Agriculture: IAS 41

Wiecek and Young

IFRS Primer
Chapter 9
2
Agriculture
Related standards
IAS 41
Current GAAP comparisons
IFRS financial statement disclosures
Looking ahead
End-of-chapter practice
3
Related Standards

FAS 144 Accounting for the Impairment or
Disposal of Long-lived Assets
FAS 157 Fair Value Measurements
SOP 85-3 Accounting by Agricultural
Producers and Agricultural Cooperatives
4
Related Standards

IAS 1 Presentation of Financial Statements
IAS 2 Inventories
IAS 18 Revenues
IAS 37 Provisions, Contingent Liabilities and
Contingent Assets
IFRS 5 Non-current Assets Held for Sale and
Discontinued Operations
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IAS 41 Overview

Objective and Scope
Recognition and Measurement
Government Grants
Disclosure
6
IAS 41 Objective and Scope
Standard deals with the accounting for agricultural activity
specifically covering:
Biological assets
Agricultural produce at the point of harvest
Related government grants
Excludes land and intangible assets

IAS 41 is considered a significant addition to GAAP since the
economies of many global countries rely on agriculture

In general, agricultural activities have the following common
characteristics: they are capable of biological transformation and
this transformation is managed, facilitated, measured, and
monitored by the entity

IAS 41 Objective and Scope
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IAS 41 Objective and Scope
IAS 41 defines the following terms:
Agricultural activity 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
Agricultural produce is the harvested product of the entitys biological
assets
A biological asset is 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
A group of biological assets is an aggregation of similar living animals or
plants
Harvest is the detachment of produce from a biological asset or the
cessation of a biological assets life processes
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IAS 41 Recognition and Measurement
Biological assets are recognized when:
Entity controls the asset as a result of past events
Future economic benefits are probable and
Fair value or cost is reliably measurable
IAS 41 Recognition and Measurement
As biological assets grow and mature through biological
transformation, they increase in value

Biological assets are measured at fair value less estimated
costs to sell on initial recognition, unless fair value cannot be
reliably measured
Costs to sell include commissions, taxes, and duties

Agricultural produce is measured at fair value less estimated
costs to sell at the point of harvest. Where fair value is used,
assets are remeasured at each reporting date



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IAS 41 Recognition and Measurement
Fair value is felt to be the most relevant measure since many of these
assets trade in active markets and therefore objective information on
their current value is available

Market values are more reliable and relevant than cost figures, which
may be inconsistently accumulated from entity to entity due to differing
choices regarding allocations

In general, fair value is determined by reference to a market price if an
active market exists for the asset in its present location and condition

An active market is a market where the items traded are homogeneous
and there are buyers and sellers and publicly available prices
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IAS 41 Recognition and Measurement
Where an active market does not exist or where markets
do not exist at all, the entity would do the following in attempting
to estimate fair value:

1. First, try to estimate current market prices by looking at the prices of
recent market transactions, market prices for similar assets, or sector
benchmarks such as the price of cattle expressed by weight

2. Second, if market-determined prices are not available for assets in their
present condition, use a discounted cash flow approach to measure the
value
This need not be carried out by an independent valuator

Cost may be close to fair value if there has been little or immaterial
biological transformation
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IAS 41 Recognition and Measurement
When using a discounted cash flow approach, the
entity would:
Use a market-determined discount rate
Exclude cash flows for financing, taxation, or replacing the asset after
harvest
Incorporate risk by either using probability weighted cash flows or
adjusting the discount rate or some combination of the two; and
Ensure assumptions for calculating the discount rate are consistent with
calculating the cash flows to avoid double-counting

Where the biological assets are attached to land, the fair value of
the land and assets would be measured, and then the value of the
land would be deducted since land is not covered by this standard
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IAS 41 Recognition and Measurement
Contracts:

If the entity has entered into a contract to sell the assets at a future
date, the price fixed in the contract does not necessarily dictate the
fair value since the contract price reflects an estimate of the future
fair value and therefore includes a time value factor

In addition, the locked-in contract price may be higher or lower than
the fair value at any point in time (spot price) due to changing
market conditions and expectations

Where an entity has locked into a price to sell the assets at a price
less than the current fair value, this would be reflected in the
statements as an onerous contract and IAS 37 would apply

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IAS 41 Recognition and Measurement
Costs related to the biological transformation process:
May include planting, weeding, fertilizing, and others
IAS 41 does not prescribe how to treat these costs
Some feel that it is inconsistent to capitalize these costs in a fair
value model and that they should be expensed
Others feel that they should be capitalized and only the net amount
should be recognized as gain or loss in the statement of profit and
loss


Gains and losses:
Gains or losses are recognized in income when they arise
This may result in a gain or loss arising upon initial recognition such
as the birth of a calf



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IAS 41 Recognition and Measurement
Inability to Measure Fair Value Reliably:
In general, the standard assumes that fair value is measurable

This rebuttable presumption may be overcome for biological assets only if the
market-determined prices are not available or fair value estimates are unreliable
at the time of initial recognition

As a default measurement method, the asset would be measured at cost
(amortized if relevant) and would also be tested for impairment

Once an asset is measured at fair value less point of sale costs it is assumed that
fair value is reliably measurable thereafter (no going back)

Agricultural produce is always presumed to have a reliably measurable fair value
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IAS 41 Government Grants
Unconditional government grants are
recognized as income when receivable

For conditional grants, conditions must be met
before recognition of the grant

If the biological asset is measured at cost or
amortized cost, the government grant is
accounted for in accordance with IAS 20

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IAS 41 Disclosure
IAS 1 requires biological assets to be presented separately on the statement
of financial position

The standard requires the following disclosures:
Recognized gains/losses (on initial recognitions and on revaluation)
Description of each type of biological asset
Nature of activities relating to the assets
Non-financial measures or estimates of the physical qualities of the assets
Methods and significant assumptions to determine fair value
Fair value of harvested assets at point of harvest
Any restrictions on title
Commitments for the development or acquisition of biological assets
Financial risk management strategies
A reconciliation of changes in the carrying amounts of biological assets between
the beginning and end of the period
Additional disclosure if measured at cost
Additional disclosures related to government grants
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IAS 41 Disclosure
An entity is also encouraged but not required to disclose the
change in fair value due to physical changes (assets getting older)
and price changes (e.g., the price of beef increases)

Biological assets:
Are categorized as being consumable (beef cattle) and bearer (dairy
cows)
Bearer biological assets are long-term assets that produce each year
such as an orchard tree
Entities are encouraged to provide a description of different types of
assets differentiating between consumable and bearer biological assets
20
Current GAAP Comparisons



Pages 80 & 108 of 164 of
http://www.kpmg.co.uk/pubs/IFRScomparedtoU.S.GAAPAnOverview(2008).pdf

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IFRS Financial Statement
Disclosures
Del Monte Pacific Limited
http://www.delmontepacific.com/ir/media/ar_ipo/AR2007.pdf

Biological Assets accounting
policy note page 62 of 108
Biological Assets note page 75 of 108

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Looking Ahead
The use of fair value in this standard means that the standard is
intertwined with the larger fair value measurement project

The IASB has established an expert advisory panel to deal with the
issue of fair value measurement in general; the panel met for the first
time in June 2008

To date, the IASB has completed a standard-by-standard review of
existing measurements in IFRSs that are identified as fair value and
has decided to delete the requirement to use a pre-tax discount rate

Other than noted in footnote 6 and above, there are no other specific
plans to make any changes in the standard in the near future
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End-of-Chapter Practice
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End-of-Chapter Practice
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End-of-Chapter Practice
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