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SESSION 07 – IAS 41 AGRICULTURE

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OVERVIEW

Objective

To outline the accounting rules for agriculture.

INTRODUCTION

PRESENTATION AND DISCLOSURE

RECOGNITION AND

MEASUREMENT

GOVERNMENT GRANTS

Objective Scope Definitions Agricultural activity

Recognition Measurement Pricing Gains and losses If fair value cannot be determined

Presentation Disclosure


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1 INTRODUCTION

1.1 Objective

The standard prescribes the accounting treatment and the presentation and disclosures related to agricultural activity.

1.2 Scope

IAS 41 covers the following when they relate to agricultural activity:

biological assets, agricultural produce at the point of harvest, and government grants as described in the standard.

IAS 41 does not cover:

land related to agricultural activity (see IAS 16), or intangible assets related to agricultural activity (see IAS 38).

1.3 Definitions

Agricultural activity is the management by an entity of the biological transformation of biological assets into agricultural produce for sale, into agricultural produce, or into additional biological assets.

A biological asset is a living animal or plant.

Biological transformation comprises the processes of growth, degeneration, production, and procreation that cause qualitative and quantitative changes in a biological asset.

Harvest is the detachment of produce from a biological asset or the cessation of a biological asset’s life processes

Agricultural produce is the harvested product of the entity’s biological assets.

1.4 Agricultural activity

Agricultural activity covers a diverse range of activities, including raising livestock, forestry, annual or perennial cropping, cultivating orchards and plantations, floriculture, and aquaculture.

The common features of agricultural activity are as follows:

Capability to change – living animals and plants are capable of biological transformation.


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Management of change – management facilitates biological changes by enhancing or stabilising conditions (i.e. temperature, moisture, nutrient levels, fertility and light).

Measurement of change – the change in quality (i.e. ripeness, density, fat cover, genetic merit) or quantity (weight, fibre length, cubic metres, and number of buds).

2 RECOGNITION AND MEASUREMENT

2.1 Recognition

An entity should recognise a biological asset when, and only when:

The entity controls the asset as a result of past event,

It is probable that future economic benefits associated with the asset will flow to the entity, and

The fair value can be measured reliably.

2.2 Measurement

A biological asset should be measured on initial recognition and at the end of each reporting period at its fair value less estimated point of sale costs, except where the fair value cannot be measured reliably.

Agricultural produce harvested from an entity’s biological assets should be measured at its fair value less estimated point of sale costs at the point of harvest. Such measurement is cost at that date when applying IAS 2 or another applicable IFRS.

Illustration 1

A farmer owned a dairy herd at 1 January 2008. The number of cows in the herd was 100. The fair value of the herd at this date was $5,000. The fair values of two-year animals at 31 December 2007 and three-year old animals at 31 December 2008 are $60 and $75, respectively.

Separating out the value increases of the herd into those relating to price change and those relating to physical change gives the following valuation:

$ Fair value at 1 January 2008 5,000 Increase due to price change (100 × ($60 – $50)) 1,000 Increase due to physical change (100 × ($75 – $60)) 1,500 ______

Fair value at 31 December 2008 7,500 ______


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2.3 Pricing

Point of sale costs include commissions to brokers/dealers, levies by regulatory agencies and transfer taxes and duties. They do not include transport and other costs necessary to get the asset to the market.

If an active market exists for a biological asset or agricultural produce, the quoted price in that market is the appropriate basis for determining the fair value of that asset. If an entity has access to different active markets, the entity uses the most relevant one, ie if the entity has access to two markets, it would use the price existing in the market expected to be used.

If an active market does not exist, an entity uses one or more of the following, when available, in determining fair value:

The most recent market transaction price, provided that there has been no significant change in economic circumstances between the date of that transaction and the end of the reporting period,

Market prices for similar assets with adjustment to reflect differences, and

Sector benchmarks such as the value of an orchard expressed per export tray, bushel, or hectare, and the value of cattle expressed per kilogram of meat.

In some circumstances market determined prices or values may not be available for a biological asset in its present condition. In such cases, an entity uses the present value of expected net cash flows from the asset discounted at a current market determined pre-tax rate in determining fair value.

Cost may sometimes approximate fair value, particularly when:

Little biological transformation has taken place since initial cost incurrence (i.e. for fruit tree seedlings planted immediately before the end of the reporting period), or

The impact of the biological transformation on price is not expected to be material (i.e. initial growth in a 30 year pine plantation production cycle).

2.4 Gains and losses

A gain or loss arising on initial recognition of a biological asset at fair value less point of sale costs (as point of sale costs need to be deducted) and from a change in fair value less estimated point of sale costs of a biological asset should be included in profit or loss for the period in which it arises.

