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IAS 41 – Agriculture
Definitions
• Biological Asset – a living plant or animal
• Biological transformation – processes of growth, degeneration,
production and procreation causing changes in a biological asset
• Agricultural activity – management of the biological transformation of
biological assets for sale, into agricultural produce
• Agricultural produce – the harvested produce of biological assets
A farmer buys a dairy calf The calf is a biological asset
The calf grows into a mature cow Growth
The cow produces milk Production (the milk is agricultural
produce)
The cow gives birth to a calf Procreation (of more biological
assets)
The cow becomes old and
unproductive
Degeneration
Typically farmers account for a group of biological assets, such as a
herd, rather than individual animals.
Biological assets
A biological asset should be recognised if:
Recognition and measurement
Initial measurement is at:
Subsequent measurement:
• It is probable that economic benefits will flow to the asset
• the cost or fair value of the asset can be reliably measured
• the entity controls the asset
• Fair value less any estimated ‘point of sale’ costs
• If there is no fair value, then use the cost model
• Revalue to fair value less point of sale costs at year end, taking and gain
or loss to the statement of profit or loss
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Definitions
Agriculture is fundamentally different from other types of business. Most
noncurrent
assets wear out or are consumed over time and therefore
they are depreciated. Many agricultural assets grow, rather than wear
out. Arguably, depreciation is irrelevant in this situation. Therefore
biological assets are measured at fair value and changes in fair value
are reported as part of net profit. This means that a farmer’s profit for the
year reflects the increase in the value of his productive assets as a
whole, as well as the profit on any sales made during the year.
Many commentators have been wary of this departure from traditional
realisation concepts , claiming that it is wrong to recognise profit before
a sale has been made. Indeed, under IAS 41 profits could be
recognised years before the products are even ready for sale. However,
supporters of IAS 41 claim that the opposite is true. By requiring all
changes in the value of a farm to be reported openly, farm managers will
be unable to boost profits by selling off an unsustainable amount of
produce. For instance, under traditional accounting rules a forestry
company could make huge shortterm
profits by felling all of its trees
without replacing them. Profit would reflect the sales but ignore the fall in
value of the forest.
IAS 41 contains a rebuttable presumption that the fair value of a
biological asset can be measured reliably. Many biological assets are
traded on an active market, so it is normally easy to determine the fair
value of an asset by ascertaining the quoted price in that market.
If there is no active market for the asset then it may be possible to
estimate fair value by using:
If there is no active market and the alternative methods of estimating fair
value are clearly unreliable, then a biological asset is measured at cost
less depreciation on initial recognition until a reliable fair value can be
established. For example, seedlings being grown on a plantation will not
have any market value until they are a few years old.
Gains and losses can arise when a biological asset is first recognised.
For example , a loss can arise because estimated selling costs are
deducted from fair value . A gain can arise when a new biological asset
(such as a lamb or a calf) is born.
• the most recent market price
• the market price for a similar asset
• the discounted cash flows from the asset
• net realisable value.
Inventories, agriculture and construction contracts
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Fair value
Agricultural produce
At the date of harvest the produce should be recognised and measured at
fair value less estimated costs to sell.
• Gains and losses on initial recognition are included in profit or loss
(operating profit) for the period.
• After produce has been harvested, IAS 41 ceases to apply. Agricultural
produce becomes an item of inventory. Fair value at the point of harvest
is taken as cost for the purpose of IAS 2 Inventories , which is applied
from then onwards.
Government grants and biological assets
Government grants
IAS 41 applies to government grants related to a biological asset.
• Unconditional government grants received in respect of biological
assets measured at fair value are reported as income when the grant
becomes receivable.
• If such a grant is conditional (including where the grant requires an entity
not to engage in certain agricultural activity), the entity recognises it as
income only when the conditions have been met.
Assets outside the scope of IAS 41
IAS 41 does not apply to intangible assets (e.g. production quotas) or to
land related to agricultural activity.
• Intangible assets are measured at cost less amortisation or fair value
less amortisation (if an active market exists) (IAS 38 Intangible assets ).
• Land is not a biological asset. It is treated as a tangible noncurrent
asset and IAS 16 Property, plant and equipment applies. This means
that (for example) when a forest is valued, the trees must be valued
separately from the land that they grow on.
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A herd of five 4 year old animals was held on 1 January 20X3. On 1 July
20X3 a 4.5 year old animal was purchased.
The fair values less estimated point of sale costs were:
Required:
Calculate the amount that will be taken to the statement of profit
or loss for the year ended 31 December 20X3.
• 4 year old animal at 1 January 20X3 $200
• 4.5 year old animal at 1 July 20X3 $212
• 5 year old animal at 31 December 20X3 $230
McDonald operates a dairy farm. At 1 January 20X1, he owns 100 cows
worth $1,000 each on the local market. At 31 December 20X1, he owns
105 cows worth $1,100 each. During 20X1 he sold 40,000 gallons of
milk at an average price of $5 a gallon. When cows are sold at the local
market, the auctioneer charges a commission of 4%.
Show extracts from the financial statements for 20X1 for these
activities, assuming that no cows were purchased or sold during
the year.
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