IAS 41 Agriculture

 Objective

This standard provides the guidelines, to deal with the accounting treatment of biological assets and agricultural produce at the time of harvest, related to the agricultural activity along with related disclosure requirements in the financial statements of the entity.

Scope

• This standard is applicable for the accounting treatment of biological assets, harvested agricultural produce at the time of harvest and related government grants it will be covered under IAS 2 Inventories or any other standard if after harvest.
• This standard does not apply to, Land related to agriculture activity, it is covered under IAS 16 Property, Plant and Equipment or in IAS 40 Investment Property.
• This standard does not apply to, Intangible assets related to agriculture activity, it is covered under IAS 38 Intangible Assets

From the above we don’t understand what biological assets is, what is harvested agriculture produce etc. This standard is important for us to understand, as how to measure Agriculture activity? What are the criteria etc. 

So, as we move further let me introduce the definitions of above terms as well as few additional terms:

1. What does it mean by Agricultural Activity?

It entails broad range of activities such as, livestock management, plantations, cultivation and cropping, forestry including fish farming. The agricultural activity has the following certain ordinary features:

• Biological assets have capability for the quantitative changes or change in attributes, as result of biological transformation
• The management involvement which enables the biological transformation by providing and maintaining the conditions essential for the process to take place such as temperature, light and fertility.

Therefore, harvesting from unmanaged sources such as de-forestation and ocean fishing does not constitute to agricultural activity and are not covered in this standard.

 

2. What we call as Agricultural Produce?

The harvested product of the biological assets of the entity is termed as agricultural produce.

 

3. What is Biological Asset?

It is a living plant or animal

 

4. What is Biological transformation?

It is the process which encompasses production, growth, reproduction, and degeneration of biological asset that result in quantitative changes or change in attributes of the biological asset such as

1. Production of agricultural produce in the form of milk, wool, fruits, tea leafs and timber
2. Improvement in the quality and creation of additional animals and plants

 

5. We heard the term harvest so many times, what do that mean in normal language?

It is a process undertaken to detach the produce from the related biological asset. It also includes the cessation of life processes of a biological asset.

6. What do you mean by Bearer Plants?

It is living plant, its used in the production or supply of agricultural produce and its expected to bear produce for more than one period. Bearer plants has a distant probability of being sold except as a scrap sale

 

7. We heard about something related to sale; if there is sale then there mustbe cost to sell as well as there must be active market,

Active market is there are wiling buyer and seller for the products are available and price is known to all as well as items which are traded should be homogenous.

How to determine cost to sell, the additional costs which are directly related to the disposal of an asset (such as transaction cost) other than Interest costs and income taxes.

So, from above atleast we understood, what all terminologies generally used by the Agriculture industries.    

As we move further, lets understand how initial recognition is completed. Before we move to initial recognition, hope we remember what the definition of asset is, an asset is a resource with economic value that an individual, corporation, or country owns or controls as a result of past event with the expectation that it will provide a future benefit and can be measured reliably.

So, from this can we all try what would be the recognition criteria:

1. Entity controls biological assets or agriculture produce as a result of past event;  
2. Probable that future economic benefit will arise to the entity
3. Fair value or cost of asset can be measured reliably 

Does it sound simple as we tried to connect asset definition with the recognition criteria.

How Initial Measurement is done,

1. For Agriculture Produce:

Produced harvested from biological asset is measured at fair value less costs to sell at the point of harvest. Such cost is on the date on which other standard applies.

 

2. For Biological assets:

• At fair value less estimated cost of sell.
• If fair value cannot be estimated reliably then biological assets are valued at cost. For Subsequent measurement, biological assets are stated at cost less accumulated depreciation and accumulated impairment losses.

Now we understand how Fair value gains and losses should be accounted.

So, for agriculture produce and for Biological assets, the gains or losses arising on initial recognition and subsequent change in fair value, is included in profit and loss statement in the period in which it arises.

Government Grant

The entity will account for the government grant which is available for biological asset as follows:

1) If the biological asset is measured at fair value less cost to sell, any government grant available for such biological asset will be accounted for as follows:

a) If the government grant is unconditional, it will be recognized in statement of profit or loss, when it becomes receivable;

b) If the government grant is conditional, it will be recognized in statement of profit or loss, when related conditions are met.

For example, if a government grant is available for cultivation in a certain specified area for a period of 3 years, the related grant will be recognized in statement of profit or loss when the 3 years have lapsed

2) If the biological asset is measured at cost less accumulated depreciation less accumulated impairment loss, because its fair value was not determinable, then any government grant available for such biological asset will be accounted for as per the requirements of IAS 20.

Hope you all enjoyed reading this article.

• Krina Shah