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IAS 41: Agriculture Objective: The objective of IAS 41 is to establish standards of accounting for agricultural activity – the management of the biological transformation of biological assets (living plants and animals) into agricultural produce (harvested product of the entity's biological assets).

Scope: IAS 41 applies to biological assets with the exception of bearer plants, agricultural produce at the point of harvest, and government grants related to these biological assets. It does not apply to land related to agricultural activity, intangible assets (such as production quotas) related to agricultural activity, government grants related to bearer plants, and bearer plants. However, it does apply to produce growing on bearer plants.

Key definitions Biological asset Agricultural activities

Agricultural produce Costs to sell Agricultural produce Harvest Biological transformation

A living animal or plant such as sheep, cows, rice, wheat, potatoes and so on. The management by an entity of the biological transformation of biological assets:  for sale;  into agricultural produce; or into additional biological assets The harvested product from biological assets. The incremental costs directly attributable to the disposal of an asset, excluding finance costs and income taxes. The harvested product of the entity’s biological assets. The detachment of produce from a biological asset or the cessation of a biological asset’s life processes. Includes the processes of growth, degeneration, production and procreation that give rise to qualitative and quantitative changes in biological asset.

Application of IAS 41 definitions A farmer buys a dairy calf. The calf grows into a mature cow. The farmer milks the cow.

The calf is a biological asset. Growth is a type of biological transformation. The milk has been harvested. Milk is agricultural produce.

Example: A farmer has a field of lambs (‘biological assets’). As the lambs grow they go through biological transformation. As sheep they are able to procreate and lambs will be born (additional biological assets) and the wool from the sheep provides a source of revenue for the farmer (‘agricultural produce’). Once the wool has been sheared from the sheep (‘harvested’), IAS 2 requires that it be accounted for as regular inventory.

Further examples Biological assets (Included in IAS 41, except bearer plants)

Agricultural produce Harvested products (included in IAS 41 at the (Outside the scope of point of harvest, treated as IAS 41) inventory after that point) Sheep Wool Yarn, carpet Trees in a timber plantation Felled trees Logs, lumber Dairy cattle Milk Cheese Pigs Carcass Sausages, cured hams Cotton plants Harvested cotton Thread, clothing Sugarcane Harvested cane Sugar Tobacco plants Picked leaves Cured tobacco Tea bushes Picked leaves Tea Grape Vines Picked grapes Wine Fruit trees Picked fruit Processed fruit Oil palms Picked fruit Palm oil Rubber trees Harvested latex Rubber products When valuing a forest, for example, the trees must be accounted for separately from the land that they grow on.

Bearer Plants: A living plant that: • Is used in the production or supply of agricultural produce • Is expected to bear produce for more than one period, and • Has a remote likelihood of being sold as agricultural produce, except for incidental scrap sales. Therefore items such as vines, tea bushes and fruit trees may be classed as bearer plants and treated as property, plant and equipment rather than being accounted for under the provisions of IAS 41 Agriculture.

Recognition criteria: A biological asset should be recognised if: • It is probable that future economic benefits will flow to the entity from the asset. • The cost or fair value of the asset can be reliably measured. • The entity controls the asset as a result of past events. (Note: The probability of future benefits can be an important factor in the recognition of these items.)

