AGRICULTURE

(IAS 41 )

AGRICULTURE

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 Learning Objectives

At the completion of studying this chapter, you will

be able to:
• Explain key terms in IAS 41 agriculture activities
• Indicate measurement and recognition of agricultural
activities
• Show the subsequent accounting treatment of agricultural
activities
• Identify the disclosure requirements for agricultural
activity
• Distinguish between the accounting treatment of
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agricultural activity under US GAAP and IFRS
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Outline
 Overview
 Applicable standards
 Objectives of the standards
 Definition of key terms
 Types of biological assets
 Exclusions
 Recognition
 Measurements
 Presentations
 Disclosures
 US GAAP VS IFRS 4
1. Overview

• IAS 41 Agriculture sets out accounting for agricultural

activity – the transformation of biological assets (living
plants and animals) into agricultural produce (harvested
product of the entity's biological assets).
2. Applicable Standards
 IAS 41 – Biological Assets
 IAS 16 – Property, Plant and Equipment
 IAS 2 –Inventory
 IAS 38- Intangible Assets
 IAS 20 – Government grants

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3. Objective
The objective of IAS 41 is to establish
standards of accounting for agricultural
activity .
4. Definitions of Key Terms (in
accordance with IAS 41)
 Agricultural activity is the management by an enterprise
of the biological transformation of biological assets for
sale, into agricultural produce or into additional biological
assets.
 Biological assets. Living plants and animals.
 Agricultural produce. The product of the entity’s
biological assets, for example, milk and coffee beans.
 Biological transformation. Relates to the processes of
growth, degeneration, and production that can cause
changes of quantitative or qualitative nature in a biological
asset.
Definitions Con’td….
 Biological transformation leads to various different
outcomes.
 Asset changes:
 Growth: increase in quantity and/or quality

 Degeneration: decrease in quantity and/or quality

 Creation of new assets:

 Production: producing separable non-living products

 Procreation: producing separable living animals

5. Scope

• This Standard shall be applied to account for the

following when they relate to agricultural activity:
 Biological assets, except for bearer plants;
 Agricultural produce at the point of harvest; and
 Government grants
 Examples of Biological Assets Covered by
IAS 41
Products that are the
result of processing
Biological Asset Agricultural Produce 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
6. Types of Biological Assets

Biological assets

Bearer biological
Consumable
assets/Bearer
biological assets
Plants

IAS 16, except

produce IAS 41
Produce
growing
thereon 12
Types of Biological Assets
(cont’d)
 Bearer biological assets:
Bearer plants are defined in IAS 41as a plant
that meets all the following criteria:
 It is used in the production or supply of agricultural
produce
 It is expected to bear produce for more than one
period
 It is not intended to be sold as a living plant or
harvested as agricultural produce, except for
incidental scrap sales (i.e. for firewood at the end of
the plants productive life). 13
Types of Biological Assets
(cont’d)
 Consumable biological assets:
 Biological assets which do not meet all
of the above requirements.
 All animals

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 Identify whether each of the following
biological assets is bearer or consumable

Agricultural Bearer or
Biological Asset Produce consumable?
Sheep
Trees in a plantation forest
Cotton
Sugarcane
Dairy cattle
Pigs
Bushes
Vines
Fruit trees
7. Exclusions
IAS 41does not apply to:
 Land related to agricultural activity (see IAS
16 Property, Plant and Equipment and IAS 40
Investment Property).
 Bearer plants related to agricultural activity
(see IAS 16). However, IAS 41 applies to the
produce on those bearer plants.
 Government grants related to bearer plants
(see IAS 20 Accounting for Government
Grants and Disclosure of Government
Assistance).
Exclusions (cont’d)
 Intangible assets related to agricultural
activity (see IAS 38 Intangible Assets).
 Harvested agricultural produce (IAS 2,
Inventory). However, it does apply to produce
growing on bearer plants.
Example 1
1. 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.
2. Entity B grows vines, harvests the grapes and
produces wine. Which of these activities are in the
scope of IAS 41?

The vines 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 vines 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.
3.An entity on adoption of IAS 41 has reclassified forest as
biological assets. The total value of the group’s forest
assets is $2 million comprising
 Freestanding trees …………$1,700

 Land under trees………………... 200

 Roads in forests …………………..100

Required
Show how the forests would be classified in the financial
statements.
Solution

The forests would be classified as

 Biological assets ……………….…………….….$1,700

 Noncurrent asset-land …………….………....….….200
 Noncurrent assets—other tangible assets…..…....100
7. Recognition

