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Return on Assets of Biological Assets in Terms of
Historical Value & Fair Value Accounting
International Financial Management MSc Thesis by
Fares El-Masri
Supervised by
Dr. Nanne Brunia
University of Groningen
Faculty of Economics and Business
2 Abstract
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1. INTRODUCTION
Valuation policies play a crucial role in the representation of a company in terms of worth of its underlying assets. Whether a company is a publicly or privately held company, a suitable valuation method has to be applied which adheres to legal requirements such as IAS 41 by the IFRS stating that biological assets such as agriculture and cattle shall be valued using Fair Value accounting methods. The choice of valuation method influences the value of assets and hence the Return on Assets leading to different performance measure results. The paper looks at the
differences of the Return on Assets by studying the two most common valuation policies. The valuation policies are the Historical Value accounting and the Fair Value accounting, whereby in Fair Value accounting the current market price of assets reflect the increase or decrease in the worth of a company‟s asset.
Table 1 depicts a simple illustration of how the different valuation methods can have a different result of Return on Assets.
Method Profit Other Net
Assets
Biological Assets Return on Asset (ROA) Case A Historical Value
accounting 20 30 0 66.7%
Case B Historical Value
accounting 20 30 100 15.4%
Case C Fair Value
accounting 20 30 100 - 150 15.4% - 11.1%
Table 1 – Introductory example distinguishing between Historical valuation methods and Fair Value valuation methods.
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their total assets. Pharming N.V. on the other hand considers biological assets as part of inventory and so it is difficult to exactly distinguish between biological assets and non-biological assets. This will be elaborated on further in this paper in section 3.
Depending on which accounting method is used to value their biological and total assets can have differing results, and thus undermining the performance measure, Return on Assets.
In Case A, assuming it is a small-sized farmer, only profits and non-biological assets are reported to calculate Return on Assets. The small farmer in question could have acquired the cattle from other sources such as inheritance or cattle offspring and thus assumed that biological assets such as his/her cattle should have a book of value of zero. The high Return on Assets of 66.7% makes Case A seem like a relatively profitable business; nonetheless, after purchasing the cattle and adjusting for depreciation the Biological Asset is reported to be at 100 in Case B resulting in a much lower return on assets of 15.4%.
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Raynor and Ahmed (2013) measured the performance of 25,000 companies that traded on US stock exchanges using the Return on Asset ratio. Their results show that the Return on Asset ratio is a strong and stable performance measure compared to other measures such as Shareholder Return which is influenced by expectations and speculation rather than true company
performance. This paper examines whether this stable measure of performance gives differing results under Fair Value accounting and Historical Value accounting. Managers and investors alike can be misled if this stable measure of performance gives varying results depending on the choice of valuation of assets. Thus, the question which this paper is concerned with is
Does the Return on Asset change depending whether Fair Value accounting or Historical Value accounting is applied?
To answer the research question, the Return on Asset of Genus is calculated under different accounting methods. A brief comparison with one of Genus‟ main competitor, Pharming N.V., is made to understand whether different national institutions regarding valuation policies of
biological assets play a role on how these assets are valued. Pharming N.V. is based in The Netherlands and thus the paper compares the similarities and differences of the implementation and adoption of IFRS policies such as the IAS 41 which directly relates to the valuation of biological assets using Fair Value accounting methods.
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Pharming N.V. in addition to providing background information regarding IFRS in the
Netherlands. Section three is mainly where the comparison between the two companies is made including the countries‟ institutional differences in order to answer the research question.
Furthermore, section four will exhibit the results of the valuation policies, which are the Return on Asset figures including their volatility. Lastly, section five sums up the paper with the conclusion and managerial implications.
2. LITERATURE 2.1 Fair Value & Historical Value Accounting
Whether to choose the Fair Value accounting method or the Historical Value is an important decision any company has to make. If a company is not obliged to use the Fair Value accounting such as in Case C as demonstrated in in the introduction, valuating a company‟s underlying assets can be a crucial determinant on its share price and how it is perceived by the public (Bernard, 1993).
