SPECIALISED STANDARDS

IAS 41: AGRICULTURE

COURSE CODE/COURSE TITLE: ACC 211/ FINANCIAL ACCOUNTING I

COURSE LECTURER: DR. DAVID OZIEGBE

Definition of Terms
i. Agricultural Activity

This is the management of the biological transformation of biological asset for sale into either
agricultural produce or into additional biological assets.

ii. Biological Assets

These are living animals and plants.

iii. Biological Transformation

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

iv. Cost to Sell

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

v. Harvest

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

vi. Bearer Plant

A bearer plant is a living plant with the following characteristics: (a) is used in the production or
supply of agricultural produce; (b) is expected to bear or produce for more than one period; and (c)
has a remote likelihood of being sold as agricultural produce.

The following are not classified as bearer plants:

✓ Plants cultivated to be harvest as agricultural produce (for example, trees grown for use as
lumber);

✓ Plants cultivated to produce agricultural produce when there is more than a remote likelihood
that the entity will also harvest and sell the plant as agricultural produce, other than as
incidental scrap sales (e.g, trees that are cultivated both for their fruit and their lumber); and

✓ Annual crops (for example, maize, wheat, yam etc.).

vii. Agricultural produce: This is the harvested product of an entity’s biological assets. For example,
calves and cows are biological assets as they are living animals. Whereas beef and milk are agricultural
produce. Similarly, apples are agricultural produce whereas the related trees and orchards are
biological assets.

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viii. Consumable biological asset: These are assets that are harvested as agricultural produce or sold
as biological assets. E.g. livestock intended for the production of meat, livestock held for sale, fish in
farms, crops such as maize and wheat, trees being grown for lumber, etc.

ix. Point of sale cost: These are transaction costs such as broker’s commissions, dealer’s commissions,
levies by regulatory authorities and commodity exchanges, any transfer taxes and duties. Point of sale
costs do not include transport and other costs necessary to get assets to market.

Recognition of Biological Assets or Agricultural Produce

An entity shall recognise a biological asset or agricultural produce when and only when:

(a) The entity controls the asset as a result of past events;

(b) It is probable that future economic benefits associated with the asset will flow to the entity;
and

(c) The fair value or cost of the asset can be measured reliably.

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Measurement

Biological Asset

A biological asset shall be measured on initial recognition and at the end of each reporting period at
its fair value less costs to sell, except where the fair value cannot be measured reliably.

Agricultural Assets

Agricultural produce harvested from an entity’s biological assets shall be measured at its fair value less
costs to sell at the point of harvest.

In summary;

Measurements

Initial measurement Subsequent measurement

Biological assets Fair value less costs to sell Fair value less costs to sell
Agricultural produce Fair value less costs to sell at IAS 2 (Inventories) applies for
the point of harvest agricultural produce after point
of harvest.

Determining the Fair Value

i. Fair value of the biological asset or agricultural produce is the quoted market price in an active
market.

ii. In the absence of an active market, fair value could be determined by:

✓ The most recent market transaction price provided there are no significant changes in
economic circumstances.

✓ Market prices for similar assets with adjustment to reflect differences

✓ Sector benchmarks

iii. In the absence of market determined prices for the asset in its present condition, fair value can be
determined as the present value of expected net cash flows from the asset discounted using a current
market determined pretax discount rate.

iv. The cost of the biological assets may reflect fair value when biological transformation is minimal or
its impact on price is immaterial.

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Treatment of Bearer Plants

✓ A bearer plant should be accounted for as property, plant and equipment in accordance with
IAS 16.

✓ Initial measurement is at cost

✓ Subsequent measurement is in line with either cost model or revaluation model

✓ Agricultural produce growing on bearer crops is a biological asset measured at fair value in
accordance with IAS 41.

Table on Biological Assets, Agricultural Produce and Produces

Biological Assets Agricultural Produce Products that are the result of

processing after harvest
Sheep Wool Yarn, carpet
Tress in a timber plantation Felled Trees Logs, lumber
Diary cattle Milk Cheese
Pigs Carcass Sausages, cured hams
Cotton plants Harvested cotton Thread, clothing
Sugarcane Harvested cane Sugar
Tobacco plants Picked leaves Cured tobacco
Tea bushes Picked leaves Tea
Grape vines Picked grapes Wine
Fruit trees Picked fruit Processed fruit
Oil palms Picked fruit Palm oil
Rubber trees Harvested latex Rubber products
Cocoa trees Harvested cocoa pod Cocoa beans

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 Asset Changes

Growth:
Increase in quantity
and/or quality
Asset Changes
Degeneration:
Decrease in quantity
and/or quality

Creation of New Assets

Production:
producing separable
non living products

Procreation:
Creation of new
producing separable
assets
living animals

Recognition:
Recognition of
biological assets

Illustration 1

Sharon Plc is considering the valuation of its harvested coffee beans. Industry practice is to value the
coffee beans at market value, the national accounting body has always used this practice and uses as
its source of reference accounting for successful farms, a local publication.

Required: The entity wishes to adopt IAS 41 but does not know what the impact will be on its
inventory of coffee.

Suggest solution

Fair value measurement stops at the time of harvest, and IAS 2 ”inventories” applies after that date,
therefore, the inventory will be measured at the lower of cost and net realisable value.

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Illustration 2

AG Limited just adopted IFRS and decided to reclassify some of its assets as biological assets in
accordance with IAS 41. The total value of the group’s forest assets is N850million comprising:

N‘000
Freestanding trees 410
Land under trees 290
Road in forests 150
850

Required:

Show how the forests would be classified in the financial statements.

Suggested solution

The forests would be classified as follows:

N‘000
Biological assets (freestanding trees) 410
Non-Current assets – Land (PPE) 290
Non-current assets – Road forests (other tangible assets) 150
850

Illustration 3

XYZ Ltd had a herd of 5, three-year-old animals on 1 January 2023. On I July 2023 a 3½ year old animal
was purchased. The fair value less estimated point of sale costs were as follows:

N‘000
Three-year-old animal at 1 January 2023 450
Three- and half-year half year old animal at 1 July 2023 480
Four-year-old animal at 31 December 2023 520

Required:

Determine the carrying amount (i.e. fair value) of the asset and show how the changes in fair value
would be accounted for in the financial statements.

Suggested solution
Calculation of carrying amount (i.e. fair value less estimated point of sales costs at the end)

= Number of animals x fair value at the end of the period

= 6 animals x N520,000 = N3,120,000

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Calculation of changes in fair value

Value of existing animals at 1 January 2023 (5 animals x N450) 2,250

Add the purchased value of additional animal purchased (1 animal x N480) 480
Expected value at the end of the year 2,730

Therefore, changes in fair value (i.e. increase in fair value) is (N3,120 - N2,730) = N390. The biological
assets should be recognised separately in the statement of financial position at N3,120. While the
changes in fair value as a result of increase in fair value should be recognised in the statement of non-
owner movement in equity and presented in equity under the heading of surplus on fair valuation of
biological assets.

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