Accounting for Agricultural Activities (Part 1)

    Written by DELOITTE
  
IAS 41 Agriculture establishes standards of accounting for agricultural activity – the management of the biological transformation and harvest of biological assets (living plants and animals) into agricultural produce (harvested product of the entity's biological assets).

Under IAS 41, the measurement of all biological assets and agricultural produce is based on their fair value at the end of the reporting period and the point of harvest, respectively. Some agricultural activity, such as the raising of livestock and the growing of timber, may take several years to give rise to produce for sale. Under the historical cost model, a sales transaction is generally required before the recognition of any gain is triggered. However, in the context of agricultural activity, the event giving rise to such gains is the progress of development of the biological assets (e.g. growth, procreation, harvest). IAS 41's fair value model is intended to capture these gains as they occur.

The following are key definitions for the purposes of accounting for agricultural activities:

••agricultural activity refers to the 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;

••a biological asset is defined as a living animal or plant;

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

••agricultural produce is defined as the harvested product of the entity's biological assets;

••harvest is the detachment of produce from a biological asset or the cessation of a biological asset's life processes; and

••costs to sell are the incremental costs directly attributable to the disposal of an asset, excluding finance costs and income taxes.

Agricultural activity covers a diverse range of activities such as raising livestock, forestry, cropping, cultivating orchards and plantations, floriculture, and aquaculture (including fish farming). Agricultural activities have three common features: capability to change, management of that change and measurement of change. The key feature that often differentiates agricultural activities from other related activities is the entity's management of the biological transformation. For example, the entity may manage biological transformation by enhancing, or at least stabilising, conditions necessary for the process to take place (e.g. nutrient levels, moisture, temperature, fertility and light).

Harvesting from unmanaged sources (such as open ocean fishing and deforestation) is not agricultural activity because it does not involve management of the resource.

A resource may be 'managed' by government, through the use of mechanisms such as licensing and quotas, but this does not of itself result in the activity being classified as an agricultural activity under IAS 41. What matters is whether the entity itself manages the resource.

Agricultural activities do not include:

••holding investments in an unmanaged forest as a carbon sink, which gives rise to carbon credits that can either be sold or used to offset pollution caused by the entity;

••using animals such as greyhounds, horses, pigeons or whippets for racing;

••exhibiting performing animals (e.g. in a park);

••managing living assets that are not animals or plants, such as viruses and blood cells used in research; or

••cloning living organisms in order to produce antibodies by applying a process analogous to a manufacturing process rather than management of a biological transformation.

Accounting after the point of harvest

IAS 41 deals only with the treatment of biological assets up to the point of harvest, and not with any further transformations that they may undergo thereafter. After the harvest is completed, the assets are generally accounted for under IAS 2 Inventories. In more limited circumstances, they may be accounted for under another Standard; for example, if an entity harvests logs and decides to use them for constructing its own building, IAS 16 Property, Plant and Equipment is applied in accounting for the logs.

Specifically excluded from the scope of IAS 41 are ageing or maturation processes that occur after harvest (e.g. wine production from grapes and cheese production from milk). [IAS 41:3] Some had argued for the inclusion of such processing within the scope of IAS 41 because it is a logical and natural extension of agricultural activity, and the events taking place are similar to biological transformation. The IASB decided, however, not to include such processes in the scope of the Standard because of concerns about difficulties in differentiating them from other manufacturing processes.

Other assets used in agricultural activity

The Standard does not address the accounting treatment for land on which agricultural activity is conducted, nor intangible assets (e.g. milk quotas) related to agricultural activity. These are covered by IAS 16 Property, Plant and Equipment , IAS 40 Investment Property and IAS 38 Intangible Assets.

Recognition of assets

Entities are required to recognise biological assets or agricultural produce when, and only when, all of the following conditions are met:

••the entity controls the asset as a result of past events;

••it is probable that future economic benefits associated with the asset will flow to the entity; and

••the fair value or cost of the asset can be measured reliably.

When future agricultural produce (fruit, wool etc.) is attached to biological assets (trees, vines, animals etc.), it should not be recognised separately before harvest. Until harvest, that future agricultural produce forms part of the total biological asset and this asset should be measured as a whole. For example, all else being equal, trees with fruit have a higher fair value immediately before harvest than immediately after harvest, and unshorn sheep have a higher fair value than those that are shorn.

Control over biological assets or agricultural produce may be evidenced by, for example, legal ownership of cattle and the branding or otherwise marking of the cattle on acquisition, birth, or weaning. The future benefits are normally assessed by measuring the significant physical attributes. [IAS 41:11]

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