INTRODUCTION

Prior to the development of IAS 41, assets related to agricultural activity and changes in those assets were excluded from the scope of International Accounting Standards. For instance, IAS 2, Inventories, excluded “producers” of livestock, agricultural and forest products “… to the extent that they are measured at net realisable value in accordance with well-established practices in certain industries.” Additionally, national standard setters have produced guidelines that are relatively piecemeal and were aimed at resolving a specific issue. Also, the traditional accountancy models are based on an historic cost and realisation basis which conflicts with the rationale of change in altering biological assets. These factors led to a diversity in accounting treatments, which IAS 41 addresses.

The earlier exclusion of agriculture from most established accounting and financial reporting rules can best be understood in the context of certain unique features of the industry. These include biological transformations (growth, procreation, production, degeneration) which alter the very substance of the biological assets; the wide variety of characteristics of the living assets which challenge traditional classification schemes; the nature of management functions in the industry; and the predominance of small, closely held ownership. On the other hand, since in many nations agriculture is a major industry, in some cases accounting for over 50% of gross national product, logic would suggest that comprehensive systems of financial reporting for business entities cannot be deemed complete while excluding so large a segment of the economy.

A review of published financial statements for agriculture-related entities would have revealed the consequences of the lack of a single method of accounting. A wide range of methods and principles has been applied to such businesses as forest products, livestock and grain production.

For example, some forest products companies have accounted for timberlands at original cost, charging depreciation only to the extent of net harvesting, with reforestation costs charged to expense as incurred. Others in the same industry capitalised reforestation costs and even carrying costs and charged depletion on a units-of-production basis. Still others have been valuing forest lands at the net present value of expected future cash flows. This wide disparity obviously has impaired users' ability to gauge the relative performance of entities operating within a single industry group, hindering investment and other decision making by them.

SCOPE

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

1. Biological assets, except for bearer plants;
2. Agricultural produce at the point of harvest; or
3. Unconditional government grants as much as it relates to a biological asset.

The accounting for assets such as inventories and plant and equipment will be guided by such existing standards as IAS 2 and IAS 16. In other words, once the biological transformation process is complete (e.g., when grain is harvested, fruit is picked, animals are slaughtered or trees are felled), the accounting principles imposed on agriculture in this chapter will cease to apply.

The following matters are excluded from the scope of this standard:

The table below provides examples of biological assets, agricultural produce and products that are the result of processing after harvest:

All of the above categories fall into the scope of this standard, except for biological assets that may be classified as bearer plants and accordingly fall into the scope of IAS 16, Property, Plant and Equipment. Examples of these bearer plants included in the table above could be cotton plants, tea bushes, grape vines, fruit trees and oil palms. When determining whether a biological asset falls into the scope of this standard, judgement is required as to whether the asset meets the definition of a bearer plant; the definition of a bearer plant is discussed later on in this section.

DEFINITIONS OF TERMS

Active market. Market for which all these conditions exist: the items traded within the market are homogeneous; willing buyers and sellers can normally be found at any time; and prices are available to the public.

Agricultural activity. Management by an entity of the biological transformation and harvest of biological assets for sale or for conversion into agricultural produce or into additional biological assets.

Agricultural land. Land used directly to support and sustain biological assets in agricultural activity; however, the land itself is not a biological asset.

Agricultural produce. The harvested product of the entity's biological assets.

Bearer plants. A living plant that:

1. Is used in the production or supply of agricultural produce;
2. Is expected to bear produce for more than one period; and
3. Has a remote likelihood of being sold as agricultural produce, except for incidental scrap sales.

The following are not bearer plants:

1. Plants cultivated to be harvested as agricultural produce, such as trees grown for use as lumber;
2. Plants cultivated to produce agricultural produce where there is more than a remote likelihood that the entity will also harvest and sell the plants as agricultural produce, other than as incidental scrap sales, such as trees that are cultivated both for their fruit and lumber; and
3. Annual crops, such as maize and wheat.

Biological assets. Living plants and animals controlled by the entity as a result of past events. Control may be through ownership or through another type of legal arrangement.

Biological transformation. The processes of growth, degeneration, production and procreation, which cause qualitative and quantitative changes in a biological asset.

Carrying amount. Amount at which an asset is recognised in the statement of financial position after deducting any accumulated depreciation or amortisation and accumulated impairment losses thereon.

Costs to sell. Incremental costs directly attributable to the disposal of an asset, excluding finance costs and income taxes.

Fair value. The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

Group of biological assets. An aggregation of similar living animals or plants. For instance, a herd, flock, etc., that is managed jointly to ensure that the group is sustainable on an ongoing basis.

Harvest. The detachment of agricultural produce from the biological asset or the cessation of a biological asset's life processes.

IDENTIFICATION

Agriculture is defined by IAS 41 as the management of the biological transformation of plants and animals to yield produce for consumption or further processing. The term agriculture encompasses livestock, forestry, annual and perennial cropping, orchards, plantations and aquaculture. Agriculture is distinguished from “pure exploitation” where resources are simply removed from the environment (e.g., by fishing or deforestation) without management initiatives such as the operation of hatcheries, reforestation or other attempts to manage their regeneration. IAS 41 does not apply to pure exploitation activities, nor does it apply to agricultural produce, which is harvested and is thus a non-living product of the biological assets.