As mentioned before, the two main alternatives to asset valuation are Fair Value accounting method and the more commonly used Historical Value accounting method. These two methods are primarily used by accountants to value assets for the financial reporting of a company. Many regulative bodies such as the European Union, The International Accounting Standards Board (IASB), and Financial Accounting Standards Board (FASB) have been supporting the move towards the Fair value method because it better reflects market prices of assets (Argilés et al, 2009).
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Watts (2003) for example, elaborates in his paper that Fair Value relative to Historical Value accounting methods is a poor measure of asset value since it is subjected to more altering. This means that more alterations by accountants can lead to more misleading Return on Asset figures as the value of that asset changes. Nevertheless, other scholars such as Liang and Wen (2007) compared input-based accounting measures and output-based accounting measures and
concluded that Fair Value is a better representation of the output-based accounting. Output-based accounting is an estimate of expected returns of operational activities or assets. Liang and Wen (2007) labeled the Fair Value valuation method as “a would-be market value” meaning that accountants report the value of current assets with values which they expect to be in the future similar to expected cash flows. Both valuation methods, Historical Value accounting and Fair Value accounting are subjected to altering; however, “a would-be market value” provides Fair Value accounting methods with more room for altering relative to Historical Value valuation methods. The term altering describes the intention of the firms‟ valuators to value an asset in any direction which they deem to be favorable with the objectives of the company. Altering is usually easier for products and assets which do not have a close or similar product or asset as a reference in the market for comparison as will be discussed in section 2.2.
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value is a better explanatory approach when trying to explain fluctuations in share price. The increase or decrease in the share price can be attributed to the assets increase or decrease in value.
Under the Historical Value accounting method, the link between asset value and share price is not as visible as the Fair Value accounting method. Bernard (1993) stated that revalued amounts1 are
significantly associated with share price and this in turn affects future profitability of a company. Bath and Clinch (1998) also empirically investigated the relationship between Fair Value
accounting and share price and came to the conclusion that it is Value Relevant, which means that the asset has a “significant relation in the predicted direction with share prices”.
Moreover, Historic approaches might not be as responsive as fair value when reflecting current asset worth, but limits the opportunities managers have for altering worth of assets according to Liang and Wen (2007) as mentioned above. Hanselman (2009) studied how Historical Value accounting methods outperform Fair Value methods by two characteristics only, namely, understandability and verifiability out of the 10 characteristics incorporated in his paper. Hanselman (2009) describes understandability as being the “Advantage obtained simply by the long standing common practice and use of historic cost accounting”.
Historical Value methods are thus considered a baseline in the valuation of assets according to Hanselman (2009) due to its common use by accountants and financial analysts, and are hence relatively more understood to Fair Value methods. Furthermore, verifiability is defined according to him as the advantage earned when using Historical Value accounting “since the information is certain to be confirmed by several independent evaluators since the purchase price is fixed and easily determined and any subsequent adjustments likely conform to standard depreciation
1 Revalued Amounts according to Bernard (1993) and Barth & Clinch (1998) are the assets which are priced at fair
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schedules.” These two characteristics, understandability and verifiability, in which the Historical Value accounting methods outperform Fair Value methods seem to be originating from the same principle, which is the fact that it is more commonly used and thus one can say that it becomes more “user friendly”. However, this does not mean that Fair Value methods are not
understandable and verifiable. Ease of use and the convenience offered by the Historical Value methods is the drive behind why most companies‟ annual reports tend to revert to Historical Value accounting methods unless there are any legal requirements on which method to use such as the IAS 41.
The pros and cons of the Fair Value accounting and the Historical Value accounting makes the decision as to which of these is the more suitable method more difficult when considering the value of assets and which would at the same time be a good reflection of the company‟s performance when calculating Return on Asset. The choice however is limited, for instance if assets become impaired, which occurs when assets valued at Fair Value are lower as compared to when valued with the Historical Value methods. When Fair Value of an asset is higher in value than under Historical value accounting, such as the Straight-Line method, accountants will have to opt for the Historical Value method.
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opportunities accountants receive for alteration as mentioned earlier. This undermines the Return on Asset measure during the alteration process. When an asset is impaired, whether it includes false judgment or not, and is tagged with a lower value gives “asset strippers” the chance to take over undervalued assets during acquisitions or liquidations (Gage, 2006). Impairment in terms of biological assets in specific will be discussed in the following section.
