IPSAS 27- Agriculture

Content

» To complete these tasks, you’ll need to apply your knowledge in

the following areas of IPSAS 27:
» Scope
» Recognition and measurement criteria
» Recognition of gains or losses
» Measuring fair value

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Definitions

» Biological assets – a living animal or plant

» Bearer plant – a living plant that is used in the production or supply of agricultural
produce; (b) is expected to bear produce for more than one period; (c) has a remote
likelihood of being sold as agricultural produce, except for incidental scrap sales
» Agricultural produce – the harvested produce of the entity’s biological assets
» Harvest – the detachment of produce form a biological asset or the cessation of a
biological asset’s like process
» Agricultural activity is management by an entity of the biological transformation and
harvest of biological assets for:
» Sales
» Distribution at no charge or for a normal charge
» Conversion into agricultural produce or into additional biological asset

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Definitions

» Bearer plant is a living plant that:

» Is used in the production and supply of agricultural produce;
» Is expected to bear produce for more than one period
» Has a remote likelihood of being sold as agricultural produce, except for
incidental scrap sales
» Biological transformation –comprises the processes of growth,
degeneration, production, and procreation that cause qualitative or
quantitative changes in a biological asset.
» Group of biological assets – is an aggregation of similar living
animals or plants
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Scope of IPSAS 27

» IPSAS 27 should be applied to account for the following when they

related to agricultural activity:
» Biological assets, Except for bearer plants
» Agricultural produce at the point of harvest
» It does not apply to:
» Land related to agricultural activity
» Intangible assets related to agricultural activity
» Bearer plants related to agricultural activity (IPSAS 27 applies to the produce on
those bearer plants
» Any post-harvest produce or produce
» Biological assets held from provision or supply of services

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Scope of IPSAS 27

» IPSAS 27 applies to agricultural produce, which is the harvested product of an entity’s

biological assets only at the point of harvest.
» Thereafter, IPSAS 12 inventories or another applicable IPSAS is applied. Accordingly,
IPSAS 27 does not deal with the processing of agricultural produce after harvest, for
example, the processing of grapes into wine by the vintner who has grown the grapes.
» Take the example of a piece of livestock. A sheep, for instance, gives birth to a lamb
(labeled a biological asset). The lamb grows and in time starts to grow wool (which
will later become labeled agricultural produce). The lamb (biological asset) and the
wool on the lamb (part of the biological asset until harvest and agricultural produce at
the point of harvest) both fall into the scope of IPSAS 27.
» Once the wool is sheared from the lamb, the wool falls into IPSAS 12 or other
applicable IPSAS

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Scope of IPSAS 27

» Categorizing different types of produce can be more difficult than it appears

at first. Would you classify this egg as produce (i.e., the harvested product
of a chicken) or a biological asset (i.e., a chicken in waiting that could be
used as a means of producing more eggs)?
» Quite simply, You cannot answer the question without discussing the
management’s intentions- what they intend to do with the egg is the guiding
factor. This is the only way of classifying certain items under IPSAS 27.
» If the egg is to be fertilized and used to breed more chickens, It would be
considered a biological asset (and so falls into the scope of IPSAS 27). If
the egg is going to be sold as a foodstuff, then it would fall outside the
scope of IPSAS 27 and fall into IPSAS 12 or other applicable IPSAS.
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Scope of IPSAS 27 –check your understanding

Match the following

1. Cheese A. Biological asset
2. Live sheep
B. Agricultural produce
3. Powdered eggs
C. Processed product
4. Milk
5. Wool
6. Grape vines
7. Logs
8. Picked grapes
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Scope of IPSAS 27 –check your understanding

» Which of the following items fall within the scope of IPSAS 27

A. The land on which a vineyard is planted
B. A sheep kept to breed more sheep
C. Grapes on the vine
D. Wool sheared from the sheep
E. Wool on the sheep
F. Grapes picked from the vine
G. Grape vines

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Scope of IPSAS 27 –check your understanding

» Which of the following items fall within the scope of IPSAS 27

A. The land on which a vineyard is planted
B. A sheep kept to breed more sheep
C. Grapes on the vine
D. Wool sheared from the sheep
E. Wool on the sheep
F. Grapes picked from the vine
G. Grape vines

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Scope of IPSAS 27

» What is agricultural activity?