However, when bearer plants are no longer used and sold as scrap, such as cherry trees sold for firewood, these sales are seen as incidental sales and IAS 16 will still apply to the date that the bearer plant is scrapped. The standard furthermore does not govern accounting for agriculture produce which is incorporated in further processing, as occurs in integrated agribusiness entities that involve activities which are not unique to agriculture.

IAS 41 sets forth a three-part test or set of criteria for agricultural activities. First, the plants or animals which are the object of the activities must be alive and capable of transformation. Secondly, the change must be managed, which implies a range of activities (e.g., fertilising the soil and weeding in the case of crop growing; feeding and providing health care in the instance of animal husbandry; etc.). Thirdly, there must be a basis for the measurement of change, such as the ripeness of vegetables, the weight of animals, circumference of trees and so forth. If these three criteria are all satisfied, the activity will be impacted by the financial reporting requirements imposed by IAS 41.

A practical example would be where a zoo also has a breeding programme. Animals are held mainly for recreational purposes rather than agricultural activities; the animals in the zoo would therefore not fall into the scope of this standard due to the absence of management of biological transformation and IAS 16, Property, Plant and Equipment, would apply.

Biological assets are the principal assets of agricultural activities, and they are held for their transformative potential. This results in two major types of outcomes: the first may involve asset changes—as through growth or quality improvement, degeneration or procreation. The second involves the creation of separable products initially qualifying as agricultural produce. The management of the biological transformation process is the distinguishing characteristic of agricultural activities.

Biological assets often are managed in groups, as exemplified by herds of animals, groves of trees and fields of crops. To be considered a group, however, the components must be homogeneous in nature and there must further be homogeneity in the activity for which the group is deployed. For example, cherry trees maintained for their production of fruit are not in the same group as cherry trees grown for lumber.

IAS 41 applies to forests and similar regenerative resources excluded from IAS 16; producers' inventories of livestock, agriculture and forest products, including those excluded from IAS 2, to the extent they are to be measured at net realisable value; and natural increases in herds and agricultural and forest products excluded from IFRS 15. In other words, the produce grown on bearer plants are included in the scope of IAS 41, whereas the bearer plant itself is included in the scope of IAS 16 Property, Plant and Equipment.

Biological assets are categorised as either consumable or bearer and mature or immature. Consumable biological assets are those that are to be harvested as agricultural produce or sold as biological assets, such as beef cattle or crops for harvest such as wheat. Bearer biological assets are those from which other biological assets or agricultural produce are obtained, such as dairy cattle or fruit trees. Mature biological assets are those that have attained harvestable specifications or are able to sustain regular harvests whereas immature biological assets have not yet reached that stage.

RECOGNITION AND MEASUREMENT

PRESENTATION AND DISCLOSURES

EXAMPLES OF FINANCIAL STATEMENT DISCLOSURES

OTHER ISSUES

US GAAP COMPARISON

US GAAP provides specific incremental guidance for the accounting, reporting and disclosure of agricultural activities. Agricultural products and activities include animals (livestock) and plants. However, ASC 905 does not apply to growers of timber, sugarcane and pineapple in tropical regions, breeding animals in competitive sports or merchants or non-co-operative processors of agricultural products that purchase commodities from growers, contract harvesters or others serving agricultural producers.

The carrying amount of agricultural products is historical cost. For assets deemed property, plant and equipment, depreciation is systematic and rational based on its utility. Permanent improvements to land, such as grading, are not depreciated because their utility does not diminish with time. Short-lived animals, such as chickens, are classified as inventory. The costs of reclaiming productive capacity from the land that relates specifically to the current year harvest are accrued as part of the costs, even though these costs will benefit subsequent years' harvest. In instances where additional costs are required after harvest of a particular crop to overcome a physical or noxious condition, those costs are estimated and accrued as costs of the harvested crop. Costs involved in raising progeny to a productive state (i.e., a calf to the point it produces milk) are accumulated as part of the costs and depreciated when the livestock reaches maturity.

Market prices for valuing crops or livestock are only used in valuing inventory or property, plant and equipment in exceptional circumstances when it is not practicable to determine an appropriate cost basis for products. Per ASC 905-330-30-1, a market basis is acceptable if the products meet all of the following criteria: (1) the products have immediate marketability at quoted market prices that cannot be influenced by the producer, (2) the products have characteristics of unit interchangeability, and (3) the products have relatively insignificant costs of disposal.

US GAAP also provides guidance for agricultural co-operatives. An agricultural co-operative is an organisation which performs any of following on behalf of its patrons: sale, processing, marketing and other activities. Co-operatives can provide services for non-patrons, but the results and financial positions must be separately presented. Co-operatives generally distribute all profits to patrons, except for retains, which are reserves to insulate the co-operative from financial shocks. Revenue is recorded by patrons whenever title passes to the co-operative. If title does not pass, the revenue is accounted for on a consignment basis, with revenue deferred until sale to the third-party buyer takes place. The equity section of an agricultural co-operative must separate earnings and balance between patrons and non-patrons. This is because the co-operative's mission is to perform service on behalf of the patrons, and each patron may have different rights and obligations, although bylaws or other agreements generally govern most of the activities. Frequently, co-operatives pool products from patrons and remit proceeds to each patron based on the volume sold.

Investments by patrons in co-operatives are accounted for under the cost method or the equity method if it has significant influence (per applicable US GAAP). The investment balance includes retains. The investment balance is reduced if co-operative losses will likely not be recovered by the patron.