Workbook on IAS 41 Agriculture

Introduction

Aim

The aim of this workbook is to assist the individual in understanding accounting for biological assets and agricultural produce, according to IAS 41 Agriculture.

Scope

IAS 41 should be applied to the following agricultural activities:

(i) biological assets; 

(ii) agricultural produce at the point of harvest; and

(iii) certain government grants.

IAS 41 does not apply to:

(i) land related to agricultural activity (see IAS 16 Property, Plant and Equipment and IAS 40 Investment Property); and

(ii) intangible assets related to agricultural activity (see IAS 38 Intangible Assets).

Bearer Plant Amendment 2014

The amendment brings bearer plants, which are used solely to grow produce, into the scope of IAS 16 so that they are accounted for in the same way as property, plant and equipment.

. A bearer plant is defined as "a living plant that:

is used in the production or supply of agricultural produce;

is expected to bear produce for more than one period; and

has a remote likelihood of being sold as agricultural produce, except for incidental scrap sales."

Biological assets, except for bearer plants, are accounted for under IAS 41. The IASB also excluded livestock from the scope of the amendment.

IAS 41 is applied to agricultural produce at the point of harvest.The harvested product is the output of the undertaking’s biological assets. After harvesting, IAS 2 Inventories, or another Standard is applied. 

EXAMPLE – Products after the harvest

You have harvested your corn. It is now accounted for as inventory, and you apply IAS 2. Accordingly, IAS 41 does not deal with the processing of agricultural produce after harvest.

EXAMPLE-Processing grapes

You have grown the grapes, harvested them and are going to process the grapes into wine. They are now beyond the agricultural activity of IAS 41, and should be accounted for as a production process, and valued under IAS 2.

While such processing may be a logical extension of agricultural activity, and the events taking place may bear some similarity to biological transformation, such processing is not included within the agricultural activity in IAS 41.

The table below provides examples of biological assets, agricultural produce, and products that are the result of processing after harvest:

Definitions

Agriculture-Related Definitions

Agricultural activity is the management of the biological transformation of biological assets for sale, into agricultural produce, or into additional biological assets.

Agricultural produce is the harvested product of biological assets.

A biological asset is a living animal, or plant.

Biological transformation comprises the processes of growth, degeneration, production, and procreation that cause qualitative, or quantitative, changes in a biological asset.

A group of biological assets is an aggregation of similar living animals, or plants.

Harvest is the detachment of produce from a biological asset, or the end of a biological asset’s life processes.

Agricultural activity includes:

livestock,

forestry,

cropping,

cultivation,

aquaculture (including fish farming). 

In each case, living animals and plants perform a biological transformation that takes place in a managed environment. Management is the key issue that differentiates agricultural activity from other activities such as sea fishing, or harvesting virgin forest, neither of which are classified as agricultural activities.

The extent of change in the biological asset can be measured in a wide variety of ways, ripeness, dimensions, fat content etc.

Biological transformation results in:

(1) Change in the asset through an increase or decrease in quantity, or quality.

(2) Additional assets may result from procreation or 

(3) Agricultural produce (cereals, legumes, beef, milk).

General Definitions

An active market includes the following characteristics:

(i) the items traded are homogeneous;

(ii) buyers and sellers are willing and readily available;

(iii) current prices are public knowledge.

Carrying amount is the amount at which an asset is recorded in the balance sheet.

Fair value depends on location, and condition so the same cow in Moscow has a different fair value than in Kaluga. 

Costs to sell are the incremental costs directly attributable to the disposal of an asset, excluding finance costs and income taxes.

Recognition and Measurement

Recognition and recording biological assets or agricultural produce takes place when the enterprise:

controls the asset, or the future benefits, that will flow from it and 

can measure reliably, the fair value, or cost.

In practice, this means that most biological assets, or agricultural produce, can be recorded before the harvest, or before they are sold. They must also be remeasured at each balance sheet date.

A biological asset should be measured on initial recognition, and at each balance sheet date, at its ‘fair value less estimated point-of-sale costs’, except where the fair value cannot be measured reliably. 

In the following examples, I/B refers to Income Statement and Balance Sheet (SFP).

Biological assets should be shown as non-current assets if they last for more than one year. Dairy cattle and trees are examples of non-current assets.

Rather than being depreciated, they are remeasured at their ‘fair value less estimated point-of-sale costs’ at each balance sheet date. Whilst trees for lumber will appreciate in value, fruit trees or dairy cattle will tend to fall in value in their later years.

Other products with a short life, such as milk and wheat, will be classified as inventory, and transferred to cost of sales.  

