Agricultural Assets
IAS 41
Aim
» The objective of this lesson is to assist
individuals in understanding accounting for
biological assets and agricultural produce.
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Scope of the standard (IAS 41)
» IAS 41 should be applied to the following
agricultural activities
» Biological assets;
» Agricultural produce at the point of harvest; and
» But IAS 41 does not apply to
» Land related to agricultural activity (IAS 16, Property,
Plant and Equipment, IAS 17, Leases, or IAS 40,
Investment Properties, applies as appropriate)
» Intangible assets related to agricultural activity (IAS 38)
» Bearer plant (as per PPE IAS 16)
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Scope of the standard
» Agricultural activity that is not managed, for example:
harvesting from ocean fishing
» Minerals, oil, natural gas and similar non-regenerative
resources (not yet covered by an IAS).
» Also does not apply to biological assets used for
» research,
» education,
» transportation,
» Entertainment and recreation,
» Customs control
» Agro tourism
» Agro sports
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Scope of the standard
» It is applied to agricultural produce at the point of
harvest. The harvested product is the output of the
undertaking’s biological assets.
» After harvesting, IAS 2 inventories or another standard
applies
» You have harvested your corn. It is now accounted for as
inventory (IAS 2)
» You have harvested your tobacco . Now it is accounted as
inventory (IAS 2)
» You have grown the grapes, harvested them and are going to
process the grapes into wine. They are now beyond the
agricultural activity of IAS 41 and accounted as IAS 2
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Scope of the standard
The table below provides examples of biological assets, agricultural
produce, and products that are the result of processing after harvest.
Biological assets Agricultural produce Products that are the
(IAS 41) (IAS 41 at the point of result of processing after
harvest) harvest (beyond IAS 41)
Sheep Wool Yarn, carpet
Trees in a plantation Logs Lumber
forest
Cotton Thread, clothing
Plants Harvested beet Sugar
Dairy Cattle Milk Cheese
Pigs Carcass Sausages, cured hams
Bushes Leaf Tea, Cured tobacco
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Vines Grapes Wine
Check your understanding
» Entity A raises cattle, slaughters them at its
abattoirs and sells the carcasses to the local
meat market.
» Which of these activities are in the scope of
IAS 41?
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Check your understanding
» Entity B grows vines, harvests the grapes and
produces wine. Which of these activities are in
the Scope of IAS 41?
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Definition of terms
» Agricultural activity is the management of the biological
transformation of biological assets for sale, into agricultural
produce, or into additional biological assets.
» Agricultural produce is the harvested product of biological
assets
» A biological asset is a living animal or plant.
» Biological transformation comprises the processes of
growth, degeneration, production, and procreation that
cause qualitative, or quantitative, changes in a biological
asset.
» A group of biological assets is an aggregation of similar
living animal or plants
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Definition of terms
» Harvest – is the detachment of produce from a biological asset or the
end of a biological asset’s life processes
» Agricultural activity includes
» Livestock
» Forestry
» Cropping
» Cultivation
» Aquaculture (Including fish farming)
» In each of the above case, living animal and plants perform a
biological transformation that takes place in a managed environment.
Management is the key issue that differentiates agricultural activity
from other activities such as sea fishing, harvesting virgin forest
neither of which are classified as agricultural activities.
» The extent of change in the biological asset can be measured in a
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wide variety of ways, ripeness, dimensions, fat content etc.
Definition of terms
» Biological transformation results in:
» Change in the asset through an increase or decrease in
quantity or quality
» Additional assets may result from procreation or
» Agricultural produce (Cereals, beef, Milk)
» Active market includes
» The items traded are homogeneous
» Buyers and sellers are willing and readily available
» Current price are public knowledge
» Carrying amount is the amount at which an asset is
recorded in the balance sheet.
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Definition of terms
» Fair value: the price that would be received to sell
an asset or paid to transfer a liability in an ordinary
transaction between market participants at the
measurement date (IFRS 13).
» Bear in mind fair value depends on location, and
condition so the same cow in Moscow has a
different fair value than in Nairobi.
» Costs to sell are the incremental cost directly
attributable to the disposal of an asset, excluding
finance costs and income taxes.
