CHAPTER THREE: ACCOUNTING FOR AGRICULTURE

Background and Introduction

IAS 41 defines agricultural activity as ‘the management by an entity of the biological
transformation and harvest of biological assets for sale or for conversion into agricultural
produce or into additional biological assets.

The standard states that ‘agricultural activity’ covers a wide range of activities, e.g. ‘raising
livestock, forestry, annual or perennial cropping, cultivating orchards and plantations,
floriculture, and aquaculture (including fish farming).

Nevertheless, these agricultural activities have certain common features:

(a) Capability to change. Living animals and plants are capable of biological transformation;

(b) Management of change. Management facilitates biological transformation by enhancing, or

at least stabilizing, conditions necessary for the process to take place (for example, nutrient
levels, moisture, temperature, fertility, and light). Such management distinguishes agricultural
activity from other activities. For example, harvesting from unmanaged sources (such as ocean
fishing and
deforestation) is not agricultural activity; and

(c) Measurement of change. The change in quality (for example, genetic merit, density,
ripeness, fat cover, protein content, and fibre strength) or quantity (for example, progeny, weight,
cubic metres, fibre length or diameter, and number of buds) brought about by biological
transformation “or harvest” is measured and monitored as a routine management function.

The main objective of IAS 41 is to establish accounting standards for agricultural activity. This
Standard applies to biological assets, agricultural produce at the point of harvest, and
government
grants. The Standard does not apply to land related to agricultural activity, which is covered by
IAS 16, Property, Plant, and Equipment, and IAS 40, Investment Property, or to intangible
assets
related to agricultural activity, which are covered by IAS 38, Intangible Assets. Agricultural land
is accounted for under IAS 16, but biological assets that are attached to the land are measured
separately from the land.
2. DEFINITIONS OF KEY TERMS (in accordance with IAS 41)
Biological assets-Living plants and animals.
A group of biological assets-an aggregation of similar living animals or plants.
Agricultural produce-The harvested product of the entity’s biological assets, for example, milk
and coffee beans.
Harvest- the detachment of produce from a biological asset or the cessation of a biological
asset’s life processes.
Biological transformation. Relates to the processes of growth, degeneration, and production
that can cause changes of quantitative or qualitative nature in a biological asset.
The standard explains that biological transformation results in the following types of outcomes:
(a) asset changes through:
(i) growth (an increase in quantity or improvement in quality of an animal or plant);
(ii) degeneration (a decrease in the quantity or deterioration in quality of an animal or plant); or
(iii) procreation (creation of additional living animals or plants); or
(b) production of agricultural produce such as latex, tea leaf, wool, and milk.’
Active market. One where these conditions exist: The items traded in the market are
homogenous;
willing buyers and sellers normally can be found at any time, and prices are available to the
public.
Fair value. The amount for which an asset can be exchanged or a liability settled in an arms-
length
transaction between knowledgeable and willing parties. The fair value of an asset is based on its
present location and condition.
Costs to sell- the incremental costs directly attributable to the disposal of an asset excluding
finance costs and income taxes.
The standard provides the following examples to illustrate the above definitions:
Types of Biological Assets
Biological Assets under this standard are classified into
a) Bearer Biological Assets
b) Consumable Biological Assets
Definition of bearer plants
A bearer plant is defined as ‘a living plant that:
 is used in the production or supply of agricultural produce;
 is expected to bear produce for more than one period; and
 has a remote likelihood of being sold as agricultural produce, except for incidental scrap
sales
All of the above criteria need to be met for a plant to be considered a bearer plant. The definition
captures plants that would intuitively be considered to be bearers, for instance, grape vines. In
addition, some plants that may appear to be consumable, such as the root systems of perennial
plants (e.g., sugar cane, bamboo or asparagus) are expected to meet the definition of a bearer
plant.

Annual crops and other plants that are held solely to be harvested as agricultural produce (e.g.
many traditional arable crops such as maize, wheat and soya, as well as trees grown for lumber),
are explicitly excluded from the definition of a bearer plant.
In addition, plants that have a dual use (i.e., plants cultivated to bear agricultural produce, but for
which there is more than remote likelihood that the plant itself will be harvested and sold as
agricultural produce, beyond incidental scrap sales) are not bearer plants. This may be the case
when, for example, an entity holds rubber trees to sell both the latex as agricultural produce and
the trees as lumber.

Bearer animals, like bearer plants, may be held solely for the produce that they bear. However,
bearer animals have been explicitly excluded from the bearer plants amendments and will
continue to be accounted for under IAS 41 on the basis that the measurement model would
become more complex if applied to such assets.
b) Consumable biological assets:
a. Biological assets which do not meet all of the above requirements.
b. All animals
3.1 RECOGNITION AND MEASUREMENT
 An entity recognizes a biological asset (including produce growing on a bearer plant)

or agricultural product that is within the scope of IAS 41 only when:

(a) it controls the asset as a result of past events;

(b) it is probable that future economic benefits associated with the asset will flow to the entity;
and

(c) the fair value or cost of the asset can be measured reliably.