Conservatism is another characteristic by which Historical Value accounting gains support. Provided that historical straight-line depreciated values remain lower than Fair Value, describes Historical Value accounting as the more conservative method. Just like King (2009), Shortridge (2006) opposes the non-conservative method, Fair Value accounting, and mentions that the inclusion of judgment during the valuation of assets can mislead investors and managers as it can give false Return on Asset figures. Shortridge (2006) adds that the non-conservative nature of Fair Value accounting increases uncertainty during acquisitions or expansions in addition to Return on Assets. Expansion naturally implies the acquisition of more assets will be used to conduct a business‟ operations. When these assets rise in value, under Fair Value, management can translate this rise in executive bonuses, but when assets fall executives blame Fair Value markdowns for accelerating the decline (Ramanna, 2013).
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2.2 Biological Assets and the IAS 41
The introduction of the IAS 41 by the International Financial Reporting Standards (IFRS) has the effect of limiting the choice of valuation options when valuing biological assets which includes both agricultural products and cattle (IFRS, 2012). Especially where most of their operational assets are considered biological, will have to be valued at Fair Value because of IAS 41. The IFRS defines fair value as “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”. In order to gain more understanding on how assets are valued under IAS 41, it is appropriate to first look into how impairment is dealt with under IAS 41. When biological assets are impaired,
accountants can revert to subtracting accumulated depreciation and impairment losses (Historical Value accounting) according to the following statement.
“IAS 41 presumes that fair value can be reliably measured for most biological assets. However, that presumption can be rebutted for a biological asset that, at the time it is initially recognized in financial statements, does not have a quoted market price in an active market and for which other methods of reasonably estimating fair value are determined to be clearly inappropriate or unworkable. In such a case, the asset is measured at cost less accumulated depreciation and impairment losses. But the entity must still measure all of its other biological assets at fair value less costs to sell. If circumstances change and fair value becomes reliably measurable, a switch to fair value less costs to sell is required. [IAS 41.30]” (Deloitte, n.d)
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Perry (2008) criticizes the adoption of IAS 41 based on two points. Firstly, the increase in reported profits after the adoption of IAS 41, which is usually observed during the initial stages of adoption if assets are in fact valued higher than the previous Historical Value accounting. This increase in value initially does not reflect the addition of increased performance generated by the company itself, but rather by the push of market prices which at that time is in favor of the company. In Perry‟s (2008) paper, Landcorp Farming Limited realized an increase of $34.2 million simply after the revaluation of livestock under Fair Value. Secondly, the increased volatility in the value of assets after the adoption of Fair Value accounting gives a relatively less stable value to the assets compared to the more conservative Historical Value accounting.
Another aspect in the IAS 41 is that increments or decrements in fair value of the biological asset can be reported as either revenue (increment in fair value) or as an expense (decrement in fair value) (Elad, 2004). So when assets increase in value and receive a constant increment which is then translated into revenue, executive bonuses will eventually rise as discussed earlier by (Rammana, 2013).
On the other hand, Argilés and Slof (2001) claim that the Fair Value accounting‟s ease of use is a more suitable choice since all is needed is to compare assets to their market price. They also add that this makes it easier for smaller farms to keep record of the value of their cattle and other biological assets. Argilés and Slof (2001) take a more biological oriented approach by distinguishing the stages of age of a biological asset such as cattle or agriculture. They
incorporate the fact that these living things have different values during different stages, namely,
procreation, growth, and death. They claim that it is harder to retrieve values of these biological
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during different stages of the animals or plants life-cycle. With Fair Value methods it is possible to compare the asset to similar ones in the market. Argilés and Slof (2001) however, do not seem to bear in mind that it might not be possible to compare the same asset in different stages of age if no similar assets are available for comparison. The unpredictability and economically
ever-changing current environment fueled with the recent occurrence of the global financial crisis will increase uncertainty with the adoption of Fair Value accounting (Ore, 2011). This relates to the introduced volatility in the value of assets mentioned earlier and which will be further elaborated on in the following section.