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Recognition and Measurement
» Recognition and recording biological assets or
agricultural produce takes place when the
enterprise:
» Controls the asset, or the future benefits, that will flow
form it and
» Can measure reliably, the fair value or cost
» In practice, this means that most biological
assets, or agricultural produce, can be recorded
before the harvest or before they are sold. They
are also re-measured at each balance sheet date.
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Recognition and Measurement
» A biological asset should be measured on
initial recognition, and at each balance sheet
date, at its ‘fair value less estimated point of
sales costs’; except where the fair value can
not be measured reliably.
» Biological asset should be shown as non-
current assets if they last for more than one
year. Dairy cattle and trees are examples of
non-current assets.
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Recognition and Measurement
» What do point-of-sales cost includes:
» Commissions to brokers and dealers
» Changes by regulatory agencies and commodity
exchanges and
» Transfer taxes and duties
» But it does not include transport and other costs,
necessary to transport assets to a market.
Transport costs are taken into account in fair
values, as costs they reduce the fair values.
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Fair value
» The estimation of fair value can be determined by
reference to:
» the quoted price in an active market for the particular
biological asset or agricultural produce (most likely for
consumable biological assets)
» market-determined prices or values (for example, the
most recent market transaction price or sector
benchmarks) when an active market does not exist or
» the present value of expected net cash flows from the
asset when market-determined prices or values may not
be available for a biological asset in its present condition
(see the forestry example below).
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Fair value (Note)
» The standard specifically requires that fair value
not be determined by reference to a future sales
contract.
» Contract prices are not necessarily relevant in
determining fair value, because fair value reflects
the current market in which a willing buyer and
seller would enter into a transaction.
» As a result, the fair value of a biological asset or
agricultural produce is not adjusted because of the
existence of a contract.
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Fair value (Note)
» The difficulty in establishing the fair value of a
biological asset increases when the asset is a bearer
asset (which itself will not eventually become
agricultural produce) and the more long-lived the
asset is.
» For example, in the established vineyards in France,
grapevines have long lives and it is not uncommon to
have productive vines that are over 100 years old
and which are capable of continued production for a
similarly long time.
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Analogizing Market value
» If an active market does not exist, uses one or
more of the following,
» The most recent market transaction price, provided
that there has not been a significant change in
economic circumstances between the date of that
transaction and the reporting date.
» Market prices for similar assets with adjustment to
reflect differences, and
» Sector benchmarks such as the value of an orchard
expressed per export try, bushel, or hectare, and the
value of cattle expressed per kilogram of meat.
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Examples slide 1 of 2
» As at 31 December 20X1, a plantation consists of 100
Wanza trees that were planted 10 years earlier. Wanza
trees takes 30 years to mature, and will ultimately be
processed into building material for houses or furniture. The
enterprise’s weighted average cost of capital is 6% p.a.
» Only mature trees have established fair values by reference
to a quoted price in an active market. The fair value
(inclusive of current transport costs to get 100 logs to
market) for a mature tree of the same grade as in the
plantation is:
» As at 31 December 20X1: 171
» As at 31 December 20X2: 165
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Example Slide 2 of 2
» Assuming immaterial cash flow between now
and the point of harvest, the fair value (and
therefore the amount reported as an asset on
the statement of financial position) of the
plantation is estimated as follows:
» As at 31 December 20X1: 17,100 ÷
[(1+6%)^20] = 5,332.
» As at 31 December 20X2: 16,500 ÷
[(1+6%)^19] = 5,453.
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Bearer plant (the new requirement 2014) effective
date 1 January 2016)
Former requirements New requirements
At initial Measured together with any Measured separately form any
recognition agricultural produce attached agricultural produce attached
(i.e., One unit of accounts) (i.e., two units of account)
Measured at fair value less Measured at cost,
costs to sell accumulated until maturity
Subsequent Measured together with the Measured at:
measurement agricultural produce until the Cost, less any subsequent
requirements point of harvest (i.e., one unit accumulated depreciation and
of account until the point of impairment with changes
harvest) recognized in profit or loss
Measured at the end of each Or
reporting period at fair value Revaluation model
less costs to sell through profit 22
Comparison of measurement requirements for agricultural
produce
Former New
requirements requirement
At the end of Measured Measured
each reporting together with separately form
Period prior to the bearer plant the bearer plant
harvest at fair value less
costs to sells
At the point of Measured separately form the
harvest bearer plant at fair value less cost
to sell 23
Gain or loss
» The change in fair value (less estimated point-
of-sale costs) of a biological asset between two
year end dates is reported as a gain or loss in
the statement or profit or loss.