Initial recognition: Biological assets within the scope of IAS 41 are measured on initial recognition and at subsequent reporting dates at fair value less estimated costs to sell/estimated 'point of sale' costs, unless fair value cannot be reliably measured. Gains and losses may arise in profit or loss when a biological asset is first recognised. For example: • A loss can arise because estimated selling costs are deducted from fair value. • A gain can arise when a new biological asset (such as a lamb or a calf) is born. Agricultural produce is measured at fair value less estimated costs to sell at the point of harvest. Because harvested produce is a marketable commodity, there is no 'measurement reliability' exception for produce. 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, are included in profit or loss. Any change in fair value less cost to sell at the end of each reporting period are similarly recognised in profit or loss for the period. A gain on initial recognition (e.g. as a result of harvesting) of agricultural produce at fair value less costs to sell are included in profit or loss for the period in which it arises. All costs related to biological assets that are measured at fair value are recognised as expenses when incurred, other than costs to purchase biological assets. Example: Using the earlier example of the sheep farmer, lambs should initially be measured when they are born at their fair value less costs to sell. Their value changes as they grow. This value change is reflected in the carrying amount of the lambs with the gain or loss recognised in the statement of profit or loss. The sheep may be used for obtaining wool. Once the wool has been sheared from the sheep, as an agricultural produce the wool should be valued at fair value less costs to sell. If the wool is then turned into yarn or carpet its value is then transferred to inventory and IAS 2 will provide any further accounting rules. Example: A Farmer owns a Diary Herd at 1stJanuary 2015. The number of cows in the herd is $5000. The fair value of 2 year old animals and 31 December 2014 and 3 year old animals at 31 December 2015 are $60 and 75 respectively: Separating out the value increase of the herd into those relating to price change and those relating to the physical change gives the following valuation: Fair value a 1 January 2015 Increase due to price change (100 x ($60-$50)) Increase due to physical change (100x(($75-$60)) Fair value at 31stDecember 2015

$5,00 0 1000 $1500 7,500

Example: As at 31 December 2015, a plantation consists of 100 Insignis pine trees that were planted 10 years earlier. Insignis Pine take 30 years to mature and will ultimately be processed into building material for house or furniture. Only mature trees have established fair values by reference to quoted price in an active market. The fair value is inclusive of transport cost to deliver 100 logs to market. For mature trees for same type as in market is As at 31 december2015= 171 As at 31 december2016= 165 The organisation weighted average cost of capital is 6% per annum. Require: Calculate the fair value of the plantation as at: 1. 31 December 2015 and 2. 31 December 2016 Calculate the gain between the two period ends: 1. A change in price 2. A physical Change Solution: Fair Value computation The mature plantation would have been valued at $17100 The estimation for the immature plantation is 17100/1.06^20 = 5332 31 December 2016 The mature plantation would have been valued at 16500. The estimate for the immature plantation is 16500/1.06^19 = 5453 Analyses of gain: The gain identified in part a is analysed as follows: Price change: Reflects the change in price on biological asset over the period. Prior period asset restated at current price 16500/1.06^20 = Less: prior year estimate at previous price Loss

5145 (5332) (187)

2. Physical Change: Reflects the change in state of maturity of biological asset at current price Current year estimate as per current year price from (a)

545 3

Prior year estimate re stated at current price from b Gain

514 5 308

Subsequent measurement: At each reporting date, biological assets are revalued to fair value less costs to sell. Gains and losses arising from changes in fair value are recognised in profit or loss for the period in which they arise. Biological assets are presented separately on the face of the statement of financial position within noncurrent assets.

Fair Value: The price that would be received to sell an asset or paid to transfer a liability in transaction between market participants at the measurement date. Fair value is the quoted price in an active market. Agriculture is fundamentally different from other types of business. Most non-current assets wear out or are consumed over time and therefore they are depreciated. Many agricultural assets grow, rather than wear out. Arguably, depreciation is irrelevant in this situation. Therefore biological assets are measured at fair value and changes in fair value are reported as part of profit for the period. This means that a farmer’s profit for the year reflects the increase in the value of his productive assets as a whole, as well as the profit on any sales made during the year. Many commentators have been wary of this departure from traditional realisation concepts, claiming that it is wrong to recognise profit before a sale has been made. Indeed, under IAS 41 profits could be recognised years before the products are even ready for sale. However, supporters of IAS 41 claim that the opposite is true. By requiring all changes in the value of a farm to be reported openly, farm managers will be unable to boost profits by selling off an unsustainable amount of produce. For instance, under traditional accounting rules a forestry company could make huge short-term profits by felling all of its trees without replacing them. Profit would reflect the sales but ignore the fall in value of the forest. IAS 41 presumes that fair value can be reliably measured for most biological assets. However, that presumption can be rebutted for a biological asset that, at the time it is initially recognised, does not have a quoted market price in an active market and for which alternative fair value measurements are determined to be clearly unreliable. In such a case, the asset is measured at cost less accumulated depreciation and impairment losses. But the entity must still measure all of its other biological assets at fair value less costs to sell. If circumstances change and fair value becomes reliably measurable, a switch to fair value less costs to sell is required (this could arise where a vineyard owner buys some vines that have no value until they are several years old and start to produce grapes. Ultimate selling costs include commissions to brokers and dealers, levies to regulators, transfer taxes and duties.