Point-of-sale costs include:

•  commissions to brokers and dealers,
• charges by regulatory agencies and commodity exchanges, and 
• transfer taxes and duties.  

Point-of-sale costs exclude transport, and other costs, necessary to transport assets to a market. Transport is the cost of getting the produce to the market prior to sale.

Transport costs are taken into account in fair values. 

As costs, they reduce the fair values.

For convenience, similar assets may be grouped (by age, quality etc) and fair values established for the group.

Contracts to sell their biological assets, or agricultural produce, at a future date are not relevant in determining fair value, which reflects the current market between a willing buyer and seller.

A contract for the sale of a biological asset, or agricultural produce, may be an onerous contract. (see IAS 37) 

If an undertaking has access to more than one market, fair value should be based on the market it expects to use. 

For example, if an undertaking has access to two active markets, 

EXAMPLE- 2 active markets

You can sell your products in 2 active markets, but 95% of your sales go to the nearer. 

This market involves cheaper transport, and lower commissions. The prices in this market are those on which fair value should be based.

In the absence of an active market, the following may be used to estimate fair value:

(i) the most recent market price;

(ii) market prices for similar assets

(iii) sector benchmarks (for example, cattle expressed per kilogram of beef).

In the absence of market based prices, the present value of future cash flows may be used as the basis for fair value of a biological asset in its present location and condition. This excludes any increases in value from additional biological transformation, and future activities.

Cash flows exclude those from financing the assets, taxation, or re-establishing biological assets after harvest.

Expectations about possible variations in cash flows are usually included in the estimate of cash flows or discount rate. 

EXAMPLE- Variations in cash flows 

You sell this year’s crop for the same price as next year’s crop ($100 each year). The cash flow for this year’s crop will be more valuable to you, as you will receive it sooner, than that of next year. The fair value of next year’s crop will have a lower net present value than that of this year’s. 

Assuming you are about to receive the money for this year’s crop, the 100 for this year will be calculated at full value ($100). 

The 100 for next year’s crop will be discounted. 

Assuming a cost of capital of 10%, it will be valued at only $91 reflecting the wait to receive the funds.

Cost may sometimes approximate fair value, particularly when little or no biological transformation has taken place.

EXAMPLE - Little biological transformation

1. Fruit tree seedlings planted immediately prior to a balance sheet date 

2. The initial growth in a 25-year tree plantation production cycle

Biological assets, particularly those growing, may be inseparable from the land and an active market may exist only for the combined assets.  

EXAMPLE – Market for a package of combined assets 1

There may be no market for your wood, but buyers may want to buy for the trees (biological assets), raw land, and land improvements, as a package.

You may use information regarding the combined assets to determine fair value for the biological assets.

EXAMPLE – Market for a package of combined assets 2

The fair value of raw land, and land improvements ($2m), may be deducted from the fair value of the combined assets ($8m), to arrive at the fair value of biological assets ($6m).

Gains and Losses

Initial recognition

Gains or losses on a biological asset should be included in net profit, for the period in which it arises.

Gains may arise on initial recognition of a biological asset, such the birth of a calf.

A gain (or loss) may arise on initial recognition of agricultural produce as a result of harvesting.

Inability to Measure Fair Value Reliably

EXAMPLE – No fair value

Your crop is about to be harvested. The market for your crop has been suspended, as it is a GM crop, the future of which the government is considering. Currently there are no buyers. No reliable market price can be calculated. You are confident of finding foreign buyers, but have not yet agreed terms of sale. Until buyers are found, your crop should be valued at its cost, less any accumulated depreciation and any accumulated impairment losses.

In all cases, an undertaking measures agricultural produce at the point of harvest at its ‘fair value less estimated point-of-sale costs’.

In determining cost, accumulated depreciation and accumulated impairment losses, an undertaking considers IAS 2 Inventories, IAS 16 Property, Plant and Equipment and IAS 36 Impairment of Assets.

In general, the logic of costing of industrial products (see IAS 2) provides guidance. Direct labour, materials and production overhead should be charged to the product. Depreciation of long-term assets, such as the trees that bear coffee beans, should be included in the costs, as should any impairment to those assets.  

Unlike finished manufacturing goods, (which remain at the lower of cost and net realisable value) the agricultural produce is held at its ‘fair value less estimated point-of-sale costs’.

Government Grants

An unconditional grant should be recorded as income when the grant becomes receivable.

EXAMPLE-Grant becomes receivable

In January, you negotiate a grant for your crop. The condition of the grant is that your crop will be ready for harvest. Your crop is ready for harvest in August. You receive the grant in November. The grant becomes receivable in August, when you have met the condition of the grant.

