CHAPTER 34 AGRICULTURE

34.2 IAS 41 AGRICULTURE Key Terms Agricultural Activity –the biological transformation of biological assets for sale into agricultural produce or into additional biological assets Agricultural Produce – the harvested product of an enterprise’s biological assets Biological Asset – A living animal or plant Biological Transformation – the processes of growth, degeneration, production and procreation that cause qualitative and quantitative changes in a biological asset Group of Biological Assets – An aggregation of similar living animals or plants Harvest – the detachment of produce from a biological asset or the cessation of a biological asset’s life processes

Introduction and scope IAS 41 published because of the economic importance of agriculture in both developed and developing countries IAS 41 prescribes the accounting treatment, FS presentation and disclosures related to agricultural activity But there is great diversity in practices and it is difficult to apply traditional accounting methods to agricultural activities IAS 41 does not apply to: Land related to agricultural activity (IAS 16 Property, Plant and Equipment) (See Chapter 6) Intangible assets related to agricultural activity (IAS 38 Intangible Assets) (See Chapter 9) The processing of agricultural produce after harvest (IAS 2 Inventories) (See Chapter 11)

Introduction and scope IAS 41 applies to the three elements that form part of, or result from, agricultural activity: Biological assets Agricultural produce at the point of harvest Government grants See Chapter 34, Table 34.1

Table 34.1 Agricultural activity Biological Asset Agricultural Produce Products that are the result of processing after harvest Sheep Wool Yarn, carpet Trees in a plantation forest Logs Lumber Plants Cotton, harvested cane Thread, clothing, sugar Dairy cattle Milk Cheese Pigs Carcass Sausages, cured hams Bushes Leaf Tea, cured tobacco Vines Grapes Wine Fruit trees Picked fruit Processed fruit

Example 34.1: Mixed businesses Entity A raises cattle, slaughters them at its abattoirs and sells the carcasses to the local meat market. Which of these activities are in the scope of IAS 41?   The cattle are biological assets while they are living. When they are slaughtered, biological transformation ceases and the carcasses meet the definition of agricultural produce. Hence, Entity A should account for the live cattle in accordance with IAS 41 and the carcasses as inventory in accordance with IAS 2 Inventories (See Chapter 11).

Example 34.1: Mixed businesses Entity B grows vines, harvests the grapes and produces wine. Which of these activities are in the scope of IAS 41?   The grapevines are biological assets that continually generate crops of grapes. When the entity harvests the grapes, their biological transformation ceases and they become agricultural produce. The grapevines continue to be living plants and should be recognised as biological assets. Assets such as wine that are subject to a lengthy maturation period are not biological assets. These processes are analogous to the conversion of raw materials to a finished product rather than biological transformation. Therefore, the entity should account for the grapevines in accordance with IAS 41 and the harvested grapes and the production of wine, as inventory in accordance with IAS 2.

Biological assets Recognition Biological assets may not be recognised unless the following conditions are met: (a) the enterprise controls the asset as a result of past events; (b) it is probable that the future economic benefits will flow to the enterprise; and (c) the fair value or cost can be measured reliably.

Biological assets Measurement Measured at fair value less estimated point of sale costs on the basis that fair value has greater relevance, reliability, comparability and understandability as a measure of future economic benefits If a fair value cannot be determined because market prices are not available, cost less accumulated depreciation and impairment losses may be used The alternative basis is only permitted on initial recognition

Biological assets Measurement 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, should be reported in arriving at net profit or loss for the period. The change in fair value of biological assets may be part physical change (i.e. growth) and part price (i.e. fair value) change. IAS 41 encourages, but does not require, the separate disclosure of these two components on the basis that it assists with appraising current period performance and future prospects.  

Example 34.2: Measurement of biological assets A herd of 10 two-year-old animals was held at 1 January 2012. One animal, aged 2.5 years, was purchased on 1 July 2012 for €108, and one animal was born on 1 July 2012. No animals were sold or disposed of during the period. Per unit fair values less estimated point-of-sale costs were as follows: € 2-year-old animal at 1 January 2012 100 Newborn animal at 1 July 2012 70 2.5-year-old animal at 1 July 2012 108 Newborn animal at 31 December 2012 72 0.5-year-old animal at 31 December 2012 80 2-year-old animal at 31 December 2012 105 2.5-year-old animal at 31 December 2012 111 3-year-old animal at 31 December 2012 120 Before separating the physical changes and the price change, it is useful to examine the overall movement in the valuation of the herd during 2012.

Example 34.2: Measurement of biological assets FV less estimated point-of-sale costs of herd at 1 January 2012: (10 x €100) € 1,000 Purchased on 1 July 2012: (1 x €108) 108 1,108 FV less estimated point-of-sale costs of herd at 31 December 2012: 11 x €120 1,320 1 x €80 80 1,400 Therefore the movement in valuation during the period is €292 (€1,400 - €1,108). This can be explained by:

Example 34.2: Measurement of biological assets Increase in fair value less estimated point-of-sale costs due to price change: € 10 x (€105 – €100) 50 1 x (€111 – €108) 3 1 x (€72 – €70) 2 55 Increase in fair value less estimated point-of-sale costs due to physical change: 10 x (€120 – €105) 150 1 x (€120 – €111) 9 1 x (€80 – €72) 8 1 x €70 70 237

Biological assets Presentation SFP Biological assets should also be sub-classified as follows: (a) class of animal or plant (b) nature of activities (consumable or bearer) (c) maturity or immaturity for intended purpose SPLOCI Analysis of income and expenses based on their nature (rather than the cost of sales method) Other Detailed disclosures to include the measurement base used for fair value and the details of the reconciliation of the change in carrying value for the year  

Agricultural produce Recognise at the point of harvest (e.g. detachment from the biological asset) and this should end once the produce enters trading activities or production processes Measure at fair value at each reporting date Change in the carrying amount of agriculture produce held at two reporting dates should be recognised as income or expenses in the SPLOCI. However, this will be rare as such produce is usually sold or processed within a short time. Agricultural produce that is harvested for trading or processing activities should be measured at fair value at the date of harvest. This amount is the deemed cost for application of IAS 2 (See Chapter 11). Classify as inventory in the SFP and disclose separately either on the face of the SFP or in the notes

Government grants An unconditional government grant related to a biological asset measured at fair value less estimated point of sale costs should be recognised as income when, and only when, the grant becomes receivable If a grant requires an enterprise not to engage in agricultural activity an enterprise should only recognise the grant as income when the conditions are met. IAS 20 does not apply to such grants However, if a biological asset is measured at cost less accumulated depreciation and impairment losses then IAS 20 does apply (See Chapter 16)

Disclosure IAS 41 requires extensive disclosures in relation to biological assets, agricultural produce and government grants. In summary, these include: Description of assets and activities Gains and losses recognised in the period Methods and significant assumptions applied in determining fair value See Chapter 34, Example 34.3