3. CASE STUDY: GENUS PLC. & PHARMING N.V.
This chapter conducts the main comparison of the two genetics companies in the UK and the Netherlands. The chapter includes the necessary information needed from Genus‟ annual reports to analyze discrepancies of Return on Assets under different accounting methods. However, Pharming‟s annual reports will not be studied for differences in Return on Assets, but merely serve as a way to strengthen the comparison case study by analyzing institutional differences in the UK and Netherlands.
3.1 Company Information and Background 3.1.1 – Genus plc.(United Kingdom)
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owned business such as in the US, the UK, Australia, Brazil, Canada, Chile, France, Ireland, Italy, Germany, South Africa, Argentina and Mexico. The company is primarily occupied with
studying and researching cattle breeding in terms of biotechnology and not just breeding for the sale of cattle and the production of beef and dairy produce. However, biological assets are a substantial part of their operational assets as they collect around 13 million doses of semen each year from their bovine division to be frozen and sold to farmers worldwide. The second division is Porcine Genetics (PIC) which is responsible for studying and researching pig breeding stock. The division also offers technical support to commercial pig producers who are using Genus‟ genetics in their farms. Similar to the ABS division, it also distributes semen to commercial producers, but the PIC division also distributes breeding males and females pigs in addition to semen. The PIC division produces more than 100 million slaughter pigs each year containing PIC genetics.
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Figure 1 – Stock price of Genus with red line indicating when IAS 41 became in effect. Source: Yahoo! Finance. The reason behind the rise in stock price of Genus could be attributed to the fact that biological assets, which make around 50% of the company‟s total assets, are now valued using Fair Value accounting as IAS 41. As previously discussed, and visible in Figure 1, Bernard (1993), Bath and Clinch (1998) showed the relation in their studies between Fair Value accounting and its
influence on share price and how share price can follow the movement of asset values when valued using Fair Value accounting.
3.1.1 – Pharming Group N.V. (The Netherlands)
This subchapter provides the necessary information about Pharming, a close competitor of Genus and operating in different environments, but still in the same industry. Furthermore, this
subchapter reviews literature related to the adoption and implementation of IFRS policies and how IAS 41 is treated in the Netherlands compared to the UK.
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According to D&B, which is a leading source of commercial insight and information, Pharming N.V. (Pharming) is Genus‟ closest competitor despite the fact that Pharming‟s primary objectives are not limited to the breeding of bovine and cattle for farming purposes. The company is behind the first genetically engineered bull, Herman, which synthesis a protein in its milk that is used to treat human diseases. Herman is an example of many other animals used to incubate these proteins in order treat diseases. Pharming‟s involvement in disease treatment is what sets it apart from Genus which is solely operating in the genetic modification of cattle and bovine for meat produce. However, Pharming, similar to Genus, has biological assets which is a noticeable share of their total assets based on their annual reports that mentions the costs of running and operating their numerous farms. It is difficult to state exactly what the share of biological assets is at Pharming since the company does not distinguish between biological assets and non-biological assets. Moreover, Pharming‟s annual reports state that all their assets, except for their financial assets, are valued using Historical based valuation.
Having the biological assets valued using Historical Value accounting can be explained since the Dutch GAAP, unlike the IFRS, has no specific guidance concerning biological assets (KPMG, 2006). Furthermore, the report by KPMG (2006) on the differences between the IFRS and the Dutch GAAP states that the general requirements for inventory apply when valuating biological assets under the Dutch GAAP.
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requirements for biological or agricultural assets and that convergence with all IFRS
requirements is a slow process, especially the ones related to biological and agricultural assets since that sector makes up 3.4% of the country‟s GDP and a substantial share of it includes small to medium sized farms.
This slow convergence process with IAS 41 can be reflected in Pharming‟s annual reports. Comparing the Return on Asset, and the return on their biological asset, under both the accounting methods would cumbersome since biological assets are part of inventory as
mentioned earlier. Moreover, the company realized a loss of €24.1 million in 2012, but this is not attributed to the choice of asset valuation method. The company underwent several financing and leveraging policies which have not worked in the favor of Pharming N.V.