An entity should recognize a biological asset or

agricultural produce when :
(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.
8. Measurement
• Any biological asset should be measured initially and
at each balance sheet date, at its fair value less
estimated point-of-sale costs.
• The only exception to this is where the fair value
cannot be measured reliably.
• Agricultural produce should be measured at fair value
less estimated point-of-sale costs at the point of
harvest.
• According to IAS 41, agricultural produce can always
be measured reliably.
• Point-of-sale costs include brokers’ and dealers’
commissions, any levies by regulatory authorities and
commodity exchanges, and any transfer taxes and
duties.
• They exclude transport and other costs necessary to
get the assets to a market.
Measurement ...
• If an active market does not exist, then fair value is
determined as per fair value hierarchy. The hierarchy
may be summarized as follows:
 Price for the asset in an active market.
 Recent transaction price for the asset if there is
no active market.
 Market prices for similar assets, adjusted for the
points of difference.
 Sector benchmarks.
 Present value of the future cash flows expected
to be generated from the asset.
Recognition & Measurement:
Biological Assets
Consumable Biological
Assets
At initial • Measured together with any
recognition agricultural produce
attached (i.e., one unit of
account)
• Measured at fair value less
costs to sell
Subsequent • Measured together with the Measured at:
measurement agricultural produce until
requirements the point of harvest (i.e.,
one unit of account until the
point of harvest)
• Measured at the end of
each reporting period at fair
value less costs to sell, with
changes recognised in
profit or loss
Bearer Biological
assets/Bearer Plants
• Measured separately from any
agricultural produce attached
(i.e., two units of account)
• Measured at cost
accumulated until maturity
a) Cost, less any subsequent
accumulated depreciation
and impairment.
b) Fair value at each
revaluation date, less any
subsequent accumulated
depreciation and
impairment.
Recognition & Measurement:
Agricultural Produce
Consumable Bearer Biological
Biological Assets assets/Bearer Plants
At the end of •Measured together Measured separately
each with the bearer at fair from the bearer plant at
reporting value less costs to fair value less costs to
period prior sell, with changes sell
to harvest recognised in profit or
loss as the produce
grows

At the point Measured separately Measured separately

of harvest from the bearer at fair from the bearer plant at
value less costs to sell fair value less costs to
sell
Recognition & Measurement...

 Subsequent expenses relating to agricultural

Activity
 Such costs may include feeding, veterinary services,
planting, weeding, irrigation, fertilizer, and harvesting
and slaughtering costs.
 IAS 41 does not prescribe the treatment of such costs.
 Prior to adoption of IAS 41, many agricultural businesses
had policy of capitalizing some of these costs.
 many entities now adopt a policy of treating all such
expenditure as a cost of production.
Recognition & Measurement…

Gain or Loss
• The change in the fair value of biological assets is
twofold.
• There can be physical change through growth, and there
can be a price change.
• Any gain on the initial recognition of biological assets at
fair value less estimated point-of sale costs and any
changes in the fair value less estimated point-of-sale
costs of biological assets during the reporting period are
included in profit or loss for the period.

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Recognition and Measurements:
Bearer Biological Assets
1. Before maturity
 Equivalent to Construction - in - progress
 Measured at Accumulated costs (IAS 16)
 Entry to record costs incurred:
Dr. Bearer Immature BA… xxx
Cr. Cash/Materials etc.. xxx

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Bearer Biological Assets
(cont’d)
2. On maturity
 Accumulated cost transferred to depreciable PPE
(IAS 16)
 Entry to record the transfer:
Dr. Bearer Matured BA… xxx
Cr. Bearer Immature BA.. xxx

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Bearer Biological Assets
(cont’d)
3. After maturity
a) Depreciation on matured BA (IAS 16)
 Use acceptable depreciation method as per
IAS 16
 Entry to record depreciation:
Dr. WIP-BA… xxx
Cr. Accumulated Depreciation - BA.. xxx

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Bearer Biological Assets (cont’d)
3. After maturity
b) Current costs on matured Biological
Assets(IAS 16)
 Standard silent on these costs
 Options: Capitalize or charge to Cost of
Production
 Entry to record current costs:
Treatment Entry
Current cost capitalized Dr. Bearer Matured BA …. xxx
Cr. Cash/Materials etc …. xxx
Current cost charged to Dr. WIP – BA…….xxx
production Cr. Cr. Cash/Materials etc …. xxx
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Bearer Biological Assets (cont’d)
3. After maturity
c) Agricultural produce (IAS 41)
 Measured at fair value less costs to sell, with
changes recognised in profit or loss as the
produce grows.
 Entry to record agricultural produce:
Treatment Entry
End of year before Dr. Standing Inventory - BA …. xxx
harvest(IAS 41) Cr. WIP - BA…. ……….. xxx
Cr. Gain on Re-measurement …. xxx
Date of harvesting Dr. Inventory (e.g. Sugarcane)…….xxx
(IAS 2) Cr. Standing Inventory……………. xxx

