Chapter 3

Accounting for Agriculture

IAS 41

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 Outline of the chapter

Basic Terms and Scope of Biological Assets

The Nature of Biological Assets

Recognition and Measurement of Biological Assets

Presentation and Disclosure Issues

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 Basic Terms and Scope
What is a biological asset ????
International Accounting Standard 41 (IAS 41)- defines a biological asset as
“a living animal or plant”.
Biological asset (BA) – assets that are a living animal or plant owned by a
business for agriculture activity.
Biological assets” is one of the categories of assets.
Biological assets include animals such as goats, sheep, cows, buffaloes,
calves, and fish.
Biological assets include plants such as vegetables, crops, vineyards, trees,
and fruit orchards.
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 Basic Terms and Scope
Agricultural activity –

The management by an entity for the

 Biological transformation (growth) of biological assets for the purpose of

sale.

 Biological transformation (reproduction) of biological assets for the

purpose of creating additional biological assets.

 Biological transformation of biological assets for the purpose of harvesting

agricultural produce from that asset.
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 Basic Terms and Scope
What is the management of biological transformation ??

• Management of biological transformation normally takes the form of activity to

enhance, or at least stabilize, the conditions necessary for the process of;
growth,

degeneration,

production and

Procreation/breeding that causes qualitative or quantitative changes in a

biological asset to take place.
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 Basic Terms and Scope

Examples of agricultural activity include:

 Raising livestock, fish, or poultry
 Stud farms (for example, breeding horses or cattle)
 Forestry
 Cultivating vineyards, orchards, or plantations
 Floriculture
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 Basic Terms and Scope
• Agricultural produce – the harvested product of the entity’s biological assets.
(e.g. milk, mutton, beef, fruits, coffee beans etc.).
• Biological transformation – it is a natural change of BA result in,
growth (improvement in quality or increase in quantity of animals/plants).
deterioration in quality or decrease in quantity of animals or plants.
creation of additional animals or plants.
harvesting of agricultural produce
• Point-of-sale costs – payments to intermediaries, assessors, sales agents, as
well as taxes, levies, and similar costs.
• Harvest – the detachment/unit of produce from a biological asset (e.g. picking of
apples) or the cessation of a biological asset’s life processes (e.g. threshing
grains, slaughtering livestock).
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 The Nature of Biological Assets
• Biological assets can be held and accounted for by any business owner.

• However, because of their nature, they are, typically, of the utmost

importance individuals whose primary source of profit comes from growing,
selling, and shipping such goods (farmers).

• They are the same as the goods produced by other companies that
manufacture items made of plastic, paper, or other materials in terms of
generating revenue for the seller and accounting for loss if the goods are
damaged or stolen.

• The only qualitative difference is that the asset is living.

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The Nature of Biological Assets con’t …

• Biological assets, are difficult to maintain, constantly under the threat of

change, both qualitatively and quantitatively because they are living or
have an active component.

• It simply means that plants, animals, and the living things they produce
(such as hens producing eggs or cows producing milk) have a period of
time where they must grow or be produced, a useful period during which
they can be harvested, and a limited amount of time during which they can
be moved and sold before they rot, decay, or otherwise become useless to
consumers.

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The Nature of Biological Assets con’t…
• Biological assets change and depreciate naturally and more rapidly
than other types of goods.
• Different types of biological assets, much like other goods, can be in
high or low demand, depending on the season.
• They can also be lost or damaged, with the loss or damage usually
due to things like unexpected periods of rain or drought, cold
weather, or the spread of a disease that wipes outcrops and/or
livestock.