If there is no active market for the asset then it may be possible to estimate fair value by using: • The most recent market price • The market price for a similar asset • The discounted cash flows from the asset • Net realisable value. Guidance on the determination of fair value is available in IFRS 13 Fair Value Measurement. IFRS 13 also requires disclosures about fair value measurements.

Other issues: The change in fair value of biological assets is part physical change (growth, etc) and part unit price change. Separate disclosure of the two components is encouraged, not required. Agricultural produce is measured at fair value less costs to sell at harvest, and this measurement is considered the cost of the produce at that time (for the purposes of IAS 2 Inventories or any other applicable standard). Agricultural land is accounted for under IAS 16 Property, Plant and Equipment. However, biological assets (other than bearer plants) that are physically attached to land are measured as biological assets separate from the land. In some cases, the determination of the fair value less costs to sell of the biological asset can be based on the fair value of the combined asset (land, improvements and biological assets). Intangible assets relating to agricultural activity (for example, milk quotas) are accounted for under IAS 38 Intangible Assets.

Physical changes and price changes: The fair value of a biological asset may change because of its age, or because prices in the market have changed. IAS 41 recommends separate disclosure of physical and price changes because this information is likely to be of interest to users of the financial statements. However, this disclosure is not mandatory.

Agricultural produce: At the date of harvest, agricultural produce should be recognised and measured at fair value less estimated costs to sell. Gains and losses on initial recognition are included in profit or loss (operating profit) for the period. After produce has been harvested, it becomes an item of inventory. Therefore, IAS 41 ceases to apply. The initial measurement value at the point of harvest is the deemed 'cost' for the purpose of IAS 2 Inventories, which is applied from then onwards.

Agriculture and government grants: If a government grant relates to a biological asset measured at its cost less accumulated depreciation and accumulated impairment losses, it is accounted for under IAS 20 Accounting for Government Grants. If a government grant relates to biological assets measured at fair value less costs to sell, then it is accounted for under IAS 41 Agriculture as follows: • An unconditional government grant related to a biological asset measured at its fair value less costs to sell shall be recognised in profit or loss when it becomes receivable. • A conditional government grant related to a biological asset measured at its fair value less costs to sell, shall be recognised in profit or loss when the conditions attaching to the government grant are met.

Disclosure requirements: Disclosure requirements in IAS 41 include: • Aggregate gain or loss from the initial recognition of biological assets and agricultural produce and the change in fair value less costs to sell during the period. • Description of an entity's biological assets, by broad group. • Description of the nature of an entity's activities with each group of biological assets and non-financial measures or estimates of physical quantities of output during the period and assets on hand at the end of the period. • Information about biological assets whose title is restricted or that are pledged as security. • Commitments for development or acquisition of biological assets. • Financial risk management strategies. • Reconciliation of changes in the carrying amount of biological assets, showing separately changes in value, purchases, sales, harvesting, business combinations, and foreign exchange differences. Disclosure of a quantified description of each group of biological assets, distinguishing between consumable and bearer assets or between mature and immature assets, is encouraged but not required. If fair value cannot be measured reliably, additional required disclosures include: 

Description of the assets



An explanation of why fair value cannot be reliably measured



If possible, a range within which fair value is highly likely to lie



Depreciation method



Useful lives or depreciation rates



Gross carrying amount and the accumulated depreciation, beginning and ending.

If the fair value of biological assets previously measured at cost subsequently becomes available, certain additional disclosures are required.

Disclosures relating to government grants include the nature and extent of grants, unfulfilled conditions, and significant decreases expected in the level of grants....