Pharming‟s case indicates the sensitive and slow processes of convergence to policies such as IAS 41 due to the institutional and regulative bodies in the Netherlands. Moreover, Pharming compared to Genus, shows that very similar companies operating in the same industry can have different asset valuation policies and thus influence the performance measure, Return on Asset. The fact that in the Netherlands biological assets can be added to inventory creates difficulties comparing it to Genus for example. Thus, Return on Asset can be considered a redundant performance measure when trying to compare Genus and Pharming because of the way the two companies deal with biological assets which is a substantial share of their total assets.
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3.2 Methodology - Calculation of Genus’ Assets Under Historical Value accounting This section compares the Return on Assets of both the Historical Value method and the Fair Value method of Genus. Volatility is compared by calculating the standard deviations of the Return on Assets. Standard deviations are calculated to observe how stable the performance measure is under the two different accounting methods over the period of 2008 to 2012. Table 2 shows the annual reports of Genus over the past 6 years. The analysis is concerned with the past 5 years only, but the numbers of 2007 are needed to calculate the 2007 starting value discussed below.
Non-Current Assets 2007 2008 2009 2010 2011 2012
Goodwill 60.7 63 62.5 68.4 68.3 66.4
Other intangible assets 77.4 79.5 81.1 81.5 75.6 71.2
Biological assets 114.1 127 153.9 175.5 187 223
Property, plant and equipment 27.3 27.6 39.3 43.4 40.8 41.7 Interests in joint ventures and
associates
3.5 4.7 5.3 7.4 8.5 9.2
Available for sale investments 0.5 0.3 0.3 0.3 0.2 0.1
Derivative financial assets 4.5 2.5 1.7 0.9 0.3
Deferred tax assets 10.4 12.8 22.1 17.5 15.6 23.1
Total Non-Current Assets 298.4 317.4 366.2 394.9 396 435
Current Assets
Inventories 18.8 21.8 28 31.1 33.5 30.2
Biological Assets 25.3 24.3 28 37 27.3 36.8
Trade and other receivables 43 51.7 53.7 60.2 65 66.5
Cash and cash equivalent 26 19.3 20.6 18.1 18.3 18.6
income tax receivable 1.4 1.5 1.4 0.8 1 0.8
Total Current Assets 114.5 118.6 131.7 147.2 145.1 152.9
Total Assets 412.9 436 497.9 542.1 541.1 587.9
Trade and other payables 34.8 42.1 39 42.3 47.3 48.9
NET ASSETS 378.1 393.9 458.9 499.8 493.8 539
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Operating profits (Fair Value) 28.7 32.4 38.1 47 44.8 54.2 Operating profits (Historical Value) 26.2 33 39.9 42.2 45.8 Table 2 – Summary of Genus’ annual reports 2008-2012
Table 3 – Operating profits and Net Assets of Genus plc. After IAS 41 (Fair Value Accounting, (£MILLION))
The annual reports of Genus only show the biological assets of the company using Fair Value accounting (Table 3). In order to calculate the value of Genus‟ biological assets using the Historical approach, cash flows from the fair value (After IAS 41) statements in Table 3 are calculated using the Clean Surplus equation C1 = P1 – (A1-A0)2. After the cash flow is determined, which is done by subtracting the difference of total assets of two subsequent years at a time, it is subtracted from the profits of the corresponding year to result with the increase in assets (A1-A0)
= P1 – C1. The starting point for the historical asset values (Before IAS 41) represents the A0 that is calculated by discounting increases and purchases of biological asset using a straight-line approach assuming that biological assets have a useful life-time of 5 years. So increases due to investments and purchases in biological assets are calculated starting from 2003 up to 2007.
Year Investment/purchases of assets Straight-line discounting Asset Value 2007 72.2 72.2 x 1 72.2 2006 128 128 x 0.8 102.4 2005 137.6 137.6 x 0.6 82.56 2004 158 158 x 0.4 63.2 2003 83 83 x 0.2 16.6 Total 336.96 (A0) Table 4 – Calculation of Starting Value (A0) of 2007 (£MILLION)
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C1 is the cash flow at time t1. This is attained after subtracting the total assets from the total assets of a previous yea. The difference in total assets between the proceeding year is then subtracted from the profits of the year at t1 to result with the cash flows at t1. P1 is profits at time t1. A0 is the total assets of the year which is following the total assets of A1 which is the year after.
