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IAS 41 - Agriculture

REVIEW QUESTIONS Question 1. A herd of five 4 year old pigs was held on 1 January 20X3. On 1 July 20X3 a 4.5 year old pig was purchased for $212. The fair values less estimated point of sale costs were:  4 year old pig at 1 January 20X3 $200  4.5 year old pig at 1 July 20X3 $212  5 year old pig at 31 December 20X3 $230 Required: Calculate the amount that will be taken to the statement of profit or loss for the year ended 31 December 20X3. Question 2. McDonald operates a dairy farm. At 1 January 20X1, he owns 100 cows worth $1,000 each on the local market. At 31 December 20X1, he owns 105 cows worth $1,100 each. During 20X1 he sold 40,000 gallons of milk at an average price of $5 a gallon. When cows are sold at the local market, the auctioneer charges a commission of 4%. Required: Show extracts from the financial statements for 20X1 for these activities, assuming that no cows were purchased or sold during the year. Question 3. On 1 January 20X1, a farmer had a herd of 100 cows, all of which were 2 years old. At this date, the fair value less point of sale costs of the herd was $10,000. On 1 July 20X1, the farmer purchased 20 cows (each two and half years old) for $60 each. As at 31 December 20X1, three year old cows sell at market for $90 each. Market auctioneers have charged a sales levy of 2% for many years. Required: Discuss the accounting treatment of the above in the financial statements for the year ended 31 December 20X1. Question 4. GoodWine is a company that grows and harvests grapes. Grape vines, which produce a new harvest of grapes each year, are typically replaced every 30 years. Harvested grapes are sold to wine producers. With regards to property, plant and equipment, GoodWine accounts for land using the revaluation model and all other classes of assets using the cost model. On 30 June 20X1, its grape vines had a carrying amount of $300,000 and a remaining useful life of 20 years. The grapes on the vines, which are generally harvested in August each year, had a fair value of $500,000. The land used for growing the grape vines had a fair value of $2m. On 30 June 20X2, grapes with a fair value of $100,000 were harvested early due to unusual weather conditions. The grapes left on the grape vines had a fair value of $520,000. The land had a fair value of $2.1m. Page 1 of 7

IAS 41 - Agriculture

All selling costs are negligible and should be ignored. Required: Discuss the accounting treatment of the above in the financial statements of GoodWine for the year ended 30 June 20X2. Question 5. Ted started running a farm that is involved in agricultural activity whereby it buys dairy producing cows. At the start of the financial year Ted purchased 1,000 dairy cows, with an average age of 2 years old, for $1.50 million. Ted has the following data on fair values of agricultural activity:

Two year old cows (per cow) Three year old cows (per cow)

Fair value less point of sale costs Start of year End of year $ $ 1,500.00 1,550.25 1,590.00 1,650.10

Required: Explain the accounting treatment of the above in the financial statements Question 6. IAS 41 Agriculture prescribes the accounting treatment and disclosures related to agricultural activities. An entity is encouraged, but not required, to provide a quantified description of each group of biological assets, distinguishing between consumables and bearer biological assets, or between mature and immature biological assets, as appropriate. Required: (a) Distinguish between a biological asset and agricultural produce. (b) Explain how agricultural produce is measured in the financial statements of an entity. (c) Give five examples of biological assets and their relative agricultural produce. (d) Explain what is meant by consumable and bearer biological assets, giving one example for each. (10 marks) Question 7. Supreme Ltd purchased 100 sheep at an auction for Tshs60 million on 31December 20X5. The auctioneer’s fees amounted to be 1% of sales price. At what value would the sheep be measured in the statement of financial position and what gain / loss would be shown in the statement of profit or loss? Suppose the fair value of the sheep rises to Tshs70 million on 30 June 20X6. At what value would the sheep be measured in the statement of financial position and what gain / loss would be recognised in the statement of profit or loss? Question 8. A herd of 15, 4-year old animals valued at Tshs250,000 was held in Marigold Source farms as at 1 January 20X6. Page 2 of 7