A conditional grant should be recorded as income when all the conditions are met.

EXAMPLE-Grant for set-aside land

In January, you negotiate a grant for your land. The condition of the grant is that your land will not be used for crops. Your last crop is harvested in August. The land is cleared and set aside in September. You receive the grant in November. The grant becomes receivable in September, when you have met the condition of the grant.

Terms and conditions of grants vary:  

EXAMPLE-Long-term grant

A grant requires you to farm in a particular location for five years, and requires the return of all of the grant, if you farm for less than five years. The total grant is $50.000, receivable in equal installments.

Each year the entry in the books will be.

Cash $10.000 DR and Deferred income $10.000 CR

The grant is not recorded as income until the five years have passed, when the book entry is:

Deferred income DR $50.000 and Grant Income $50.000 CR

However, if the conditions allowed retention of the grant in proportion the elapsed part of the five years then the grant would be recorded proportionately.

Presentation and Disclosure

Presentation

You may disclose the carrying amounts of consumable biological assets and bearer biological assets, by group.  You may further divide those carrying amounts between mature and immature assets. 

Consumable biological assets are those that are to be harvested as agricultural produce, or sold as biological assets.  

EXAMPLES-consumable biological assets:

Livestock intended for the production of meat,
livestock held for sale,
fish in farms,
crops such as maize and wheat,
trees being grown for lumber.

Bearer biological assets are those other than consumable biological assets. Bearer biological assets are not agricultural produce but, rather, are self-regenerating.

EXAMPLES-Bearer biological assets:

Biological assets may be classified either as mature biological assets, or immature biological assets. 

Mature biological assets are those that have achieved harvestable specifications (for consumable biological assets), or are able to sustain regular harvests (for bearer biological assets).

Disclosures:

1.the nature of activities involving each group of biological assets

2.estimates of the physical quantities of:

3.each group of the undertaking’s biological assets, at the end of the period

4.output of agricultural produce, during the period.

5.methods, and significant assumptions applied, in determining the fair value of each group

6.the ‘fair value less estimated point-of-sale costs’ at the point of harvest, of agricultural produce harvested.

7.carrying amounts of biological assets whose title is restricted or pledged as security for liabilities;

8.commitments for the development, or acquisition, of biological assets

9financial risk management strategies for agricultural activities.

10.a detailed reconciliation of changes in the carrying amount of biological assets between the beginning and the end of the current period. Comparative information is not required

EXAMPLE- Biological assets pledged as security

You have a bank loan for $1m. Your crop is pledged as security, and has not been sold at the balance sheet date. 

Disclose the value of the crop and the fact that it has been pledged as security against the loan. 

EXAMPLE-Commitments for biological assets

At the balance sheet date, you have contracted to buy crops for feed, worth $400.000, from your neighbor. This should be disclosed as a commitment for biological assets.

EXAMPLE-Financial risk management strategies

You have sold your crop, in advance, to a Japanese firm. You will be paid in Yen. You have a forward contract, to sell the Yen at a fixed rate, when you receive the funds. Disclose this, as one of your financial risk management strategies. 

Changes in the value of a biological asset are the result of a combination of physical changes (e.g growth) and changes in the market (e.g. increased demand). It can provide useful information if the two types of change are disclosed separately.

EXAMPLES- Biological asset physical changes

1.Your trees have grown another year towards being cut for lumber. This is a physical change, which will be reflected in your ‘fair value less estimated point-of-sale costs’.

2. At the harvest, you lose 2% of your crop. This is a physical change, which will be reflected in your ‘fair value less estimated point-of-sale costs’.

Additional Disclosures for Biological Assets Where Fair Value Cannot Be Measured Reliably

The reconciliation should also include the following amounts included in net profit, related to those biological assets:

If the fair value of biological assets previously measured cost less any accumulated depreciation and impairment losses, becomes reliably measurable during the current period, disclose:

(i) a description of the biological assets;

(ii) an explanation of why fair value has become reliably measurable; and

(iii) the effect of the change.

Grants

Disclosure for grants for agricultural activity covered by IAS 41:

Illustrative Examples of disclosure

Example 1 illustrates how the presentation and disclosure requirements of IAS 41 might be put into practice for a dairy farming undertaking.  IAS 41 encourages the separation of the change in ‘fair value less estimated point-of-sale costs’ of an undertaking’s biological assets into physical change, and price change, which is reflected in Example 1.  

