IAS 41: Agriculture

This standard deals with biological assets and agricultural produce until
the point of harvest. A biological asset is a living animal, plant or tree. Ex:
The orange (before it is picked). When the agricultural produce has been
harvested we show it as inventory.
This standard does not apply to tangible or intangible assets that are used
in agricultural activity. These are dealt with in IAS16, IAS40 and IAS38.
Land that is used to grow crops (orchards, farms etc.) cannot be
accounted for in accordance with IAS41. IAS41 states that all biological
assets and agricultural produce until the point of harvest needs to be at
Fair Value less cost to sell. IAS 16 provides us with an option: cost or
revaluation models.
Agricultural produce could require further processing. Ex: The pig is a
biological asset from which we harvest the meat to produce sausages and
bacon. What is produced from the meat is not in the scope of IAS41 and is
considered as inventory.
Goods from the agricultural produce but require further processing are
accounted for in accordance with IAS2. Ex:
Cows
Milk
Cheese, butter

Biological asset
Agricultural produce
Inventory

IAS41
IAS41
IAS2

Agricultural activity: This is the management by an entity of the biological

transformation and harvest of biological assets for sale or for conversion
into agricultural produce or into additional biological assets. We can only
account under IAS41 if there is an agricultural activity.
Biological transformation: this comprises the processes of growth,
degeneration, production and procreation that cause qualitative or
quantitative changes in the biological asset.
Farmer takes out weeds, irrigates the crops, feeds the animals. He is the
third party who is aiding the biological transformation of this asset.
Whats the difference between the accounting treatment of fish farms and
fish in the open sea? Fish that are in the fish farm are fed and giving
medicine by a third party and thus there is management by an entity. We
accounting in accordance with IAS41. On the other hand, fish in the open
sea feed themselves and thus are not accounting for under IAS41.
Qualitative change: increase in quality: a flower becomes and orange, a
piglet becomes a pig.

Quantitative change: increase in the quantity: through procreation or

growth. A 4-year-old pig is worth more than a 1-year-old one because it
has more meat.
Recognition and measurement: An entity recognises a biological asset or
agricultural produce when:

The entity controls the asset as a result of past events

It is probable that future economic benefits associated with the
assets will flow to the entity
The fair value of the cost of the asset can be measured reliably: This
is important because the entity upon initial recognition and
subsequent accounting, the management has to account for the
biological asset or agricultural produce at fair value less cost to sell.
Fair value is the market price, however, we need to deduct the cost
to sell. Ex: Pitkali fees, transport costs, brokerage fees.

There is a presumption that a market exists. Any movement in fair value

less cost to sell finds itself in the income statement as income. This is
because you have incurred the expenses which you recorded in the profit
and loss. We need to match the revenue to the cost. If the expenses went
to the Income Statement, income needs to go there.
There might be rare instances where there is no active market for the
biological asset. Ex: Reptile that is caught every 20 years because it is not
sold on a regular basis. There is no active market. In these cases, the
biological assets or agricultural produce will be recognised at cost and
depreciated over the useful life of the asset.
A company cannot switch from fair value to cost. If it has established from
initial recognition that there is an active market, such market cannot
disappear. It has to continue using the fair value less cost to sell. If a
market appears after a period when there was no market, the company
has to switch from cost to the fair value model. However, it cannot switch
the other way round because some companies would want to do that to
arrest losses. This is called cooking the books and it misleads investors.
Yes
Is there an established
market?

Do not switch: active

market will never
disappear

Use cost model

No
Market appears:
switch to fair value
model.

For something to become extinct there needs to be a number of years.