International Accounting Standard 41 (IAS 41)

International Accounting Standard 41 (IAS 41) Agriculture Objective To prescribe the accounting treatment and disclosures related to agricultural activity. Scope: IAS 41 applies to the following when they relate to agricultural activity: (a) biological assets; (b) agricultural produce at the point of harvest; (C) government grants relating to biological assets. The standard does not apply to : 1. Land related to agricultural activity( IAS 16/IAS 40) 2. Intangible assets relating to agricultural activity (IAS 38) Definitions

Biological Assets
Living animals or plants, e.g sheep, dairy cattle, plants, trees in a plantation forest, fruit trees, vines.

Agricultural produce

Harvested products of an entity's biological assets e.g. wool, milk, cotton, logs, picked fruit, grapes.

Active Market
A market where the following exist: the items traded within the market are homogeneous; willing buyers and sellers can be found at any time; prices are available to the public.

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

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International Accounting Standard 41 (IAS 41)

Accounting for Biological Assets

When to recognise a biological asset?

When 3 conditions are met:(1) the entity controls the asset; (2) it is probable that future economic benefits will flow to the entity from the asset; (3) the fair value or cost can be measured reliably. Accounting for Biological Assets At fair value less costs to sell. 2.Gains/losses on initial recognition These should be included in profit or loss in the period in which they arise. A loss on initial recognition could arise because costs to sell are deducted. A gain on initial recognition could arise for example when a calf is born.

1. Initial Recognition of a Biological Asset

3.Subsequent Measurement of Biological Assets

A biological asset should be measured at each subsequent reporting date at fair value less costs to sell. 4.Treatment of subsequent changes in fair value less costs to sell Gains/losses arising from changes in fair value (less costs to sell) are included in profit or loss for the period in which they arise. NOTE The fair value less costs to sell of a biological asset can change because of (a) physical changes and (b) price changes Entities are encouraged to disclose the analysis the change in fair value under the 2 headings. Example: 3 (2 year old) cows were purchased in the year ended 30th June 2009 for 180 each. During the next year, to June 2010 a further 3 (2 year old) cows were purchased for 600 and three calves were born on 30th June 2010. No sales took place in 2009/2010. Page 2 of 5

International Accounting Standard 41 (IAS 41)

You ascertain that the market prices at 30th June 2009 Calf 50 2 year old cow 180 3 year old cow 210 are as follows: 2010 75 200 230

Required: Calculate the herd value at 30th June 2009 and 2010 Show the movement in the SOCI for the fair value credit/debit Show an analysis of the change in fair value arising from (a) physical changes and (b) price changes Solution Herd Value at 30/6/2009 3 cows at fair value of 180 each (2 year old cows) = 540 Herd Value at 30/6/2010 3 cows at fair value of 200 each (2 year old cows) = 600 3 cows at fair value of 230 each (3 year old cows) = 690 3 calves at fair value of 75 each = 225 Total 1,515 SOCI charge/credit Opening inventory Purchases Closing inventory Net movement in cost of sales at fair value

540 600 (1,515) (375)

Analysis of the change in fair value between physical changes and price changes The 3 cows in opening inventory were valued at 540 on 30/6/2009 and this had increased to a fair value of 690 by 30/6/2010. Part of the increase was because the cows are a year older (physical change) - if the 3 cows were 3 years old at 30/6/2009 they would have been valued at 210 each total of 630 which is 90 more than they were valued at in 2009.

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International Accounting Standard 41 (IAS 41)

The price increase for a 3 year old cow between the two period ends was 20 each (up from 210 to 230) so for 3 cows the price increase accounted for 60. For these 3 cows the gain in value of 690 - 540 = 150 is accounted for by Physical changes 90 Fair value change 60 Calves the 225 increase is all due to physical change as they were born on the last day of the financial year. If they had been born say, mid-way through the year , the value at that date and the revalued amount at the period end would need to be compared. Cows purchased. There is no change in fair value for the cows purchased this year as they cost 200 each and the fair value at the period end is the same.

The gain in the SOCI is therefore made up of: Physical changes (90 plus 225) = 315 Fair value change = 60 Total = 375

Inability to Measure Fair Value

When fair value cannot be measured reliably biological assets can be measured at cost, less any accumulated depreciation and any impairment losses. Accounting for Agricultural Produce (1) they should only be recognised when the same 3 conditions as for a biological asset are met. (2) agricultural produce should be measured at its fair value less costs to sell at the point of harvest (e.g. detachment from the biological asset). This is the cost of the inventories at that date for the application of IAS 2. (3) Any gain/loss on initial recognition should be included in profit/loss for the period in which it arises. Thereafter the produce will be valued under IAS 2. Page 4 of 5

International Accounting Standard 41 (IAS 41)

Government Grants The standard refers to specific grants i.e. (a) An unconditional grant which relates to a biological asset measured at fair value less costs to sell. The grant should be recognised as income when the grant becomes receivable. (b) A conditional grant relating to a biological asset measured at fair value less costs to sell. The grant should be recognised as income when the conditions attaching to it are met. N.B. Some grants relate to biological assets which are measured at cost less depreciation and impairment (only when fair value cannot be measured reliably). Such grants should be accounted for under IAS 20. Disclosure Requirements (1) gains/losses arising during the year on biological assets and agricultural produce- these could arise on initial recognition or at the reporting date ; (2) a description of each class of biological assets; (3) a reconciliation of opening and closing carrying amounts of biological assets. (4) the nature of activities involving each group of biological assets ; (5) the methods and assumptions applied in determining fair values. (6) the nature and extent of government grants and any unfulfilled conditions and contingencies

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