IAS 41 introduces a fair value model to agriculture accounting. This is a major shift away from the traditional cost model widely applied in primary industry.
IAS 41 impacts those agricultural activities where the income-producing biological assets are living animals or plants and will include the harvested produce of these assets eg if the biological asset is dairy cattle, the agricultural produce is milk or the same distinction could be made with trees in a plantation/felled trees or sugarcane/harvested cane Biological assets do not include bearer plants. Bearer plants are:
i. used in the production or supply of agricultural produce;
ii. are expected to bear produce for more than one period;and
iii. have a remote likelihood of being sold as agricultural produce, except for incidental scrap.
Bearer plants would include tea bushes, grape vines and rubber trees. They will be accounted for using IAS 16 – accumulated cost until maturity and then subject to depreciation and impairment. The revaluation model could also be applied. The agricultural produce from them will be accounted for using IAS 41 and IAS 2.
By contrast, in the case of an annual crop of wheat, for example, when the cultivated plants would typically have a useful life that does not extend beyond the next year end date, the introduction of the fair value model should not have such a major impact.
Coverage of the standard
IAS 41 applies to:
- Biological assets (living plants or animals – for example, trees in a plantation or orchard, cultivated plants, sheep, cattle) related to managed agricultural activity. (for example, raising livestock, forestry, annual or perennial cropping, fish farming). Agricultural activity is the management by an entity of the biological transformation (the process of growing, degenerating, production and procreating that causes qualitative or quantitative change in the biological asset.
- Agricultural produce at the point of harvest.
- Government grants related to agricultural assets
IAS 41 does not apply to:
- Bearer plants related to agricultural activity (IAS 16, Property, Plant and Equipment)
- Products that are the result of processing after the point of harvest, for example: yarn/carpet, processed meats such as cured hams, tea, wine, rubber, logs – IAS 2, Inventories, applies
- The land on which the biological assets grow, regenerate and/or degenerate (IAS 16, Property, Plant and Equipment, IFRS 16, Leases, or IAS 40, Investment Properties, applies as appropriate)
- Any intangible asset associated with the agricultural activity, for example: licenses and rights (IAS 38, Intangible Assets, applies)
- Agricultural activity that is not managed, for example: harvesting from ocean fishing
- Minerals, oil, natural gas and similar non-regenerative resources (not yet covered by an IAS).
The following accounting standards specifically do not apply to biological assets related to managed agricultural activity because of the specific coverage in IAS 41:
- IAS 2, until beyond the point at which agricultural produce is harvested
- IAS 16, IFRS 16, IAS 40
- IFRS 15, Revenue from Contracts with Customers, in respect of revenue arising from the initial recognition of agricultural produce, and initial recognition and changes in fair value of biological assets
- IAS 20, Accounting for Government Grants and Disclosure of Government Assistance
- IAS 36, Impairment of Assets, when biological assets are measured at fair value.
The main issues addressed by IAS 41 are:
- When should a biological asset or agricultural produce be recognised on the statement of financial position?
- At what value should a recognised biological asset or agricultural produce be measured?
- How should the differences in value of a recognised biological asset or agricultural produce between two year end dates be accounted for?
IAS 41 specifies the usual tests in order that a biological asset or agricultural produce be recognised on the statement of financial position, namely:
- Control: the enterprise must have ownership or rights of control akin to ownership that result from a past event
- Value: future economic benefits are expected to flow to the enterprise from its ownership or control of the asset
- Measurement: the cost or fair value of the asset can be measured reliably.
Biological assets should be measured at initial recognition, and at the end of each reporting period , at fair value less estimated costs to sell.
Agricultural produce is measured, at the point of harvest, at fair value less estimated costs to sell at the point of harvest. The point of harvest represents the transition between accounting for agricultural produce assets under IAS 41 and IAS 2. Fair value less costs to sell at the point of harvest forms ‘cost’ for the purposes of IAS 2.
Costs to sell are incremental costs directly attributable to the disposal, excluding taxation and finance costs, and would include commissions to brokers and dealers, levies by regulatory agencies and commodity exchanges, and transfer taxes and duties. They exclude transport and other costs necessary to get assets to a market (these are taken into account in arriving at fair value).
IAS 41 contains a rebuttable presumption that fair value can be established for all biological assets and agricultural produce. Only on the initial recognition of such assets can the presumption be rebutted because of:
- the lack of quoted market prices, and
- alternative estimates of fair value t are determined to be clearly unreliable.
When the presumption that fair value can be established is rebutted, and until such time as a fair value becomes measurable with reliability, the asset is carried on the statement of financial position at cost less any accumulated depreciation and any accumulated impairment losses. IAS 41 contains additional disclosure requirements in such a situation
The estimation of fair value will be determined by applying the requirements of IFRS 13 Fair Value Measurement. Fair value is the price that would be received to sell the biological asset or agricultural produce in an orderly transaction between market participants at the measurement date.
IAS 41 recognises that fair value measurement may be aarived at more reliably by grouping assets or produce eg by age or quality if this better reflects the attributes used in the market to arrive at prices. For example livestock would be grouped by species, age, weight, yield in a similar manner to how they would be valued by the market.
