships can confidently adapt to regulatory changes, strengthening their management capabilities and promoting sustainable financial success.