A gain or loss arising on initial recognition of agricultural produce at fair value less estimated point of sale costs should be included in profit or loss for the period in which it arises.


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2.5 If fair value cannot be determined

If the fair value on initial recognition cannot be determined for a biological asset as market determined prices or values are not available and for which alternative estimates of fair value are determined to be clearly unreliable, the biological asset should be valued at cost less accumulated depreciation and any impairment losses. Once the fair value of the asset can be reliably determined an entity should measure it at fair value less estimated point of sale costs.

Example 1

As at 31 December 2007, a plantation consists of 100 Insignis Pine trees that were planted 10 years earlier. Insignis Pine takes 30 years to mature, and will ultimately be processed into building material for houses or furniture. The entity’s weighted average cost of capital is 6% per annum.

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:

As at 31 December 2007: 171

As at 31 December 2008: 165

Required:

(a) Assuming immaterial cash flow between now and the point of harvest, estimate the fair value of the plantation as at:

(i) 31 December 2007; and (ii) 31 December 2008.

(b) Analyse the gain between the two period ends:

(i) a price change; and (ii) a physical change.


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3 GOVERNMENT GRANTS

An unconditional government grant related to a biological asset measured at its fair value less estimated point of sale costs should be recognised as income when, and only when the government grant becomes receivable.

If a government grant related to a biological asset measured at its fair value less estimated point of sale costs is conditional, including where a government grant requires an entity not to engage in specified agricultural activity, an entity should recognise the government grant as income when, and only when, the conditions attaching to it are met.

4 PRESENTATION AND DISCLOSURE

4.1 Presentation

An entity should present the carrying amount of it biological assets separately on the face of its statement of financial position.

4.2 Disclosure

An entity should disclose

The aggregate gain or loss arising during the current period on initial recognition of biological assets and agricultural produce and from the change in the fair value less estimated point of sale costs of biological assets.

The methods and assumptions applied in determining the fair value.

A reconciliation of changes in the carrying amount of biological assets between the beginning and the end of the current period, including:

The nature and extent of government grants recognised in the financial statements, any unfulfilled conditions attached to those grants and any significant decreases in the level of grants.


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Illustration 2

Note 17 - Biological assets

See accounting principles page 69. MSEK

Standingforest

Group Cost Opening balance, 1 Jan 2004 27,761Acquisition of forest properties – standing forest 11 Change in value – standing forest Change in volume – felling –1,643 Change in volume – growth 1,628 Other change –88 Sale of forest properties (opening balance) – standing forest –236 Closing balance 31 Dec 2004 27,433 Opening balance, 1 Jan 2005 27,433 Acquisition of forest properties – standing forest 19 Change in value – standing forest Change in volume – felling and effects of storm –1,770 Change in volume – growth 1,609 Other change 11 Sale of forest properties (opening balance) – standing forest –400 Closing balance 31 Dec 2005 26,902 The book value of Sveaskog’s forest assets decreased by MSEK 557 in 2005. The fair value of the standing forest is MSEK 26,902 (27,433) and the estimated cost of forest land MSEK 2,070 (2,096).

Change in value of forest in the income statement The income statement includes change in value of forest assets with MSEK 180 (206). Of this change, MSEK 326 (310) pertains to consolidated capital gains from the sale of forest properties. Other change, MSEK –146 (–104) is mainly due to the financial value of harvests being higher than the value of growth in the forest. Group MSEK 2005 2004 Change in value of forest land and biological sets – standing forest in the balance sheet –557 –353 Acquisition of forest properties –23 –12 Sales revenue – sold forest properties 756 567 Other 1 4 Sub-total 177 206 Plus change in value of lying, unprocessed storm-felled forest 3 – Total 180 206


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FOCUS You should now be able to:

account for biological assets, agricultural produce at the point of harvest and

government grants;

discuss the recognition and measurement criteria including treatment of gains and losses, and the inability to measure fair value reliably;

present and disclose information relating to agriculture.


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EXAMPLE SOLUTION

Solution 1

(a) Estimate of fair value

(i) 31 December 2007

The mature plantation would have been valued at 17,100.

2006.1100,17 = 5,332

(ii) 31 December 2008

The mature plantation would have been valued at 16,500.

1906.1500,16 = 5,453

(b) Analysis of gain

The difference in fair value of the plantation between the two period ends is 121 (5,453 – 5,332) which will be reported as a gain in profit or loss, analysed as follows:

(i) Price change

Relates to the biological asset’s state as at the previous period end.

Value at prices prevailing as at the current period end 2006.1500,16 = 5,145

less

value at prices prevailing as at the previous period end 5,332 ________

Loss 187 ________

(ii) Physical change

This is calculated at current prices.

Value in its state as at the current period end 5,453

less

value in its state as at the previous period end (as in (i)) 5,145

________

Gain 308

________


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