Any biological asset should be measured initially and at each balance sheet date, at its fair value
less estimated point-of-sale costs. The only exception to this is where the fair value cannot be
measured reliably.

 Agricultural produce should be measured at fair value less estimated point-of-sale costs at
the point of the harvest. Unlike a biological asset, there is no exception in cases in which
fair value cannot be measured reliably. According to IAS 41, agricultural produce can
always be measured reliably. Point-of-sale costs include brokers’ and dealers’
commissions, any levies by regulatory authorities and commodity exchanges, and any
 transfer taxes and duties. They exclude transport and other costs necessary to get the
assets to a market.
 Where biological assets are harvested, then fair value measurement stops at the time of
the harvest, and IAS 2, Inventories, applies after that date.
 In deciding on the fair value for a biological asset or agricultural produce, it is possible to
group together items in accordance with, for example, their age or quality. Entities often
contract to sell their biological assets or produce at a future date. These contract prices do
not necessarily represent fair value. Therefore, the fair value of a biological asset or
produce is not necessarily adjusted because of the existence of a contract. In many cases,
these contracts may in fact be onerous contracts, as defined in IAS 37. If an active market
exists for the asset or produce, then the price in that market may be the best way of
determining fair value.
 If an entity has access to different active markets, then the entity will choose the most
relevant and reliable price that is the one at which it is most likely to sell the asset.
If an active market does not exist, then these methods can be used to determine fair value:
• The most recent market transaction price
• Market prices for similar assets after adjustment to reflect any differences in the asset
• Any benchmarks within the sector, such as the value of cattle per kilogram.
 In some cases, market prices or values may not be available for an asset in its present
condition. In these cases, the entity can use the present value of the expected net cash
flow from the asset discounted at a current market pretax rate. In some circumstances,
costs may be an indicator of fair value, especially where little biological transformation
has taken place or the impact of biological transformation on the price is not expected to
be significant.

Figure-3.1: Comparison of measurement requirements for bearer plants (assuming fair value can
be reliably measured)
3.2 GAINS AND LOSSES

Any gain on the initial recognition of biological assets at fair value less estimated point-of-sale
costs and any changes in the fair value less estimated point-of-sale costs of biological assets
during the reporting period are included in profit or loss for the period. Any gain on the initial
recognition of agricultural produce at fair value less estimated point-of-sale costs will be
included in profit or loss for the period to which it relates. All costs related to biological assets
that are measured at fair value are recognized in profit or loss when incurred, except for costs to
purchase biological assets.

The Standard does not explicitly prescribe how to account for subsequent expenditure related to
biological assets. A gain or loss can, therefore, arise when an animal is born, plants and animals
grow, plants are harvested, or animals generate agricultural produce. Losses can arise on the
initial recognition of the purchase of animals, as their fair value less estimated point-of-sale costs
are likely to be less than the purchase price plus any transaction and transportation costs.

An entity has these balances in its financial records:

$m

Value of biological asset at cost 12/31/X1 600

Fair valuation surplus on initial recognition at fair value 12/31/X1 700

Change in fair value to 12/31/X2 due to growth and price fluctuations 100

Decrease in fair value due to harvest 90

Required

Show how these values would be incorporated into the financial statements at December 31,
20X2.

Solution

Balance sheet at December 31, 20X2:

$m

Biological assets— 600

Fair valuation (included in profit or loss year ended 12/31/01) 700

Carrying value 1/1/20X2 1,300

Change in fair value 100

Decrease due to harvest (90)

Carrying value at December 31, 20X2

1,310

Income statement for year ended December 31, 20X2:

Biological assets change in fair value 100

Decrease due to harvest (90)

Net gain 10

FAIR VALUE RELIABILITY

IAS 41 presumes that fair value can be measured reliably for a biological asset. However, it is
possible that this presumption can be rebutted for a biological asset that, when it is first
recognized, does not have a quoted market price in an active market and for which other
valuation methods are clearly inappropriate or unworkable. In this case, the asset is measured at
cost less accumulated depreciation and any impairment losses. All the other biological assets of
the entity still must be measured at fair value. If circumstances do change and fair value becomes
reliably measurable, then the entity must switch its valuation method to fair value less point-of-
sale costs.

If a noncurrent biological asset meets the criteria to be classified as held for sale or is included in
a disposal group in accordance with IFRS 5, then it is presumed that fair value can be measured
reliably.

In determining cost, depreciation, and impairment losses, the entity should use IAS 2, IAS 16,
and IAS 36.

GOVERNMENT GRANTS

A government grant that is related to a biological asset measured at fair value less estimated
point-of-sale costs should be recognized as income when the government grant becomes
receivable.

If there are conditions attached to the government grant, then the government grant shall be
recognized only when those conditions are met. IAS 20 is applied only to a government grant
that is related to a biological asset that has been measured at cost less accumulated depreciation
and impairment losses.

