INTRODUCTION
Agriculture is fundamentally different from other types of business. Instead of wearing out or being consumed over time, many agricultural assets actually grow. It can be argued that depreciation is irrelevant in this situation. Hence, biological assets are measured at fair value and any changes in fair value are reported as part of net profit for the period.
As a result, not only will a farmer’s profit on sales be recorded but so too will increases in the value of the farms productive assets as a whole.
At first glance, this may appear counter-intuitive as it departs from the traditional accounting realisation concept, where a profit is not recognised before a sale has been made. In the case of forestry for example, IAS 41 allows profits to be recognised years before the products are even ready for sale. In fact, IAS 41 particularly impacts upon agricultural activities where the income-producing biological assets are expected to have economic lives that extend beyond one accounting period.
However, the rationale is that by requiring all changes in the value of a farm to be reported openly and transparently, farm managers will be unable to boost profits by selling off an unsustainable amount of produce. An example of this would be where a forestry company could show large short-term profits by cutting down and selling all trees without replacing them. The profit would reflect the sales but ignore the fall in the value of the forest.
The change in the fair value of biological assets has two dimensions:
- There can be physical change in the asset through growth
- There can be a price change
Separate disclosure of these two elements is encouraged but not required. Where biological assets are harvested, then fair value measurement ceases at the time of harvest and after that, IAS 2 Inventories applies.
The main issues addressed by IAS 41 are:
- When should a biological asset or agricultural produce be recognised in the statement of financial position?
- At what value should a recognised biological asset or agricultural produce be measured?
- How should the difference in value of a recognised biological asset or agricultural produce between two Statement of Financial Position dates be accounted for?
DEFINITIONS
Agricultural activity: the management by an entity of the biological transformation of biological assets for sale into agricultural assets or into additional biological assets.
Agricultural produce: the harvested product of the entity’s biological assets, for example, milk, apples, coffee beans.
A biological asset: 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
Harvest: is the detachment of produce from a biological asset or the cessation of a biological asset’s life processes.
Active Market: a market where the items traded are homogenous, willing buyers and sellers can be found at any time and prices are available to the public.
Fair Value: the amount for which an asset can be exchanged or a liability settled in an arm’s length transaction between knowledgeable and willing parties. The fair value of an asset is based on its present condition and location.
This standard shall be applied to account for the following when they relate to agricultural activity:
- Biological assets
- Agricultural produce at the point of harvest
- Government grants related to agricultural activities
RECOGNITION AND MEASUREMENT
An entity should recognise a biological asset or agricultural produce, when and only when
- The entity controls the asset as a result of past events; and
- It is probable that future economic benefits associated with the asset will flow to the entity; and
- The fair value or cost of the asset can be reliably measured
A biological asset shall be measured on initial recognition and at each subsequent Statement of Financial Position date at fair value less point of sale costs, except where the fair value cannot be estimated reliably.
Agricultural produce harvested from biological assets shall be measured at fair value less point of sale costs at the point of harvest. Unlike a biological asset, there is no exception in cases in which fair value cannot be measured reliably. IAS 41 states that agricultural produce can always be measured reliably. Fair value, less estimated point of sale cost at the point of harvest, forms “cost” for the purposes of IAS 2.
The point of sale costs include commissions payable to brokers and dealers, levies by regulatory agencies and commodity exchanges, transfer taxes and duties. Point of sale costs exclude transport and other costs necessary to get assets to markets.
If an active market does not exist which would allow the assessment of fair value then the company may employ some of the following to assist in determining fair value:-
- Assess the most recent market price, provided there has not been a significant change in economic circumstances between the date of that transaction and the Statement of Financial Position date
- Consider market prices for similar assets with adjustments to reflect differences and
- Use sector benchmarks such as the value of an orchard expressed per tray, bushel, kilogramme or hectare and the value of beef-cattle expressed per kg of meat
If an entity has access to different markets, then the entity should choose the most relevant and reliable price that is the one at which it is most likely to sell the asset.
In some cases, market prices or values may not be available for an asset in its present condition. In these cases, the entity can use the present value of the expected net cash flow from the asset, discounted at a current market pre-tax rate. In some circumstances, costs may be an indicator of fair values, especially where little biological transformation has taken place or the impact of biological transformation on the price is not expected to be significant.
The standard specifically requires that fair value is not 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 value in which a willing buyer and seller would enter into a transaction. Consequently, the fair value of the biological asset or agricultural produce is not adjusted because of the existence of a contract.
The difficulty in establishing the fair value of a biological asset increases when the asset is a “bearer asset”. This is an asset which itself will not eventually become agricultural produce. The problem is exacerbated the more long-lived the asset is.
Coffee bushes – they take 3-4 years to mature then may live and produce fruit/beans for a further 10 years or more. The standard does not require external independent valuations but, in such cases where fair values are otherwise difficult to determine, it may be possible and appropriate to apply IAS 36 Impairment to determine both the value in use and the net selling price of the asset and to use the higher of these two amounts to represent valuation.
Then the presumption that fair value can be established can be 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. All the other biological assets of the entity must still be measured at fair value. IAS 41 also contains additional disclosure requirements in such a situation.
GAINS AND LOSSES
At initial recognition, the fair value (less estimated point of sale costs) of a biological asset is reported as a gain or loss in the statement of comprehensive income. A loss may arise on initial recognition when the estimated point of sale costs exceed the fair value of the asset in its present state.
The change in fair value (less estimated point of sale costs) of a biological asset between two period end dates is reported as a gain or loss in the statement of comprehensive income.
A gain or loss arising on initial recognition of agricultural produce at fair value less estimated point of sale costs is included in net profit or loss for the period.
GOVERNMENT GRANTS AND ASSISTANCE.
The government grants are as defined in IAS 20 Accounting for Government Grants and Disclosure of Government Assistance.
A government grant that is related to a biological asset measured at fair value less estimated point of sale costs should be recognised as income when the government grant becomes receivable. If there are conditions attached to the grant, then the entity will only recognise the government grant when the conditions attaching thereto are complied with.
IAS 20 is applied only to a government grant that is related to a biological asset which has been measured at cost less accumulated depreciation and impairment losses.
IAS 41 does not deal with grants related to agricultural produce. These grants may include subsidies. Subsidies are normally payable when the produce is sold and would therefore be recognised as income on the sale.
DISCLOSURE
IAS 41 requires extensive disclosures, including:
- The aggregate gain or loss arising during the current accounting period on initial recognition of biological assets and agricultural produce and from the change in fair value less point of sale costs of biological assets
- A description of each group of biological assets
- The methods and significant assumptions applied in determining the fair value of each group of agricultural produce at the point of harvest and each group of biological asset
- The fair value less estimated point of sale costs of agricultural produce harvested during the period, determined at the point of harvest
- The existence and carrying amounts of biological assets whose title is restricted, and the carrying amounts of biological assets pledged as security for liabilities;
- The amount of commitments for the development or acquisition of biological assets
- Financial risk management strategies related to agricultural activity
- A reconciliation of the changes in carrying value of biological assets between the beginning and end of the current period including
- The gain or loss from the changes in fair value less point of sale costs
- Increases due to purchases
- Decreases due to sales and biological assets held for sale in accordance with IFRS 5 (d) Decreases due to harvest
- Increases resulting from business combinations
- Net exchange differences from foreign current transactions
- Other changes