IAS 41 - Agriculture

The following transactions took place during the year: On 1 July 20X6: One animal aged 4.5 years was purchased for Tshs260,000 One animal was born No animal was sold or disposed of. The per-unit fair values less costs to sell were as follows: Tshs’000 4-year old animal on 1/01/20X6 250 Newborn animal on 1/07/ 20X6 200 4.5-year old animal on 1/07/20X6 260 Newborn animal on 31/12/20X6 205 0.5-year old animal on 31/12/20X6 220 4-year old animal on 31/12/ 20X6 258 4.5-year old animal on 31/12/ 20X6 270 5-year old animal on 31/12/ 20X6 280 Required: 1. The change in fair value less costs to sell showing: The portion attributable to physical changes The portion attributable to price change 2. The carrying cost of the herd as at 31 December 20X6 3. An extract of the livestock account for the year to 31 December 20X6 Question 9. (NBAA November, 2015 Qn.2) Since Tanzania’s attainment of independence, agriculture has been the mainstay of the economic activities in most rural and peri-urban areas. In order to regulate accounting practice in agricultural undertakings, the International Accounting Standards Board (IASB) developed an accounting standard, IAS 41: Agriculture. Kayumba, an emerging female farmer located in central province, prepares financial statements to 30 th September each year in order to align the financial year to major agricultural activities. On 1st October 2013, Kayumba carried-out the following transactions: (i) Purchased a large piece of traditional land in Mkuki farming block for TZS. 1billion (ii) Purchased 100 dairy cows (with average age of two years), costing TZS.50 million in total. (iii) Received a non-refundable grant of TZS.20,000,000 towards acquisition of these cows. During the year ended 30th September 2014, Kayumba incurred the following costs: (i) TZS.25,000,000 to maintain the condition of her animals (food and disease protection) (ii) TZS.15,000,000 in breeding fees to a local farmer. On 1st April 2014, 50 calves were born. Kayumba’s established mortality rate for her biological assets (which she incorporates in her financial statements in line with best practice and prudence) is 10% per Page 3 of 7

IAS 41 - Agriculture

annum of every birth or purchase. Apart from the forgoing, she recorded no other changes in the number animals during the year ended 30th September 2014. At year-end (30th September 2014), Kayumba had 100 litres of unsold milk. This was sold shortly after year end at the prevailing market price. Information regarding fair value is as follows: Item Land Six month old calves (per calf) Three year old cows (per cow) Milk (per litre)

Fair value less point of sale cost at 30 September 2014 (TZS) 1.2 billion 125,000 685,000 3,000

REQUIRED: (a) State the provisions of IAS 41: Agriculture, regarding recognition and measurement of biological assets and agricultural produce in the preparation and presentation of financial statements. (b) Prepare extracts of the statement of comprehensive income and the statement of Financial Position that show how transactions entered into by Kayumba in respect of purchase and maintenance of dairy herd would be reflected in the financial statements of the year ended 30th September 2014. Question 10. (NBAA November, 2018 Qn.6) (a) Agriculture is one of the world's largest industry. In some countries it is the mainstay of the gross domestic product. Yet until January 2003 when the IASB issued IAS 41 Agriculture, no major accounting standard setting body had issued a comprehensive pronouncement on this topic. IAS 41 introduced what some would say are radical changes in the way agricultural enterprises should account for biological assets. REQUIRED: Define biological assets and explain how IAS 41 requires them to be treated in the financial statements. (5 marks) (b) Miti Safi na Nyuki Brothers (MSNB) is a Limited Company that was incorporated to invest in forest and bee resources in general and to collect forestry and beekeeping revenues. As at 30th June 2018, it had a forest plantation in the Sourthen Highland part of Tanzania in Njombe region consisting of 250,000 Eucalyptus trees that were planted 2 years earlier. Maturity and ideal harvesting age of Eucalyptus trees are dependent on the intended purpose or market. The harvesting age significantly varies from 3 to 4 years (construction poles), 8 to 15 years (transmission poles) to as late as 20 years for timber production. The company’s weighted average cost of capital is 9% per annum. The accountants of the MSNB were unable to value the 250,000 Eucalyptus trees for inclusion in the company’s statement of financial position as biological assets as only mature Eucalyptus trees for timber production had established fair values by reference to a quoted price in an active market. The Page 4 of 7

IAS 41 - Agriculture

fair value (inclusive of current transport costs) for a mature tree for timber production of the same grade as in the plantation is:  As at 1st July 2017: TZS 6,000 th  As at 30 June 2018: TZS 7,000 REQUIRED: (i) Determine the amount of the biological asset to be reported as at 1st July 2017 and 30th June 2018. (3 marks) (ii) Determine the total fair value change of the immature trees during the year ended 30th June 2018. (2 marks) (iii) Determine the gain or loss due to changes in fair values as a result of the effects of change in market price, and (5 marks) (iv) Determine the gain or loss due to changes in fair values as a result of the physical change (growth) of the trees in the forest plantation. (5 marks) (Total: 20 marks) Question 11. Numbers prepares financial statements to 30 September each year. On 1 October, 2012 Numbers carried out the following transactions:   

Purchased a large piece of land for $47 million Purchased 10,000 dairy cows (average age at 1 October, 2012 two years) for $2.35 million Received a grant of $940,000 towards the acquisition of the cows. This grant was non–returnable

During the year ending 30 September, 2013 Numbers incurred the following costs:  

$1,175,000 to maintain the condition of the animals (food and protection). $705,000 in breeding fees to a local farmer

