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AGRICULTURE

Objective of IAS 41

The objective of IAS 41 is to establish standards of accounting for agricultural activity – the management of the biological transformation of biological assets (living plants and animals) into agricultural produce (harvested product of the entity's biological assets).

Key Definitions

Biological assets: living animals and plants. [IAS 41.5]

Agricultural produce: the harvested product from biological assets. [IAS 41.5]

Costs to sell: incremental costs directly attributable to the disposal of an asset, excluding finance costs and income taxes. [IAS 41.5]

Initial Recognition

An entity should recognise a biological asset or agriculture produce only when the entty controls the asset as a result of past events, it is probable that future economic benefits will flow to the entity, and the fair value or cost of the asset can be measured reliably. [IAS 41.10]

Measurement

Biological assets should be measured on initial recognition and at subsequent reporting dates at fair value less estimated costs to sell, unless fair value cannot be reliably measured. [IAS 41.12]

Agricultural produce should be measured at fair value less estimated costs to sell at the point of harvest. [IAS 41.13] Because harvested produce is a marketable commodity, there is no 'measurement reliability' exception for produce.

The gain on initial recognition of biological assets at fair value less costs to sell, and changes in fair value less costs to sell of biological assets during a period, are reported in net profit or loss. [IAS 41.26]

A gain on initial recognition of agricultural produce at fair value less costs to sell should be included in net profit or loss for the period in which it arises. [IAS 41.28]

All costs related to biological assets that are measured at fair value are recognised as expenses when incurred, other than costs to purchase biological assets.

IAS 41 presumes that fair value can be reliably measured for most biological assets. However, that presumption can be rebutted for a biological asset that, at the time it is initially recognised in financial statements, does not have a quoted market price in an active market and for which other methods of reasonably estimating fair value are determined to be clearly inappropriate or unworkable. In such a case, the asset is measured at cost less accumulated depreciation and impairment losses. But the entity must still measure all of its other biological assets at fair value less costs to sell. If circumstances change and fair value becomes reliably measurable, a switch to fair value less costs to sell is required. [IAS 41.30]

The following guidance is provided on the measurement of fair value:

• a quoted market price in an active market for a biological asset or agricultural produce is the most reliable basis for determining the fair value of that asset. If an active market does not exist, IAS 41 provides guidance for choosing another measurement basis. First choice would be a market-determined price such as the most recent market price for that type of asset, or market prices for similar or related assets [IAS 41.17-19]
• if reliable market-based prices are not available, the present value of expected net cash flows from the asset should be use, discounted at a current market-determined rate [IAS 41.20]
• in limited circumstances, cost is an indicator of fair value, where little biological transformation has taken place or the impact of biological transformation on price is not expected to be material [IAS 41.24]
• the fair value of a biological asset is based on current quoted market prices and is not adjusted to reflect the actual price in a binding sale contract that provides for delivery at a future date [IAS 41.16]
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Other Issues

The change in fair value of biological assets is part physical change (growth, etc.) and part unit price change. Separate disclosure of the two components is encouraged, not required. [IAS 41.51]

Fair value measurement stops at harvest. IAS 2, Inventories, applies after harvest. [IAS 41.13]

Agricultural land is accounted for under IAS 16, Property, Plant and Equipment. However, biological assets that are physically attached to land are measured as biological assets separate from the land. [IAS 41.25]

Intangible assets relating to agricultural activity (for example, milk quotas) are accounted for under IAS 38, Intangible Assets.

Government Grants

Unconditional government grants received in respect of biological assets measured at fair value less costs to sell are reported as income when the grant becomes receivable. [IAS 41.34]

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. [IAS 41.35]

Disclosure

Disclosure requirements in IAS 41 include:

• carrying amount of biological assets [IAS 41.39]
• description of an entity's biological assets, by broad group [IAS 41.41]
• change in fair value less costs to sell during the period [IAS 41.40]
• fair value less costs to sell of agricultural produce harvested during the period [IAS 41.48]
• description of the nature of an entity's activities with each group of biological assets and non-financial measures or estimates of physical quantities of output during the period and assets on hand at the end of the period [IAS 41.46]
• information about biological assets whose title is restricted or that are pledged as security [IAS 41.49]
• commitments for development or acquisition of biological assets [IAS 41.49]
• financial risk management strategies [IAS 41.49]
• methods and assumptions for determining fair value [IAS 41.47]
• reconciliation of changes in the carrying amount of biological assets, showing separately changes in value, purchases, sales, harvesting, business combinations, and foreign exchange differences [IAS 41.50]

Disclosure of a quantified description of each group of biological assets, distinguishing between consumable and bearer assets or between mature and immature assets, is encouraged but not required. [IAS 41.43]

If fair value cannot be measured reliably, additional required disclosures include: [IAS 41.54]

• description of the assets
• an explanation of the circumstances
• if possible, a range within which fair value is highly likely to lie
• depreciation method
• useful lives or depreciation rates
• gross carrying amount and the accumulated depreciation, beginning and ending

If the fair value of biological assets previously measured at cost now becomes available, certain additional disclosures are required. [IAS 41.56]

Disclosures relating to government grants include the nature and extent of grants, unfulfilled conditions, and significant decreases expected in the level of grants. [IAS 41.58]