International Accounting Standard IAS 41, Agriculture, is the first standard that specifically covers the primary sector. The standard is operative for annual financial statements covering periods beginning on or after 1 January 2003 with earlier application encouraged.
IAS 41 introduces a fair value model to agriculture accounting. This is a major shift away from the traditional cost model widely applied in primary industry.
IAS 41 impacts those agricultural activities where the income-producing biological assets are expected to have economic lives that stretch beyond one accounting period. This is the case for both ‘consumable biological assets’, such as a tree that will be logged, and for ‘bearer biological assets’, such as a grapevine that bears fruit but which itself will not eventually become agricultural produce. 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.
IAS 41 applies to:
IAS 41 does not apply to:
The following accounting standards specifically do not apply to biological assets related to managed agricultural activity because of the specific coverage in IAS 41:
The main issues addressed by IAS 41 are:
IAS 41 specifies the usual tests in order that a biological asset or agricultural produce be recognised on the statement of financial position, namely:
Biological assets should be measured initially, and at each year end date subsequently, at fair value less estimated point-of-sale costs.
Agricultural produce is measured, at the point of harvest, at fair value less estimated point-of-sale costs. The point of harvest represents the transition between accounting for agricultural produce assets under IAS 41 and IAS 2. Fair value less estimated point-of-sale costs at the point of harvest forms ‘cost’ for the purposes of IAS 2.
Point-of-sale costs include commissions to brokers and dealers, levies by regulatory agencies and commodity exchanges, and transfer taxes and duties. Point-of-sale costs exclude transport and other costs necessary to get assets to a market (these are taken into account in arriving at fair value).
IAS 41 contains a rebuttable presumption that fair value can be established for all biological assets and agricultural produce. Only on the initial recognition of such assets can the presumption be rebutted because of:
The estimation of fair value can be determined by reference to:
The standard offers the following guidance on determination of the discount rate: 'The objective of a calculation of the present value of expected net cash flows is to determine the fair value of a biological asset in its present location and condition. An enterprise considers this in determining an appropriate discount rate to be used and in estimating expected net cash flows. The present condition of a biological asset excludes any increases in value from additional biological transformation and future activities of the enterprise, such as those related to enhancing the future biological transformation, harvesting, and selling.'
The standard specifically requires that fair value not be determined by reference to a future sales contract. Contract prices are not necessarily relevant in determining fair value, because fair value reflects the current market in which a willing buyer and seller would enter into a transaction. As a result, the fair value of a biological asset or agricultural produce is not adjusted because of the existence of a contract.
The difficulty in establishing the fair value of a biological asset increases when the asset is a bearer asset (which itself will not eventually become agricultural produce) and the more long-lived the asset is. For example, in the established vineyards in France, grapevines have long lives and it is not uncommon to have productive vines that are over 100 years old and which are capable of continued production for a similarly long time. The standard does not require external independent valuations but, in such cases where fair values are otherwise difficult to determine, it may be possible and appropriate to apply IAS 36 to determine both the value in use and the net selling price of the asset and to use the higher of the two amounts to represent valuation.
When the presumption that fair value can be established is rebutted, and until such time as a fair value becomes measurable with reliability, the asset is carried on the statement of financial position at cost less any accumulated depreciation and any accumulated impairment losses. IAS 41 contains additional disclosure requirements in such a situation.
Establishing fair value when market-determined prices or values may not be available for a biological asset in its present condition:
As at 31 December 20X1, a plantation consists of 100 Pinus Radiata trees that were planted 10 years earlier. Pinus Radiata takes 30 years to mature, and will ultimately be processed into building material for houses or furniture. The enterprise’s weighted average cost of capital is 6% p.a.
Only mature trees have established fair values by reference to a quoted price in an active market. The fair value (inclusive of current transport costs to get 100 logs to market) for a mature tree of the same grade as in the plantation is:
Assuming immaterial cash flow between now and the point of harvest, the fair value (and therefore the amount reported as an asset on the statement of financial position) of the plantation is estimated as follows:
At initial recognition, the fair value (less estimated point-of-sale costs) of a biological asset is reported as a gain or loss in the statement of profit or loss. A loss may arise on initial recognition when the estimated point-of-sale costs exceed the fair value of the asset in its present state.
The change in fair value (less estimated point-of-sale costs) of a biological asset between two year end dates is reported as a gain or loss in the statement or profit or loss.
A gain or loss arising on initial recognition of agricultural produce at fair value less estimated point-of-sale costs is included in net profit or loss for the period in which it arises.
Referring to the forestry example above, the difference in fair value of the plantation between the two year end dates is 121 (5,453 – 5,332), which will be reported as a gain in the statement or profit or loss (regardless of the fact that it has not yet been realised). The aggregate gain of 121 is attributed to two factors:
The aggregate gain is analysed as follows:
IAS 41 requires disclosure of the aggregate gain or loss arising during the current period on initial recognition of biological assets and agricultural produce and from the change in fair value less estimated point-of-sale costs of biological assets. In recognising that reporting the aggregate gain or loss according to its distinct causes may not be practical in all circumstances, the standard does not require reporting of the gain or loss on a disaggregated basis (that is, analysed between the gain and/or loss due to price and physical factors) but encourages such disclosure because it is useful in appraising current period performance and future prospects, particularly when there is a production cycle of more than one year.
Extensive disclosure is required by IAS 41, including:
For biological assets measured at cost less any accumulated depreciation and any accumulated impairment losses, the standard requires the following additional disclosure:
In addition, if the fair value of biological assets previously measured at cost less any accumulated depreciation and any accumulated impairment losses subsequently becomes reliably measurable, an enterprise should disclose a description of the biological assets, an explanation of why fair value has become reliably measurable, and the effect of the change. Disclosure is also required in respect of government grants relating to managed agricultural activity.
Simon Riley is deputy director (accounting), Hong Kong Society of Accountants