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How to Account for Subsequent Expenditures

in Agriculture?
by Silvia
 ACCOUNTING POLICIES, SECTORS&INDUSTRIES 13
The standard IAS 41 Agriculture prescribes measuring all biological assets at fair value less
costs to sell (with exceptions), while all the changes in fair value are recognized in profit or
loss.

Here, one significant question arises: How should you account for expenditures that you incur
during the year in relation to these biological assets?

Food, vaccinations, veterinary expenses, fertilizers, pesticides…?

In this article with video, I tried to answer the question from Wai from Australia who
struggled with exactly the same thing:
“I work for a company that owns a few sheep farms. We are breeding sheep for sale and for
the purpose of the production of sheep products like milk, cheese and other.

I know that we must apply IAS 41 for accounting of sheep and remeasure them at fair value
less costs to sell at the end of the reporting period.

But, how shall we account for expenses like food for animals and veterinary costs?”
 

Answer: IAS 41 does not tell you, so make your own policy
I am sure that many accountants working in agricultural activities will appreciate the answer
to this question and not only if you work in the animal production, but the similar questions
pop out in the companies working with plants, like palm trees, wheat, vineyards and other.

In fact, my answer will not only relate to the animal food and veterinary expenses, but also to
fertilizers, pesticides, removing the weed and other related expenses.

So how shall we account for these costs?

Well, the trouble is that the standard IAS 41 Agriculture is silent on this topic.

There are no exact rules on how to present these costs.

Why?

I read the basis for conclusion related to IAS 41 – that’s a document explaining why the
standard creators created the rules as they are.

It says that it is not necessary to make the rules about the subsequent expenditures in
agricultural activities, because biological assets need to be remeasured to their fair value less
cost to sell with all changes in profit or loss and thus it does not matter how you treat the
subsequent expenditure.

I do not fully agree with this approach, for a very simple reason:

It is true that the effect on profit or loss will always be the same – I will show you in the short
illustration later.

But, the presentation of the individual expenses in your profit or loss is totally affected by
the way of how you treat the subsequent expenditure.

Also, your cash flow statement will look differently.

 

Select the accounting policy

In any case, it is YOU who need to set the accounting policy of treating the subsequent
expenditure.

Basically, you have 2 options:

 1. Put all subsequent expenditure in profit or loss directly, or
2. Capitalize the subsequent expenditure in the carrying amount of your biological
assets.

 
Let’s explain.
 

Option #1: All expenses in profit or loss

This is very simple and very easy way of doing the things.

In my opinion, it is not ideal, because in this case, you would show big expenses in your
profit or loss statement and on the other hand, you would show big increase in fair value of
your biological assets.

What’s wrong with that?

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Well, the fair value of your biological assets increases not only due to external market
changes, but also due to your activities like feeding the animals, taking care of them etc.

If you present all expenses in profit or loss, you are effectively presenting the increase in fair
value in one bunch regardless its source or reason.

Sure, fo some assets, you need to add additional disclosures about the fair value change due
to price change and physical change – but this disclosure is just encouraged, not obligatory.
 
Option #2: Capitalize expenses in the carrying amount of an asset.
Under the first option, you would add the expenses to the carrying amount of the biological
asset.

This way, you do not show big expenses for agricultural activity in your profit or loss, and
also you show smaller increase in fair value of your biological assets.

In my opinion, this method reflects the fair value changes better than the first method, but it
is more demanding and challenging.

Example: expense vs. capitalize

Let’s say the fair value of your herd of sheep was CU 1 000 at the end of year 1.

In the year 2, you spent CU 200 for the sheep food supplements, vet and other living and
breeding expenses.

The fair value of your herd is CU 1 500 at the end of the year 2.

Accounting #1 – all expenses in profit or loss:

The journal entry for the subsequent expenses is:

 Debit Profit or loss – operating expenses: CU 200

 Credit Suppliers / Bank account: CU 200

The journal entry to remeasure the carrying amount of sheep herd to fair value less cost to
sell at the end of year 2:

 Debit Biological assets: CU 500 (CU 1 500 – CU 1 000)

 Credit Fair value change in profit or loss: CU 500

Here, the net effect in profit or loss is CU 300 which a gain from remeasurement of 500 less
the expenses of 200.

Accounting #2 – expenses are capitalized:

The journal entry for the subsequent expenses is:

 Debit Biological assets – sheep herd: CU 200

 Credit Suppliers / Bank account: CU 200

The journal entry to remeasure the carrying amount of sheep herd to fair value less cost to
sell at the end of year 2:

 Debit Biological assets: CU 300 (CU 1 500 – CU 1 200)

 Credit Fair value change in profit or loss: CU 300

The net effect in profit or loss is CU 300 which is just gain from remeasurement.

So it’s the same, but the presentation is different.

This table summarizes the impact on profit or loss:

Expense Capitalize

FV change 500 300

Operating expenses -200 0

Net effect on P/L 300 300

How to set your accounting policy?

Finally let me just outline the optimal process of setting the accounting policy for the
subsequent expenditures.

If you want to take it easy regardless the presentation in profit or loss, then go for option 1
and put all the expenses in profit or loss as they arise.

If you care more about the presentation of your profit or loss and cash flows, then you can
try looking at IAS 2 and IAS 16 for some guidance.

These standards do not apply to biological assets, but you can use them as help in developing
your own policy.

You can just decide that all the expenses that maintain the assets, are expensed – for
example, routine vaccinations of animals, pesticides with plants, etc.

And, all the expenses that help increase the yield or outcome of the biological assets would
be capitalized – for example, food supplements or fertilizers.

This is quite challenging, because here you need to apply your judgement to determined
which costs to capitalize and which to expense.

Here’s the video summing up the issue:

Any questions or comments?

Please add them below this article. Thank you!