The standard specifically requires that fair value not be determined by reference to a future sales contract. Contract prices are not necessarily relevant in determining fair value, because fair value reflects the current market in which a willing buyer and seller 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.
The standard also addresses the situation where the biological assets are physically attached to the land eg trees in a forestry plantation. There may be no separate market for the biological asset separate from the land but rather the active market is for the combined assets as a package. The standard suggests arriving at a fair value for the combined package and deducting the fair value of the land and land improvements to arrive at the fair value of the biological assets.
The standard also acknowledges cost can approximate to fair value when little biological transformation has taken place since initial cost incurrence (newly acquired livestock) or the impact of biological transformation on price is not material (initial growth in timber plantation).
Establishing fair value when market-determined prices or values may not be available for a separate biological asset in its present condition:
- As at 31 December 20X1, a plantation consists of 100,000 Pinus Radiata trees that were planted 10 years earlier. Pinus Radiata takes 40 years to mature, and will ultimately be processed into building material for houses or furniture. Only plantations combining land, land improvements and trees have established fair values by reference to a quoted price in an active market.
|31 December 20X2
|31 December 20X1
Fair value of plantation
Fair value of land
Fair value of land improvements
Trees – fair value (biological asset)
Gains and losses
At initial recognition, the fair value (less estimated costs to sell) of a biological asset is reported as a gain or loss in the statement of profit or loss. A loss may arise on initial recognition when the estimated selling costs exceed the fair value of the asset in its present state or a gain on initial recognition such as when livestock are born
The change in fair value (less costs to sell) of a biological asset between reporting dates is reported as a gain or loss in the statement or profit or loss.
A gain or loss arising on initial recognition of agricultural produce at fair value less selling costs is included in profit or loss for the period in which it arises.
Referring to the forestry example above, the difference in fair value of the plantation between the two year end dates is 800 (4,500 – 3,700), which will be reported as a gain in the statement or profit or loss (regardless of the fact that it has not yet been realised).
The aggregate gain of 800 is attributed to two factors:
- The effects of change in market price, and
- The physical change (growth) of the trees in the plantation.
IAS 41 requires disclosure of 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. In recognising that reporting the aggregate gain or loss according to its distinct causes may not be practical in all circumstances, the standard does not require reporting of the gain or loss on a disaggregated basis (that is, analysed between the gain and/or loss due to price and physical factors) but encourages such disclosure because it is useful in appraising current period performance and future prospects, particularly when there is a production cycle of more than one year.
Biological assets and agricultural produce should be presented as separate line items under the following headings:
- Property, Plant and Equipment – would include bearer plants
- Biological assets – would include all agricultural produce to be harvested more than 12 months from the reporting date, livestock to be held for more than 12 months and trees cultivated for lumber and fruit.
- Biological assets – would include produce to be harvested within 12 months of reporting date, livestock to be slaughtered within 12 months and annual crops eg wheat, maize
- Inventories – includes the inventories produced from agricultural produce eg the Tea to be sold, produced from the tea leaves
Extensive disclosure is required by IAS 41, including:
- the aggregate gain or loss for the period on:
– initial recognition of biological assets
– initial recognition of agricultural produce
– change in fair value less estimated costs to sell of biological assets
- a description of, and the nature of its activities involving, each group of biological assets
- non-financial measures or estimates of the physical quantities of agricultural produce output for the period and biological assets as at the year end date
- restrictions on title, pledges and commitments in respect of biological assets
- a reconciliation of changes in the carrying amount of those biological assets between the beginning and end of the reporting period. The reconciliation should include the gain/loss arising from changes in fair value, purchases, sales, decreases due to harvest and other changes
For biological assets measured at cost less any accumulated depreciation and any accumulated impairment losses, the standard requires the following additional disclosure:
- a description of those biological assets
- an explanation of why fair value cannot be measured reliably
- the range of estimates within which fair value is highly likely to lie (if possible)
- the gain or loss recognised on disposal of those biological assets
- impairment losses (if any), reversals of impairment losses (if any) and depreciation expense
- the depreciation method used
- the useful lives or the depreciation rates used
- the gross carrying amount and the accumulated depreciation at the beginning and end of the period.
In addition, if the fair value of biological assets previously measured at cost less any accumulated depreciation and any accumulated impairment losses subsequently becomes reliably measurable, an enterprise should disclose a description of the biological assets, an explanation of why fair value has become reliably measurable, and the effect of the change. Disclosure is also required in respect of government grants relating to managed agricultural activity.
Government grants – assets measured at fair value less costs to sell
An unconditional government grant related to a biological asset measured at its fair value less costs to sell shall be recognised in profit or loss when the government grant becomes receivable.
If the government grant is conditional, including when a government grant requires an entity not to engage in specified agricultural activity, the grant is recognised when the conditions are met. An example of this type og grant is the EU set-aside grant scheme.
Government grants – assets measured at cost less accumulated depreciation and impairment
IAS 20 will apply.