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 Classification of biological asset
• Biological assets can either be productive biological assets or
agricultural inventories.
1. Productive biological assets: − held for use in the production or
supply of agricultural inventories or other productive biological
assets acquired (developed) for use on a continuing basis.
2. Agricultural inventories: − held for sale in the ordinary course of
business; − in the process of agricultural production to be held for
sale or − held for use in a productive capacity with short productive
lives.
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Productive biological assets or agricultural inventories.
Biological assets Agricultural Products – result of processing
produce
Grain (crop) Cereal, straw Flour
Sugar beetroots (crop) Sugar beetroots Sugar
Flax Straw Fibre, threads, fabrics
Perennial grass, Grass, hay, Grass flour
meadows haylage, silage
Fruit trees, Picked fruit, berries Wine, juice, jam
berry-bearing bushes
Pasteurized milk, cheese, sour
Dairy cattle Milk cream, cottage cheese, butter,
cheese
Pigs, livestock Carcass Sausages
Sheep Wool Yarn, carpets
Bees Honey, wax Candles, “Midus”
Mushrooms Picked mushrooms Conserved, dried mushrooms
Fish Fry, fish Smoked fish, tinned fish
Furry animals Fur Fur coats
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 The Importance of Biological Assets
Usually, biological assets are of primary importance in the farms business.
such as
silviculture,
vineyards, and
Livestock etc.
• Farm businesses generate income from their biological assets,
• Therefore, these biological assets need to be recognized in the balance
sheet and the revenues from them also need to be recognized in the
income statement.
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 Scope of Biological Assets (agricultural activity)
1. Is managing animal-related recreational activities is agricultural activity?
No
Managing recreational activities – for example, game parks and zoos
are not an agricultural activity, as there is no management of the
transformation of the biological assets but simply control of the number
of animals.

2. Is the natural breeding of animals in zoos and game parks are

agricultural activity? No.
The natural breeding that takes place is not a managed activity and is
incidental to the main activity of providing a recreational facility.
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Scope…..
Is ocean fishing agricultural activity?
Harvesting biological assets from unmanaged sources, such as
ocean fishing, is not agricultural activity.

Is fish farming agricultural activity? Yes.

Managing the growth of fish for subsequent slaughter or sale is an
agricultural activity within the scope of IAS 41.

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 Scope…..
• Does the development of living organisms such as cultures, cells, bacteria, and
viruses represent agricultural activity? It depends.
• The development of organisms for research purposes does not qualify as an
agricultural activity, as those organisms are not being developed for sale, or for
transformation into agricultural produce or additional biological assets.
• f the organisms are being developed for those purposes, the activity is
agricultural activity.

• Is the growing of plants to be used in the production of drugs an agricultural

activity? Yes.
• If a pharmaceutical or biotechnology entity grows plants from which particular
drugs are produced, that activity will fall within IAS 41’s scope.
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 1. Example of scope Agricultural activities
• Entity A raises cattle, slaughters them at its abattoirs/ slaughters house
and sells the carcasses to the local meat market. Which of these
activities are in the scope of biological asset?
• The cattle are biological assets while they are living. When they are
slaughtered, biological transformation ceases and the carcasses meet
the definition of agricultural produce.

• Therefore, entity A should account for the live cattle as a biological asset
and the carcasses as inventory.

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 2. Example of scope Agricultural activities
• Entity B grows vines, harvests the grapes, and produces wine. Which of
these activities are in the scope of biological assets?
• The grapevines are biological assets that continually generate crops of
grapes. When the entity harvests the grapes, their biological
transformation ceases and they become agricultural produce.
• Assets such as wine that are subject to a lengthy maturation period are
not biological assets. These processes are analogous to the conversion
of raw materials to a finished product rather than biological
transformation.
• Therefore, the entity should account for the grapevines in biological
assets and the harvested grapes as inventory.
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 Recognition of biological assets
• According to IAS 41, the biological assets should be recognized in the
balance sheet when the following criteria are fulfilled:

The business controls the biological assets because of a past event.

It is probable that the business will get future economic benefits from
them.

Fair value or cost of the biological asset can be measured reliably.

• If the above criteria are fulfilled, biological assets should be recognized at

their fair value minus point-of-sale costs.