On 1 April, 2013 5,000 calves were born. There were no other changes in the number of animals during the year ended 30 September, 2013 At 30 September, 2013 Numbers had 10,000 litres of unsold milk in inventory The milk was sold shortly after the year end at market prices Information regarding fair values is as follows:

Item

Land ($million) New born calves (per calf) Six month old calves (per calf)

Fair value less point of sale costs 01 October 01 April 30 September $ $ $ 2012 2013 2013 47 51.7 55.4 47 49.35 51.7 54.05 56.4 58.15 Page 5 of 7

IAS 41 - Agriculture

Two year old cows (per cow) Three year old cows (per cow) Milk (per litre)

211.5 218.5 1.41

216.2 223.25 1.29

220.9 227.95 1.29

Required: (a) Discuss how the IAS 41 requirements regarding the recognition and measurement of biological assets and agricultural produce are consistent with the IASC Framework for the Preparation and Presentation of Financial Statements. (8 marks) (b) Prepare extracts from the statement of profit or loss and the statement of financial position that show how the transactions entered into by Numbers in respect of the purchase and maintenance of the dairy herd would be reflected in the financial statements of the entity for the year ended 30 September, 2013. You do not need to prepare a reconciliation of changes in the carrying amount of biological assets. (17 marks) Question 12. The Lucky Dairy, a public limited company, produces milk for supply to various customers. It is responsible for producing 25% of the country's milk consumption. The company owns 150 farms and has 70,000 cows and 35,000 heifers which are being raised to produce milk in the future. The farms produce 2.5 million kilograms of milk per annum and normally hold an inventory of 50,000 kilograms of milk (Extracts from the draft accounts to 31 May 20X2). The herds comprise at 31 May 20X2: 70,000 – 3-year old cows (all purchased on or before 1 June 20X1) 25,000 – heifers (average age 1½ years old – purchased 1 December 20X1) 10,000 – heifers (average age 2 years – purchased 1 June 20X1) There were no animals born or sold in the year. The per unit values less estimated point of sale costs were as follows. 2-year old animal at 1 June 20X1 1-year old animal at 1 June 20X1 and 1 December 20X1 3-year old animal at 31 May 20X2 1½-year old animal at 31 May 20X2 2-year old animal at 31 May 20X2 1-year old animal at 31 May 20X2

$ 50 40 60 46 55 42

The company has had a difficult year in financial and operating terms. The cows had contracted a disease at the beginning of the financial year which had been passed on in the food chain to a small number of consumers. The publicity surrounding this event had caused a drop in the consumption of milk and as a result the dairy was holding 500,000 kilograms of milk in storage.

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IAS 41 - Agriculture

The government had stated, on 1 April 20X2, that it was prepared to compensate farmers for the drop in the price and consumption of milk. An official government letter was received on 6 June 20X2, stating that $1.5 million will be paid to Lucky on 1 August 20X2. Additionally on 1 May 20X2, Lucky had received a letter from its lawyer saying that legal proceedings had been started against the company by the persons affected by the disease. The company's lawyers have advised them that they feel that it is probable that they will be found liable and that the costs involved may reach $2 million. The lawyers, however, feel that the company may receive additional compensation from a government fund if certain quality control procedures had been carried out by the company. However, the lawyers will only state that the compensation payment is 'possible'. The company's activities are controlled in three geographical locations, Dale, Shire and Ham. The only region affected by the disease was Dale and the government has decided that it is to restrict the milk production of that region significantly. Lucky estimates that the discounted future cash income from the present herds of cattle in the region amounts to $1.2 million, taking into account the government restriction order. Lucky was not sure that the fair value of the cows in the region could be measured reliably at the date of purchase because of the problems with the diseased cattle. The cows in this region amounted to 20,000 in number and the heifers 10,000 in number. All of the animals were purchased on 1 June 20X1. Lucky has had an offer of $1 million for all of the animals in the Dale region (net of point of sale costs) and $2 million for the sale of the farms in the region. However, there was a minority of directors who opposed the planned sale and it was decided to defer the public announcement of sale pending the outcome of the possible receipt of the government compensation. The board had decided that the potential sale plan was highly confidential but a national newspaper had published an article saying that the sale may occur and that there would be many people who would lose their employment. The board approved the planned sale of Dale farms on 31 May 20X2. The directors of Lucky have approached your firm for professional advice on the above matters. Required Advise the directors on how the biological assets and produce of Lucky should be accounted for under IAS 41 Agriculture and discuss the implications for the published financial statements of the above events. Note. Candidates should produce a table which shows the changes in value of the cattle for the year to 31 May 20X2 due to price change and physical change excluding the Dale region, and the value of the herd of the Dale region as at 31 May 20X2. Ignore the effects of taxation. Heifers are young female cows, whilst "cattle" refers to both cows and heifers. (25 marks)

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