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It is important to mention however, the cash flows do not add up when the Clean Surplus method is reassessed. This is due to the use of the Adjusted Operating Profit Values from Genus' annual reports. Adjusted Operating Profits according to Genus are ''adjusted basic earnings per share are before net IAS 41 valuation movement on biological assets''. Hence these Operating profits are used in the calculation of Return on Asset under the Historical Value accounting method below in table 5.
To better illustrate the discrepancy in cash flows further, the examples below are plugged with different Operating profit figures into the Clean Surplus method C1 = P1 – (A1-A0).
(1) C1 = 54.2 – (539 – 493.8) C1 = 9 (2) C1 = 45.8 – (486.6 – 441.4) C1 = 0.6 (3) C1 = 54.2 – (486.6 – 441.4) C1 = 9
Example (1) shows is the straightforward Fair Value figures taken from the annual reports of Genus of 2011 and 2012 to calculate the cash flow of 2012, which is 9 million pounds.
Example (2) shows the only values which needed to be calculated, the value of assets. They were calculated earlier as explained with the Clean Surplus method. However, the discrepancy occurs when the Operating Profit is replaced with the adjusted figure giving thus a cash flow of 0.6 million pounds.
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the company's assets under the two different valuation methods before and after adjusting to IAS 41. For more elaborate comparison, table 8 (matching cash flow) in the following section shows the Return on Asset and its volatility using the Operating Profits under Fair Value accounting and the Value of Net Asset taken from the Historical Value accounting.
Table 5 – Operating profits and Net Assets of Genus before IAS 41 (Historical Value Accounting (£MILLION))
The only element in table 5 above that is not available in the annual reports are the Biological Asset value which were calculated using the Clean Surplus equation which was elaborated on earlier. The relevant data used from Genus plc‟s annual reports which are used to calculate cash flows and the value of assets under Historical Value Accounting are available in table 2.
4. RESULTS
Having now the Operating Profits and Net Asset values under both Fair Value Accounting and Historical Value accounting it is possible to calculate their Return on Assets and the difference in volatility. To calculate Return on Assets, operating profits are divided by the average of the biological assets of two subsequent years.
Table 6 below shows the Return on Assets of the past 5 years of Genus plc including their volatility (standard deviation). Because Return on Assets includes the average of two subsequent years, the Net Asset value from the 2007 annual report is used to calculate the 2008 return on
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asset for the Fair Value method as mentioned previously, and the 2007 starting value calculated with the straight-line approach is used for the Historical Value method.
Fair Value Accounting 2008 2009 2010 2011 2012 Volatility (Standard Deviation) Operating Profits 32.4 38.1 47 44.8 54.2 8.38 Net Assets 393.9 458.9 499.8 493.8 539 Return on Assets 8.39% 8.94% 9.80% 9.02% 10.50% 0.82% Table 6 – Profits and Net Assets including volatilities under Fair Value accounting. (£MILLION)
Historical Value Accounting 2008 2009 2010 2011 2012 Volatility (Standard Deviation) Operating Profits 26.2 33 39.9 42.2 45.8 7.82 Net Assets 346.6 406.5 447.4 441.4 486.6 Return on Assets 7.67% 8.76% 9.35% 9.50% 9.87% 0.86% Table 7 – Profits and Net Assets including volatilities under Historical Value Accounting. (£MILLION)
Matching Cash Flow 2008 2009 2010 2011 2012 Volatility (Standard Deviation) Operating Profits 32.4 38.1 47 44.8 54.2 8.38 Biological Assets 346.6 406.5 447.4 441.4 486.6 Return on Assets 8.94% 10.12% 11.01% 10.08% 11.68% 1.04%
Table 8 – Profits (Fair Value accounting) and Net Assets (Historical Value accounting), including volatilities under Historical Value Accounting. (£MILLION)
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measurement, both Fair Value account and Historical Value accounting seem to be on the same level. However, and as Bernard (1993) stated, the difference between the two methods is more observable when looking at the difference in profitability. The standard deviation of operating profits under Fair Value accounting is £8.38 million while under Historical Value accounting it is £7.82 million, which is a 7.10% difference between these two methods.
