Agriculture: IAS 41

Wiecek and Young

IFRS PrimerChapter 9

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Agriculture

Related standards IAS 41 Current GAAP comparisons IFRS financial statement disclosures Looking ahead End-of-chapter practice

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Related Standards

FAS 144 Accounting for the Impairment or Disposal of Long-lived Assets

FAS 157 Fair Value Measurements SOP 85-3 Accounting by Agricultural

Producers and Agricultural Cooperatives

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Related Standards

IAS 1 Presentation of Financial Statements IAS 2 Inventories IAS 18 Revenues IAS 37 Provisions, Contingent Liabilities and

Contingent Assets IFRS 5 Non-current Assets Held for Sale and

Discontinued Operations

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IAS 41 – Overview

Objective and Scope Recognition and Measurement Government Grants Disclosure

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IAS 41 – Objective and Scope

Standard deals with the accounting for agricultural activity specifically covering:

– Biological assets– Agricultural produce at the point of harvest– Related government grants– Excludes land and intangible assets

IAS 41 is considered a significant addition to GAAP since the economies of many global countries rely on agriculture

In general, agricultural activities have the following common characteristics: they are capable of biological transformation and this transformation is managed, facilitated, measured, and monitored by the entity

IAS 41 – Objective and Scope

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IAS 41 – Objective and Scope

IAS 41 defines the following terms: Agricultural activity is 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

Agricultural produce is the harvested product of the entity’s 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 or quantitative changes in a biological asset

A group of biological assets is an aggregation of similar living animals or plants

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

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IAS 41 – Recognition and Measurement

Biological assets are recognized when:– Entity controls the asset as a result of past events– Future economic benefits are probable and– Fair value or cost is reliably measurable

IAS 41 – Recognition and Measurement

As biological assets grow and mature through biological transformation, they increase in value

Biological assets are measured at fair value less estimated costs to sell on initial recognition, unless fair value cannot be reliably measured

– Costs to sell include commissions, taxes, and duties

Agricultural produce is measured at fair value less estimated costs to sell at the point of harvest. Where fair value is used, assets are remeasured at each reporting date

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IAS 41 – Recognition and Measurement

Fair value is felt to be the most relevant measure since many of these assets trade in active markets and therefore objective information on their current value is available

Market values are more reliable and relevant than cost figures, which may be inconsistently accumulated from entity to entity due to differing choices regarding allocations

In general, fair value is determined by reference to a market price if an active market exists for the asset in its present location and condition

An active market is a market where the items traded are homogeneous and there are buyers and sellers and publicly available prices

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IAS 41 – Recognition and Measurement

Where an active market does not exist or where markets do not exist at all, the entity would do the following in attemptingto estimate fair value:

1. First, try to estimate current market prices by looking at the prices of recent market transactions, market prices for similar assets, or sector benchmarks such as the price of cattle expressed by weight

2. Second, if market-determined prices are not available for assets in their present condition, use a discounted cash flow approach to measure the value

– This need not be carried out by an independent valuator

Cost may be close to fair value if there has been little or immaterial biological transformation

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IAS 41 – Recognition and Measurement

When using a discounted cash flow approach, the

entity would:• Use a market-determined discount rate

• Exclude cash flows for financing, taxation, or replacing the asset after

harvest

• Incorporate risk by either using probability weighted cash flows or

adjusting the discount rate or some combination of the two; and

• Ensure assumptions for calculating the discount rate are consistent with

calculating the cash flows to avoid double-counting

Where the biological assets are attached to land, the fair value of the land and assets would be measured, and then the value of the land would be deducted since land is not covered by this standard

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IAS 41 – Recognition and MeasurementContracts:

If the entity has entered into a contract to sell the assets at a future date, the price fixed in the contract does not necessarily dictate the fair value since the contract price reflects an estimate of the future fair value and therefore includes a time value factor

In addition, the locked-in contract price may be higher or lower than the fair value at any point in time (spot price) due to changing market conditions and expectations

Where an entity has locked into a price to sell the assets at a price less than the current fair value, this would be reflected in the statements as an onerous contract and IAS 37 would apply

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IAS 41 – Recognition and MeasurementCosts related to the biological transformation process:

• May include planting, weeding, fertilizing, and others• IAS 41 does not prescribe how to treat these costs

• Some feel that it is inconsistent to capitalize these costs in a fair value model and that they should be expensed

• Others feel that they should be capitalized and only the net amount should be recognized as gain or loss in the statement of profit and loss

Gains and losses:• Gains or losses are recognized in income when they arise • This may result in a gain or loss arising upon initial recognition such

as the birth of a calf

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IAS 41 – Recognition and Measurement

Inability to Measure Fair Value Reliably: In general, the standard assumes that fair value is measurable

This rebuttable presumption may be overcome for biological assets only if the market-determined prices are not available or fair value estimates are unreliable

at the time of initial recognition

As a default measurement method, the asset would be measured at cost (amortized if relevant) and would also be tested for impairment

Once an asset is measured at fair value less point of sale costs it is assumed that fair value is reliably measurable thereafter (no “going back”)

Agricultural produce is always presumed to have a reliably measurable fair value

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IAS 41 – Government Grants

Unconditional government grants are recognized as income when receivable

For conditional grants, conditions must be met before recognition of the grant

If the biological asset is measured at cost or amortized cost, the government grant is accounted for in accordance with IAS 20

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IAS 41 – DisclosureIAS 1 requires biological assets to be presented separately on the statement

of financial position

The standard requires the following disclosures:• Recognized gains/losses (on initial recognitions and on revaluation)

• Description of each type of biological asset

• Nature of activities relating to the assets

• Non-financial measures or estimates of the physical qualities of the assets

• Methods and significant assumptions to determine fair value

• Fair value of harvested assets at point of harvest

• Any restrictions on title

• Commitments for the development or acquisition of biological assets

• Financial risk management strategies

• A reconciliation of changes in the carrying amounts of biological assets between the beginning and end of the period

• Additional disclosure if measured at cost

• Additional disclosures related to government grants

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IAS 41 – Disclosure

An entity is also encouraged but not required to disclose the change in fair value due to physical changes (assets getting older) and price changes (e.g., the price of beef increases)

Biological assets:– Are categorized as being consumable (beef cattle) and bearer (dairy

cows)– Bearer biological assets are long-term assets that produce each year

such as an orchard tree – Entities are encouraged to provide a description of different types of

assets differentiating between consumable and bearer biological assets

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Current GAAP Comparisons

Pages 80 & 108 of 164 ofhttp://www.kpmg.co.uk/pubs/IFRScomparedtoU.S.GAAPAnOverview(2008).pdf

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IFRS Financial Statement DisclosuresDel Monte Pacific Limitedhttp://www.delmontepacific.com/ir/media/ar_ipo/AR2007.pdf

Biological Assets accounting

policy note page 62 of 108

Biological Assets note page 75 of 108

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Looking Ahead The use of fair value in this standard means that the standard is

intertwined with the larger fair value measurement project

The IASB has established an expert advisory panel to deal with the issue of fair value measurement in general; the panel met for the first time in June 2008

To date, the IASB has completed a standard-by-standard review of existing measurements in IFRSs that are identified as “fair value” and has decided to delete the requirement to use a pre-tax discount rate

Other than noted in footnote 6 and above, there are no other specific plans to make any changes in the standard in the near future

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End-of-Chapter Practice

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End-of-Chapter Practice

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End-of-Chapter Practice

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