Income Statement

Cash Flow Statement 

Notes to the Financial Statements

1. Operations and Principal Activities

Tula Dairy ("the Company") is engaged in milk production for supply to various customers.  At 31 December 2XX9, the Company held 1523 cows able to produce milk (mature assets) and 467 heifers being raised to produce milk in the future (immature assets).  The Company produced 454,687 kg of milk with a ‘fair value less estimated point-of-sale costs’ of 1,554,720 (that is determined at the time of milking) in the year ended 31 December 2XX9.

2. Accounting Policies

Livestock and milk

Livestock are measured at their ‘fair value less estimated point-of-sale costs’.  The fair value of livestock is determined based on market prices of livestock of similar age, breed, and genetic merit.  Milk is initially measured at its ‘fair value less estimated point-of-sale costs’ at the time of milking.  The fair value of milk is determined based on market prices in the local area.

3. Biological Assets

4. Financial Risk Management Strategies

The Company is exposed to financial risks arising from changes in milk prices.  The Company does not anticipate that milk prices will decline significantly in the foreseeable future and, therefore, has not entered into derivative, nor other contracts, to manage the risk of a decline in milk prices.  The Company reviews its outlook for milk prices regularly in considering the need for active financial risk management.  

Example 2:  Physical Change and Price Change

The following example illustrates how to separate physical change, and price change. Separating the change in ‘fair value less estimated point-of-sale costs’ between the portion attributable to physical changes, and the portion attributable to price changes is encouraged, but not required, by IAS 41.

ACCA Past Question papers June 2014 (12 marks)

Question :

You are the financial controller of Omega, a listed company which prepares consolidated financial statements in accordance with International Financial Reporting Standards (IFRS). Your managing director, who is not an
accountant, has recently attended a seminar and has the following questions for you concerning issues raised at the seminar:

One of the delegates at the seminar was a director of an entity which operates a number of different farms. She informed me that there was a financial reporting standard which applied to farming entities. I think she said it was IAS 41. I’d like to know why a special standard is needed for farming entities. Given that we have IAS 41, does this mean that other IFRSs do not apply to farming entities? Please explain the main recognition and measurement requirements of IAS 41 – I’m not interested in details about disclosures. I am interested, though,
in any areas where the provisions of IAS 41 differ from general IFRSs. I believe I heard that farming entities treat grants from the government in a different way than other entities do. I’m particularly interested to hear about this, assuming I’m correct.

ACCA Answer: 

It is not true that, given the existence of IAS 41 – Agriculture – other IFRSs do not apply to farming companies. The general presentation requirements of IAS 1 – Presentation of Financial Statements, together with the specific recognition and measurement requirements of other IFRSs, apply to farming
companies just as much as others.

IAS 41 deals with agricultural activity. Two key definitions given in IAS 41 are biological assets and agricultural produce. A biological asset is a living animal or plant. Examples of biological assets would be sheep and fruit trees.  The criteria for the recognition of biological assets are basically consistent with other IFRSs, and are based around the Framework definition of an asset.

A key issue dealt with in IAS 41 is that of measurement of biological assets. Given their nature (e.g. lambs born to sheep which are existing assets, the use of cost as a measurement basis is impracticable.  The IAS 41 requirement for biological assets is to measure them at fair value less costs to sell. Changes in fair value less costs to sell from one period to another are recognised in profit or loss. 
Agricultural produce is the harvested produce of a biological asset. Examples would be wool (from sheep) or fruit (from fruit trees). 

The issue of measuring ‘cost’ of such assets is similar to that for biological assets. IAS 41 therefore requires that ‘cost’ should be fair value less costs to sell at the point of harvesting. This figure is then the deemed ‘cost’ for the purposes of IAS 2 – Inventories. 
A consequence of the above treatment is that government grants receivable in respect of biological assets are not treated in the way prescribed by IAS 20 – Government Grants. Where such a grant is unconditional, it should be recognised in profit or loss when it becomes receivable. If conditions attach to the grant, it should be recognised in profit or loss only when the conditions have been met. 

The IAS 20 treatment of grants is to recognise them in profit or loss as the expenditure to which they relate is recognised. This means that recognition of grants relating to property, plant and equipment takes place over the life of the asset rather than when the relevant conditions are satisfied.

ACCA Examiners feedback on answers given by students

This question was not answered well by the majority of candidates attempting it and indeed a reasonable number of candidates did not attempt it at all. As has already been noted in this report, this may be indicative of the fact that these subjects have been regarded as ‘fringe’ topics and not studied diligently by many candidates. It is very important for candidates to ensure that they have studied the whole of the syllabus.