In addition, the matching cash flow Return on Asset does not indicate a noticeable deviation in Return on Asset from the other two tables. With a volatility of 1.04% of the matching cash flow table, it is only 0.18% and 0.22% different from the volatility of Return on Asset under Fair Value and Historical Value accounting, respectively.
The results also show a steady rise in Return on Assets for both Fair Value and Historical Value accounting over the past 5 years. This is due to the constant rise in operating profits relative to the slower steady increase in the value of Genus‟ Net Assets.
5. CONCLUSION & DISCUSSION
Based on the results outlined in section 4, corporate finance advisors at Genus or investors alike can be indifferent whether Fair Value or Historical Value accounting is applied; especially when looking at the Return on Asset ratio of the company when examining the measure of performance. The results of other researchers discussed earlier in the literature review have mainly emphasized the increased volatility due to the adoption of IAS 41 which requires the use of Fair Value
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This is not the case for the Return on Assets ratio as it showed almost identical volatility under the use of two different accounting methods.
Although Return on Asset acts as unsuitable performance measure when trying to compare Pharming and Genus, it remains a strong performance measure within a company and when comparing companies which treat biological assets in the same manner. Based on the results of Genus, if Pharming distinguishes between biological assets and non-biological assets rather than considering biological assets as inventory as mentioned earlier, then Return on Assets can be a suitable comparison ratio between the two companies.
Raynor and Ahmed‟s (2013) conclusion concerning the stability of the performance measure, Return on Asset, seems to be supported by the results of this paper, and that Return on Asset measure does not change whether Fair Value accounting or Historical Value accounting is applied. It is also recommended that managers and investors to acquire requirements and policies concerning the valuation of assets in the country of operation. The Netherlands and the UK have very similar accounting standards, but it is worthwhile to asses and examine them under different valuation methods to have a broader picture on the value of assets. However, the accounting standards are not similar enough to make Return on Asset a viable comparison ratio between Pharming and Genus. Both companies could be as efficient, but Return on Assets ratio in this case is not the means to examine their differences in performance. Pharming‟s case showed how a slight deviation on an international level in accounting standards (considering biological assets as inventory) can make Return on Asset a not so suitable means of comparing the two companies despite their similarities.
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company realizing a growth in operating profits while maintaining a relatively constant value of their assets. It is still worthwhile for managers and investors to compare the Return on Asset under both of the accounting methods and try to explain any deviations should any exist. In our meat production case for example, the rise in the value of assets can increase the value of the company due to this rise if they are valued at Fair Value, but show a smaller Return on Asset if profits remain constant. The rising consumption of meat products due to the rising global
population is significantly increasing the demand for meat (Yates-Doerr, 2012). This increase in demand will inevitably increase the value of biological assets and could distort the Return on Asset measure. In conclusion, whether meat prices are rising or not, if biological assets are dealt with similarly across companies and countries, then Return on Asset is a strong comparison and measure of performance across companies as it is within a company as exhibited in this paper. Pharming‟s case provided qualitative information on how slight differences in accounting standards, or even slow convergence processes, can consider a performance measure as redundant if biological assets are not dealt with similarly.
As mentioned in the conclusion, it would be difficult to generalize the identical results of the Return on Assets under the two different valuation methods for several reasons.
Firstly, the case paper studied the annual reports of Genus only and which is obviously not a representative sample to conclude the same for other companies. Operating profits are reported in the annual reports of Genus before and after the adjustment to IAS 41, but Historical Value asset figures for the Net Assets are not.
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only addition to biological assets are the new investments and purchases in biological assets which are then depreciated using a straight-line approach over a 5 year period.
Thirdly, and which is the main limitation to this paper, is the unavailability of the biological asset figures of Pharming. A suggestion for further research concerning the stability of Return on Assets under different accounting methods is to perform the calculations over a greater sample of companies with biological assets, and which can be distinguished in their annual reports.
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