Fair value less costs to sell at the point of harvest forms ‘cost’ for the purposes of IAS 2. An entity that has previously measured a biological asset at its fair value less costs to sell continues to measure the biological asset at its fair value less costs to sell until disposal. An entity does not include any cash flows for financing the assets or re‑establishing biological assets after harvest (for example, the cost of replanting trees in a plantation forest after harvest). For example, a grant may require an entity to farm in a particular location for five years and require the entity to return all of the grant if it farms for a period shorter than five years.
International Accounting Standard IAS 41 Agriculture
IAS 41 Agriculture is an international accounting standard issued by the International Accounting Standards Board (IASB) that guides the accounting treatment of agricultural activities. They will be accounted for using IAS 16 – accumulated cost until maturity and then subject to depreciation and impairment. A gain or loss may arise on initial recognition of agricultural produce as a result of harvesting.
The need for an International Accounting Standard on agriculture
- Significant events described include the AASB staff recommendation to the IASB in 2003 to split IAS 41 in two before its designated 2005 commencement date -a recommendation which, so far, has been ignored.
- Entities must also disclose the total gain or loss arising from changes in fair value and the description of any government grants related to biological assets.
- An entity does not include any cash flows for financing the assets or re‑establishing biological assets after harvest (for example, the cost of replanting trees in a plantation forest after harvest).
- Measurement of biological assets is a critical aspect of IAS 41 as it determines the carrying amount of the asset on an entity’s balance sheet.
An entity considers this in determining an appropriate discount rate to be used and in estimating expected net cash flows. In determining the present value of expected net cash flows, an entity includes the net cash flows that market participants would expect the asset to generate in its most relevant market. 19In some cases, the information sources listed in paragraph 18 may suggest different conclusions as to the fair value of a biological asset or agricultural produce. An entity considers the reasons for those differences, in order to arrive at the most reliable estimate of fair value within a relatively narrow range of reasonable estimates. E65 proposed that pre‑sale disposal costs that will be incurred to place an asset on the market (such as transport costs) should be deducted in determining fair value, if a biological asset will be sold in an active market in another location.
International Accounting Standard 41Agriculture
Mr Finnegan and Ms McConnell do not believe that this is an improvement to financial reporting. In January 2013, the Trustees of the IFRS Foundation approved a new Due Process Handbook that specifies, among other things, the criteria for new Standards or major improvements. The main criteria (in addition to pervasiveness of the issue) are (a) whether there is a deficiency in the way particular types of transactions or activities are reported in financial reports, and (b) the importance of the matter to those who use financial reports. Disclosure is also required in respect of government grants relating to managed agricultural activity.
In many developing countries, agricultural activities represent one of the most important sources of income. Carrying amount is the amount at which an asset is recognised in the statement of financial position. The Board decided not to include such circumstances in the scope of the Standard because of concerns about difficulties in differentiating them from other manufacturing processes (such as conversion of raw materials into marketable inventories as defined in IAS 2). The Board concluded that the requirements in IAS 2 or another applicable International Accounting Standard would be suited to accounting for such processes.
No income might be reported until first harvest and sale (perhaps 30 years) in a plantation forestry entity using a transaction‑based, historical cost accounting model. On the other hand, income is measured and reported throughout the period until initial harvest if an accounting model is used that recognises and measures biological growth using current fair values. This Standard requires a different treatment from IAS 20, if a government grant relates to a biological asset measured at its fair value less costs to sell or a government grant requires an entity not to engage in specified agricultural activity. IAS 20 is applied only to a government grant related to a biological asset measured at its cost less any accumulated depreciation and any accumulated impairment losses. Unconditional grants related to biological assets measured at fair value less costs to sell are recognised as income when the grant becomes receivable. Conditional grants are recognised as income only when the conditions attaching to the grant are met.
- Many agricultural entities are vertically integrated and involved in, for example, producing both grapes and wine.
- They also argue that it is sometimes difficult to measure the fair value of such biological assets separately from the land since an active market often exists for the combined assets (that is, land and biological assets; for example, trees in a plantation forest).
- Biological transformation comprises the processes of growth, degeneration, production, and procreation that cause qualitative or quantitative changes in a biological asset.
- 44Consumable biological assets are those that are to be harvested as agricultural produce or sold as biological assets.
- If a government grant is received to compensate for expenses related to biological assets, it should be recognized in income when the expenses are recognized.
- E65 proposed that, if an active market exists for a biological asset, an entity should use the market price in the active market.
Government Grant
Among these developments, the Institute of International Accounting Standards proposed the standards for accounting and reporting. This standard comprises Biological assets and agricultural products in the time of harvesting. Biological assets and agricultural products are classified under the biological assets heading in the balance sheets.
If an entity has previously measured a ias 41 agriculture biological asset at its fair value less estimated point‑of‑sale costs, the Standard requires that the entity should continue to measure the biological asset at its fair value less estimated point‑of‑sale costs until disposal. Accordingly, the Board decided to prohibit entities from changing their measurement basis from fair value to cost, because otherwise an entity might use a reliability exception as an excuse to discontinue fair value accounting in a falling market. Those who support fair value measurement argue that the effects of changes brought about by biological transformation are best reflected by reference to the fair value changes in biological assets.
Authors think that there is place for improvement whiten the standards and the future of EU farming should not leave accounting behind, making a call for a more integrated approach and understanding. 47An entity shall disclose 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 assets. 37If a government grant relates to a biological asset measured at its cost less any accumulated depreciation and any accumulated impairment losses (see paragraph 30), IAS 20 Accounting for Government Grants and Disclosure of Government Assistance is applied.
Furthermore, Mr Finnegan and Ms McConnell believe that such a change would preserve relevant information for investors through prominent display in the primary financial statements, while addressing the concerns of those who believe that fair value changes distort profit or loss. Mr Finnegan and Ms McConnell see no reason to abandon that principle with respect to bearer plants. Consequently, they do not agree that prior to maturity, bearer plants should be measured at accumulated cost.
The amendments are effective for annual periods beginning on or after January 1, 2016, with early adoption permitted. By contrast, in the case of an annual crop of wheat, for example, when the cultivated plants would typically have a useful life that does not extend beyond the next year end date, the introduction of the fair value model should not have such a major impact. The ICAEW Library & Information Service provides full text access to a selection of key business and reference eBooks from leading publishers. EBooks are available to logged-in ICAEW members, ACA students and other entitled users. If you are unable to access an eBook, please see our Help and support advice or contact The Corporate Reporting Faculty’s annual IFRS factsheets provide a more detailed discussion of recent IFRS amendments.
Ias 41 Agriculture
In reaching the above conclusion, the Board noted that entities undertaking agricultural activity sometimes purchase agricultural produce for resale, and other entities often engage in processing purchased agricultural produce into consumable products. If agricultural produce would be measured at its fair value after harvest, a desire for consistency would suggest revaluing purchased inventories as well, and such a treatment would be inconsistent with IAS 2. Different sources of replacement animals and plants (home‑grown or purchased) give rise to different costs in a historical cost approach. Similar assets should give rise to similar expectations with regard to future benefits.
A better solution would have been for the Board to require the fair value of bearer plants in combination with the fair value of the land to which such plants are attached. One of the weaknesses in IAS 41 is that it does not require the use of fair value to measure land to which bearer plants are attached. This is a weakness because the value of bearer plants is inextricably tied to the value of the land.