International Accounting Standard IAS 41, Agriculture, is the first standard that specifically covers the primary sector.
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.
IAS 41 applies to:
IAS 41 does not apply to:
The following accounting standards specifically do not apply to biological assets related to managed agricultural activity because of the specific coverage in IAS 41:
The main issues addressed by IAS 41 are:
IAS 41 specifies the usual tests in order that a biological asset or agricultural produce be recognised on the statement of financial position, namely:
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:
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).
EXAMPLE 1
Establishing fair value when market-determined prices or values may not be available for a separate biological asset in its present condition:
|
31 December 20X2 $000 |
31 December 20X1 $000 |
Fair value of plantation |
17,100 |
16,500 |
Fair value of land |
12,000 |
12,200 |
Fair value of land improvements |
600 |
600 |
Trees – fair value (biological asset) |
4,500 |
3,700 |
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:
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:
Non-current assets
Current assets
Extensive disclosure is required by IAS 41, including:
For biological assets measured at cost less any accumulated depreciation and any accumulated impairment losses, the standard requires the following additional disclosure:
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.
The original article by Simon Riley, updated by ACCA DipIFR examining team