» IPSAS 27 defines agricultural activity as the management by an entity of the biological
transformation and harvest of biological assets for sales or for conversion into agricultural
produce or into additional biological assets.
» The following are three common features, namely:
» The capability to change
» Management of that change
» Measurement of that change
» The key feature hat often differentiates agricultural activities from other activities is the
‘management of change’ ( also known as ‘management of the biological transformation’)
feature. Biological transformation comprises the processes of growth, degeneration,
production, and procreation that cause qualitative or quantitative changes in a biological
asset

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Scope of IPSAS 27

» Agricultural activities do not include items such as:

» Investment in a forest as a carbon sink which gives rise to carbon
credits that can either be sold or used to offset pollution caused by the
entity
» Greyhounds, horses, pigeons and whippets held for racing
» Performing animals held by a theme park
» Living assets that are not animals or plants, such as viruses and blood
cells used in research

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Recognition criteria – IPSAS 27

» An entity shall recognize a biological asset or agricultural

produce when, and only when, all three of the following criteria
are fulfilled:
» The entity controls the asset as a result of a past events
» It is probable that future economic benefits associated with the asset
will flow to the entity and
» The fair value or cost of the asset can be reliably measured

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Recognition criteria –IPSAS 27

Q: can agricultural produce, such as fruit, wool and grapes, be separately

recognized from the biological assets to which they are attached-trees,
sheep, or vines?
» Until harvest, agricultural produce forms part of the total biological asset
and this asset should be measured as a whole. For example, Unshared
sheep have a higher fair value than those that are sheared.
» Following amendment made to IPSAS 17 Property, Plant and Equipment
and IPSAS 27 in 2015, biological asset that meet the definition of bearer
plants are coped out of IPSAS 27. These amendments now split the bearer
plants and the produce related to the bearer plants into two assets (i.e., two
units of account).
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Measurement Criteria

» A biological asset shall be measured on initial recognition and at

the end of each reporting period at its fair value less costs to sell,
except for the situation where fair value cannot be measured
reliably.
» Agricultural produce harvested from biological assets is measured
at fair value less cost to sell at the point of harvest. Such
measurement is the cost at that date when applying IPSAS 12
Inventories or another applicable IPSAS
» Costs to sell are the incremental costs directly attributable to the
disposal of the asset, excluding finance costs and income taxes
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Measurement Criteria

» Entities often enter into contracts to sell their biological assets

or agricultural produce at a future date.
» Contract prices are not necessarily relevant in determining fair
value, because fair value reflects the current market in which
market participant buyers and sellers 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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Measurement Criteria

» Fair value is 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.
» Approximating fair value
» cost may sometime approximate fair value, particularly when:
» Little biological transformation has taken place since initial cost were incurred(e.g., for seedlings planted immediately
prior to the end of the reporting period or newly acquired livestock) or
» The impact of biological transformation on price is not expected to be material (e.g., for the initial growth in a 30 –year
pine plantation production cycle)
» Biological assets are often physically attached to land (e.g., trees in a timber plantation). There may
be no separate market for biological assets that are attached to the land, but an active market may
exist for the combined assets, that is the biological assets, raw land and land improvement as a
package.
» An entity may use information regarding the combined assets to determine fair value for the biological
assets. For example, the fair value of raw land and land improvements may be deducted rom the fair
value of the combined assets to arrive at the fair value of the biological assets

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 Measurement Criteria

Check your understanding

» Imagine you had to specify certain information about a sheep ranch.
Have a look at the following journal entries that reflect the
recognition and harvesting of the wool in the following example:
» Entity A owns a sheep ranch. The sheep are mature and their fair value
(excluding wool) has not increased during the reporting period. However,
the fair value less cost to sell of he wool on the sheep is birr 100,000
immediately before harvest.

Sheep 100000 Inventory (wool) 100000

Gain on biological asset 100000 Sheep 100000

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Measuring assets

» There is a presumption inherent in IPSAS 27 that fair value can be

measured reliably for a biological asset. This presumption can be rebutted
only on initial recognition for biological asset for which:
» Quoted market prices are not available and
» Alternative estimates of fair value are determined to be clearly unreliable
» In such a case, the biological asset can be measured at its cost less any
accumulated deprecation and any accumulated impairment losses. Once
the fair value of such a biological asset becomes realizable measurable, an
entity shall measure it at its fair value less cost to sell.
» In all cases, an entity measures agricultural produce at the point of harvest
at fair value less cost to sell.
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Measuring assets, a case to understand