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 Measurements of biological assets
All biological assets shall be measured on initial recognition (at the
time of procreation, germination of crops, tree planting, etc.) and at
subsequent balance sheet dates; and

All agricultural produce harvested of the biological assets shall be

measured at the point of harvest applying one of these methods:

1) at the fair value less point-of-sale costs;

2) at the acquisition (production) costs.

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 Measurements of biological assets
• FV of a biological asset is the market value in a relevant and
reliable active market between knowledgeable and willing parties.
• In determining the FV of a biological asset one shall take into
account its location and condition. For example, the FV of animals
held in a farm is their market price less estimated transport and
other costs necessary to get the animals to the market.
• Point-of-sale costs include broker’s commission, transfer taxes and
duties, and commodity exchanges. These costs exclude transport
and other costs necessary to get an asset to a market.
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 Circumstances where an entity can depart from using FV?

1. Practical convenience.
The standard allows that cost may approximate fair value where little
biological transformation has taken place since the initial cost was
incurred.
for example, for fruit tree seedlings planted immediately before the
balance sheet date.
The same applies when the impact of the biological transformation on
price is not expected to be material.
for example, for the initial growth in a 30-year pine plantation cycle.

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 Circumstances where an entity can depart from using FV?

2.If fair value cannot be reliably measured

• It is almost never relevant.

• The standard includes a belief that fair value can be measured reliably
for a biological asset. That belief can be rebutted/denied only on initial
recognition for a biological asset for which market-determined prices or
values are not available and for which alternative estimates of fair value
are determined to be clearly unreliable.

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 Measurement of biological asset
What is the fair value hierarchy in IAS 41(biological asset)?

1. Price for the asset in an active market.

2. The recent transaction price for the asset if there is no active market.
3. Market prices for similar assets, adjusted for the points of difference.
4. Sector benchmarks.
5. Present value of the future cash flows expected to be generated from
the asset.
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 Example
• Ted started running a farm that is involved in agriculture activity whereby it buys
dairy-producing cows. At the start of the financial year, Ted purchased 1,000 dairy
cows with an average age of 2 years old for 1,500,000. Ted has the following data
on the Fair value of the agricultural activity.

FV less point of sell cost

Start of year end of year
2 years old cow 1500.00 1550.25
3 years old cow 1590.80 1650.10

• Explain the accounting treatment of the above in Financial statement.

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 solution
• Balance sheet
1000*1650.10=1,650,100

• Income statement:
Gain = (1650.10-1500)*1000
=150,100

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 Presenting biological assets in financial statements
• In the balance sheet biological assets are presented in a separate item between
fixed and current assets.

• If the entity's accounting policy allows for measurement of biological assets at

their fair value less point-of-sale costs, this amount is stated in the balance
sheet.

• If the entity's accounting policy allows for measurement of biological assets at

their acquisition (production) cost, biological assets (except for perennial
seedlings) are stated in the balance sheet according as inventories.

• Perennial seedlings in the balance sheet are stated at their book value, and
their depreciation is calculated and presented as “Non-current Tangible Assets”.
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 Disclosure of Biological asset
• In explanatory notes all entities shall disclose:

Groups of biological assets of the entity classified on the basis of the purpose
and useful life of these assets;

Measurement methods used for each group of biological assets of the entity;

Carrying amount of biological assets pledged as collateral and biological assets

whose title is restricted.

Results of measuring biological assets at their fair value less point-of-sale costs.

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 Disclosure……..
Information about the changes in the fair value of each group of
biological assets during the reporting period:

i. The carrying amount at the beginning of the period;

ii. An increase due to procreation of animals or plants;
iii. A change due to the changes in the fair value less point-of-sale costs;
iv. An increase due to purchases;
v. A decrease due to disposals;
vi. A decrease due to harvesting;
vii. Other changes;
viii. The carrying amount at the end of the period.

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End of chapter Three

Thank you !!

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