Part (a) required candidates to explain the applicability of general international financial reporting standards (IFRS) to farming entities and also to outline the main recognition and measurement issues outlined in IAS 41. Candidates were specifically asked about the way government grants relating to agricultural activity need to be accounted for. A number of candidates incorrectly stated that other
IFRS do not apply to farming entities. The majority of candidates incorrectly stated that government grants for agricultural activity are accounted for in the same way as other government grants. Most candidates did have some awareness of the concept of a biological asset, and the difficulty of applying
the cost concept to the measurement of such an asset. However the general level of knowledge displayed in this part was rather disappointing.

ACCA Past Question papers June 2015 (5 marks)

Question:

You are the financial controller of Omega, a listed entity which prepares consolidated financial statements in accordance with International Financial Reporting Standards (IFRS). The managing director, who is not an
accountant, has recently attended a business seminar at which financial reporting issues were discussed. Following the seminar, she reviewed the financial statements of Omega for the year ended 31 March 2016. Based on this review
she has prepared a series of queries relating to those statements:

Query
‘Another issue discussed at the seminar was financial reporting by farming entities. The issue of ‘biological assets’ was mentioned. I don’t really understand what these are or how they’re recognised and measured in the financial
statements. Please explain this to me.’

ACCA Answer: 

A biological asset is defined in IAS 41 – Agriculture – as a living plant or animal. 1
The majority of non-biological assets of an entity have an initial acquisition cost which can be computed with sufficient reliability to be used as its initial carrying value. For biological assets (e.g. a new born calf) this is often not the case.

(Note: Exact words NOT needed here, just the sense of the point.)

For the vast majority of biological assets their initial measurement should be at its fair value less costs to sell. Gains or losses arising from such initial measurement should be recognised in profit or loss.  As the biological asset transforms and its fair value less costs to sell changes, the carrying amount of the asset should be updated with changes being recognised in profit or loss.

ACCA Examiners feedback on answers given by students

Query two for 5 marks required to briefly explain how biological assets are recognized and measured in the financial statements. This question was very popular and generally quite well answered. Most candidates know that the initial measurement of biological assets should be at its fair value less costs to sell and that further gains or losses should be recognized in profit or loss.

Some candidates wrote much about biological transformation and changes in fair value but forgot to mention that those changes less costs to sell are to be recognized in profit or loss. Only a few candidates mentioned that it was necessary to disclose changes in fair value related to the qualitative changes and to changes in market prices.

ACCA Past Question papers June 2019)

Question :

You are the financial controller of Epsilon, a listed entity. The financial statements of Epsilon for the year ended 31 March 20X7 are currently being prepared. Your managing director has sent you three questions regarding the financial statements. The questions appear in notes 1–3.
Note 1 – Farming subsidiary
I’ve recently been reviewing the financial statements of one of our subsidiaries. This subsidiary specialises in both dairy farming and beef farming. There are amounts included in both non-current and current assets:
– The non-current assets include farm machinery which has been purchased. I understand why this machinery has been included as we have spent money on it. However, the non-current assets figure also includes a figure for the
dairy and beef herds. These existing herds were not purchased but are made up of animals the farming subsidiary has bred.
– The inventories include amounts for milk and beef. The milk comes from the dairy herd and the beef comes from the animals we have slaughtered.
– Is there an international financial reporting standard which deals with these issues and how does it require the subsidiary to value and account for the herds and the inventories?

Answer:

There is an international financial reporting standard which is particularly applicable to entities such as farming companies. The standard is IAS 41 – Agriculture. 
IAS 41 would regard a dairy or beef herd as an example of a biological asset. A biological asset is a living plant or animal. 
Given the impracticability of measuring the cost of biological assets, IAS 41 requires that they should be measured at each reporting date at their fair value less costs to sell, provided that fair value can be measured reliably. Gains and losses are reported in profit or loss. 
Dairy and beef cows are regularly bought and sold and therefore there should be no problem in determining their fair value which will be equivalent to market value. This would allow the calculation of the carrying amount of the dairy and beef herd in the non-current assets of the subsidiary. 
IAS 41 would regard milk and beef as agricultural produce. Agricultural produce is ‘harvested’ from the biological asset. In the case of the dairy herd, the ‘harvesting’ is the milking of the cows and in the case of the beef herd, the ‘harvesting’ is the slaughtering of the beef cows. 
IAS 41 requires that agricultural produce be initially measured based on fair value at the point of harvesting. This then forms the ‘cost’ for the purposes of subsequently applying IAS 2 – Inventories.