A scenario
» Let’s assume that a farmer grows trees in a timber plantation in
year 0 that cost him birr 250 million. At the at the end of year 1,
the following factors affect the value of timber plantation
There has been wider spread disease-an infestation of chrysobothris flat-
» Disease headed borers, to be precise-in the timber tree population, and as a result
» Precedent there is no market participant buyers and sellers entering transaction for the
timber plantation. The situation is expected to clear in six months.
» Local values After those six months, it is expected that it will be clear which types of trees
» National values are susceptible to infection and which ones are not. Until that time, nobody is
willing to risk buying tress in a timber planation infested with the
Chrysobothris insect,

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Measuring assets, a case to understand

A scenario
» Let’s assume that a farmer grows trees in a timber plantation in
year 0 that cost him birr 250 million. At the at the end of year 1,
the following factors affect the value of timber plantation
» Disease
» Precedent The last sales by the farmer of a tree in a timber plantation was six months
» Local values ago at Birr 150
He is not sure which way the market has gone since then,
» National values

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Measuring assets, a case to understand

A scenario
» Let’s assume that a farmer grows trees in a timber plantation in
year 0 that cost him birr 250 million. At the at the end of year 1,
the following factors affect the value of timber plantation
» Disease
» Precedent
The farmers in the region have an average value of birr 195 for their trees in a
» Local values timber plantation of a similar size.
» National values

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Measuring assets, a case to understand

A scenario
» Let’s assume that a farmer grows trees in a timber plantation in
year 0 that cost him birr 250 million. At the at the end of year 1,
the following factors affect the value of timber plantation
» Disease
» Precedent
The farmer recently read in a local magazine Addis Zemen that the average
» Local values price of a tree in a timber plantation is birr 225.
» National values

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Measuring assets, a case to understand

» What is the correct valuation?

» The valuation would be fair value less costs to sell. Fair value is determined as follows:
a) Quoted market prices-none, due to the disease
b) Other relevant information such as:
1. The most recent market transaction price: birr 150
2. Market prices for similar assets: birr 195
3. Sector benchmarks: birr 225

» If it was assessed at initial recognition that we cannot measure fair value reliably, the valuation would be
birr 225 less any accumulated depreciation and any accumulated impairment losses. The farmer would not
measure the trees in a timber planation in this way because at the time of initial recognition of the
biological asset in Year 0, the expectation was that a reliable value can be determined for the trees in a
timber plantation
» Although there is currently no quoted market price, the farmer can consider any other alternative source
available for which the fair value is to be determined, the famer would consider the reasons for the
differences in prices in ‘other relevant information’ in order to arrive at the most reliable estimate of fair
value. This value would be in the range of all the indicators available(birr 150 to birr 225)

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Measuring assets, a case to understand

» Consider the previous example – the farmer and the tree in the
timber plantation. If the quoted market price, sector benchmarks
and other information were not available, how would the farmer
wok out the correct value?
» Present value of future cash flows
» Cost price + potential value of produce
» Cost price – impairment – depreciation

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Disclosures IPSAS 27.38-54

» An entity shall disclose the aggregate gain or loss arising during the current period on initial recognition
of biological assets and agricultural produce and from the change in fair value less costs to sell of
biological assets.
» An entity shall provide a description of biological asset that distinguishes between consumable and
bearer biological assets and between biological assets held for sale and those held for distribution at no
charge or for a nominal charge.
» If not disclosed elsewhere in information published with the financial statements, an entity shall describe:
» The nature of its activities involving each group of biological assets; and
» Non-financial measures or estimates of the physical quantities of:
» Each group of entity’s biological assets at the end of the period; and
» Output of agriculture produce during the period

» An entity shall disclose the methods and significant assumptions applied in determining the fair value of
each group of agricultural produce at the point of harvest and each group of biological asset.
» An entity shall disclose the fair value less costs to sell of agricultural produce harvested during the
period, determined at the point of harvest.

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Disclosures IPSAS 27.38-54

» An entity shall disclose:

» The existence and carrying amount of biological assets whose title is
restricted, and the carrying amount of biological assets pledged as
security for liabilities
» The nature and extent of restrictions on the entity's use or capacity to
sell biological asset;
» The amount of commitments for the development or acquisition of
biological asset; and
» Financial risk management strategies related to agricultural activity.

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