IAS 41 does not deal with government grants that relate to agricultural produce. These grants
may include subsidies. Subsidies are normally payable when the produce is sold and would
therefore be recognized as income on the sale.
 o The change in the fair value of biological assets is twofold: There can be physical change
through growth, and there can be a price change. Separate disclosure of these two
elements is encouraged but not required.

Example 2

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.

Required

The entity wishes to adopt IAS 41 but does not know what the impact will be on its inventory of
coffee beans.

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.

Example 2

A public limited company, Dairy, produces milk on its farms. It produces 30% of the country’s
milk that is consumed. Dairy owns 450 farms and has a stock of 210,000 cows and 105,000
heifers. The farms produce 8 million kilograms of milk a year, and the average inventory held is
150,000 kilograms of milk.

However, the company is currently holding stocks of 500,000 kilograms of milk in powder form.
At October 31, 20X4, the herds are

• 210,000 cows (3 years old), all purchased on or before November 1, 20X3

• 75,000 heifers, average age 1.5 years, purchased on April 1, 20X4

• 30,000 heifers, average age 2 years, purchased on November 1, 20X3

No animals were born or sold in the year.

The unit values less estimated point-of-sale costs were

1-year-old animal at October 31, 20X4: $32

2-year-old animal at October 31, 20X4: $45

1.5-year-old animal at October 31, 20X4: $36

3-year-old animal at October 31, 20X4: $50

1-year-old animal at November 1, 20X3 and

April 1, 20X4: $30

2-year-old animal at November 1, 20X3: $40

The company has had problems during the year: Contaminated milk was sold to customers. As a
result, milk consumption has gone down. The government has decided to compensate farmers for
potential loss in revenue from the sale of milk. This fact was published in the national press on
September 1, 20X4. Dairy received an official letter on October 10, 20X4, stating that $5 million
would be paid to it on January 2, 20X5.

The company’s business is spread over different parts of the country. The only region affected by
the contamination was Borthwick, where the government curtailed milk production in the region.
The cattle were unaffected by the contamination and were healthy. The company estimates that
the future discounted cash flow income from the cattle in the Borthwick region amounted to $4
million, after taking into account the government restriction order. The company feels that it
cannot measure the fair value of the cows in the region because of the problems created by the
contamination. There are 60,000 cows and 20,000 heifers in the region. All these animals had
been purchased on November 1, 20X3. A rival company had offered Dairy $3 million for these
animals after point-of-sale costs and further offered $6 million for the farms themselves in that
region. Dairy has no intention of selling the farms at present. The company has been applying for
IAS 41 since November 1, 20X3.

Required

Advise the directors on how the biological assets and produce of Dairy should be accounted for
under IAS 41, discussing the implications for the financial statements.
Presentation

 In the statement of financial position biological assets should be classified as a separate

class of assets falling under neither current nor non-current classifications.

 This reflects the view of such assets as having an unlimited life on a collective basis; it is
the total exposure of the entity to this type of asset that is important.

 Biological assets should also be sub-classified (either on the face of the statement of
financial position or as a note to the accounts).

 Class of animal or plant

 Nature of activities (consumable or bearer)

 Maturity or immaturity for intended purpose

DISCLOSURES

• An entity shall disclose the aggregate gain or loss that arises on the initial recognition of
biological assets and agricultural produce and from the change in value less estimated point-of-
sale costs of the biological assets.

• A description of each group of biological assets is also required. If it is not disclosed anywhere
else in the financial statements, then the entity shall also set out the nature of its activities and
nonfinancial measures or estimates of the physical quantity of each group of the entity’s
biological assets at period end. It should supply the same information for the output for
agricultural produce during the period.

• The methods and assumptions applied in determining fair value should also be disclosed.
• The fair value less estimated point-of-sale costs of agricultural produce harvested during the
period shall be disclosed at the point of harvest.

• The existence and carrying amounts of biological assets whose title is restricted and any
biological assets placed as security should be disclosed.

• The amount of any commitments for the development or acquisition of biological assets and
management’s financial risk strategies should also be disclosed.

• A reconciliation of the changes in the carrying amount of biological assets showing separately
changes in value, purchases, sales, harvesting, business combinations, and exchange differences
should be disclosed.

• Where fair value cannot be measured, then additional disclosure is required including the
description of the asset, an explanation of the circumstances, if possible a range within which the
fair value is likely to fall, any gain or loss recognized on disposal, the depreciation method, and
useful lives or depreciation rates.

• The gross carrying amounts on the accumulated depreciation should also be shown.

• If the fair value of biological assets previously measured at cost less accumulated depreciation
and impairment losses is now ascertainable, then additional disclosures are required, such as a
description of the biological assets, an explanation as to why fair value is now reliably
measurable, and the effect of the change.

• Regarding government grants, disclosures should be made as to the nature and extent of the
grants, any conditions that have not been fulfilled, and any significant decreases in the expected
level of the grants.