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Bearer Biological Assets (cont’d)
3. After maturity
d) Subsequent measurement of BA (IAS 16)
 Measured using either cost model or fair
value model

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Consumable Biological Assets (IAS 41)
1. Before maturity
 Measured at fair value less costs to sell, with
changes recognised in profit or loss as the produce
grows.
 Entry to record costs incurred:
Dr. Consumable Biological Assets xxx
Cr. Cash/Materials etc xxx
2. On Maturity
 Measured at fair value less cost to sell (IAS 41)
 Entry to record change in fair value:
Dr. Consumable Biological Assets xxx
Cr. Gain on R-measurement xxx
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Consumable Biological Assets (IAS 41)
3. After maturity - Harvesting
 Measured at (IAS 2)
 Entry to record costs incurred:
Dr. Inventory (e.g. Corn) xxx
Cr. Consumable BA xxx
Cr. Gain on Re-measurement xxx

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9. Presentation

 In the statement of financial position biological assets

should be classified as a separate class of assets falling
under neither current nor non-current classifications.
 Biological assets should also be sub-classified (either on
the face of the statement of financial position or as a note
to the accounts).
 Class of animal or plant
 Nature of activities (consumable or bearer)
 Maturity or immaturity for intended purpose
10. Disclosures

 An entity shall disclose the aggregate gain or loss that

arises on the initial recognition of biological assets and
agricultural produce and from the change in value less
estimated point-of sale costs of the biological assets.
 A description of each group of biological assets is also
required.
 The methods and assumptions applied in determining
fair value should also be disclosed.
Disclosure…
 The fair value less estimated point-of-sale costs of
agricultural produce harvested during the period shall be
disclosed at the point of harvest
 The existence and carrying amounts of biological assets
whose title is restricted and any biological assets placed as
security should be disclosed.
 The amount of any commitments for the development or
acquisition of biological assets and management’s financial
risk strategies should also be disclosed.
 A reconciliation of the changes in the carrying amount of
biological assets showing separately changes in value,
purchases, sales, harvesting, business combinations, and
exchange differences should be disclosed.
 11. Difference between IFRS and US
GAAP
Topic IFRS US GAAP

Classification Classified in to bearer and Classification in to bearer and

non-bearer (consumable) consumable not common and same
and governed by different standard applied to both categories
standards

Measurement basis of Fair value with value Historical cost is generally used.
agricultural crops, livestock, changes recognized in net However, fair value less costs to sell
orchards, forests profit or loss is used for harvested crops and
livestock held for sale.

subsequent expenses IAS 41 does had a

relating to agricultural activity not prescribe the treatment
of subsequent expenditure.
policy of capitalizing some of these
costs, particularly those relating to
the development
of immature plants or livestock up to
the point they were productive
 Example: Accounting for biological
assets
A herd of 10 two-year-old animals was held at 1 January 2016. One animal,
aged 2.5 years, was purchased on 1 July 2016 for ETB108, and one animal
was born on 1 July 2016. No animals were sold or disposed of during the
period. Per unit fair values less estimated point-of-sale costs were as follows:
ETB
2-year-old animal at 1 January 2016 100
Newborn animal at 1 July 2016 70
2.5-year-old animal at 1 July 2016 108
Newborn animal at 31 December 2016 72
0.5-year-old animal at 31 December 2016 80
2-year-old animal at 31 December 2016 105
2.5-year-old animal at 31 December 2016 111
3-year-old animal at 31 December 2016 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 2016.
 Example: Accounting for biological
assets
FV less estimated point-of-sale costs of herd at 1 January 2016: ETB
(10 x ETB100) 1,000
Purchased on 1 July 2016: (1 x ETB108) 108
1,108

FV less estimated point-of-sale costs of herd at 31 December

2016: ETB
11 x ETB120 1,320
1 x ETB80 80
1,400

Therefore the movement in valuation during the period is ETB292

(ETB1,400 - ETB1,108).

This can be explained by:

 Example: Accounting for biological
assets
Increase in fair value less estimated point-of-sale costs due to price
change:
ETB
10 x (ETB105 – ETB100) 50
1 x (ETB111 – ETB108) 3
1 x (ETB72 – ETB70) 2
55

Increase in fair value less estimated point-of-sale costs due to physical

change:
ETB
10 x (ETB120 – ETB105) 150
1 x (ETB120 – ETB111) 9
1 x (ETB80 – ETB72) 8
1 x ETB70 70
237
Journal Entry for the above transaction

• Increase in fair value less estimated point-of-sale costs

due to price change:
DR Biological assets ……….…55
CR Gain on re-measurement …55
• Increase in fair value less estimated point-of-sale costs
due to physical change:
DR Biological assets ……….…237
CR Gain on re-measurement …237

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