» A gain or loss arising on initial recognition of
agricultural produce at fair value less estimated
point-of-sale costs is included in net profit or
loss for the period in which it arises.
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Gain or loss
» Referring to the forestry example above, the
difference in fair value of the plantation between
the two year end dates is 121 (5,453 – 5,332),
which will be reported as a gain in the statement or
profit or loss (regardless of the fact that it has not
yet been realized). The aggregate gain of 121 is
attributed to two factors:
» The effects of change in market price, and
» The physical change (growth) of the trees in the
plantation.
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Gain or loss
» The aggregate gain is analyzed as follows:
» The price change, which represents, at the biological asset’s state as
at the previous year end date: the value of the biological asset at
prices prevailing as at the current year end date less the value of the
biological asset at prices prevailing as at the previous year end date:
= (16,500 ÷ [(1+6%)^20]) – (17,100 ÷ [(1+6%)^20]) = 5,145 – 5,332
= 187 (loss).
» The physical change, which represents, at current prices:
the value of the biological asset in its state as at the current year end
date
less the value of the biological asset in its state as at the previous
year end date:
= (16,500 ÷ [(1+6%)^19]) – (16,500 ÷ [(1+6%)^20]) = 5,453 – 5,145
= 308 (gain).
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Cases
Facts
An entity on adoption of IAS 41 has reclassified certain
assets as biological assets. The total value of the
group’s forest assets is Br 2,000 million comprising
Millions (Br)
Freestanding trees 1,700
Land under trees 200
Roads in forests 100
How the forest would be classified
Total 2,000 in the financial
statements?
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Cases solution
The forest would be classified as:
Br
(millions)
Biological asset 1,700
Non current assets –Land 200
Non current asst – other tangible assets 100
Total 2,000
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Case two
Facts
» A Colombian entity is considering the valuation of its
harvested coffee beans. Industry practice is to value
the coffee beans at market value. The national
accounting body has always used this practice and
uses as its source of reference “Accounting for
Successful Farms,” a local publication.
» The entity wishes to adopt IAS 41 but does not know
what the impact will be on its inventory of coffee beans.
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Case two – solution
» Fair value measurement stops at the time of
harvest, and IAS 2, Inventories, applies after
that date. Therefore, the inventory will be
measured at the lower of cost and net
realizable value.
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Disclosure
» Extensive disclosure is required by IAS 41,
including:
» the aggregate gain or loss for the period on:
– initial recognition of biological assets
– initial recognition of agricultural produce
– change in fair value less estimated point-of-sale
costs of biological assets
» a description of, and the nature of its activities
involving, each group of biological assets
» non-financial measures or estimates of the physical
quantities of agricultural produce output for the period
and biological assets as at the year end date
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Disclosure
» methods and significant assumptions in determining fair
value
» the fair value less estimated point-of-sale costs of
agricultural produce harvested for the period
» restrictions on title, pledges and commitments in respect
of biological assets
» financial risk management strategies related to
agricultural activity
» a reconciliation of changes in the carrying amount of
those biological assets.
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Disclosure
» For biological assets measured at cost less any accumulated
depreciation and any accumulated impairment losses, the
standard requires the following additional disclosure:
» a description of those biological assets
» an explanation of why fair value cannot be measured reliably
» the range of estimates within which fair value is highly likely to lie (if
possible)
» the gain or loss recognised on disposal of those biological assets
impairment losses (if any), reversals of impairment losses (if any) and
depreciation expense
» the depreciation method used
» the useful lives or the depreciation rates used
» the gross carrying amount and the accumulated depreciation at the
beginning and end of the period. 33
Disclosure
» In addition, if the fair value of biological assets
previously measured at cost less any accumulated
depreciation and any accumulated impairment
losses subsequently becomes reliably measurable,
an enterprise should disclose a description of the
biological assets, an explanation of why fair value
has become reliably measurable, and the effect of
the change. Disclosure is also required in respect of
government grants relating to managed agricultural
activity.
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End
