Chapter Three

Accounting for Agriculture

AGRICULTURE

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1. Objective of IAS 41
The objective of IAS 41 is to sets out
accounting for agricultural activity.
Agricultural activity – the transformation of
biological assets (living plants and animals)
into agricultural produce (harvested product
of the entity's biological assets).
 2. Scope of IAS 41
 IAS 41 applies to:
 Agricultural activity(management of biological
transformation)
 Harvest of biological assets into agricultural
produce
 government grants related to biological assets
 Examples of Biological Assets Covered by
IAS 41
Products that are the
result of processing
Biological Asset Agricultural Produce after harvest
Sheep Wool Yarn, carpet
Trees in a plantation Logs,
forest Felled Trees Lumber
Cotton plants Harvested cotton Thread, clothing
Dairy cattle Milk Cheese
Tea bushes Tea leaves Tea, cured tobacco
Grape Vines Grape fruits Wine
Fruit trees Picked fruit Processed fruit
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4. Definitions of Key Terms (in
accordance with IAS 41)
 The Standard provides definitions of:
 Agricultural activity (and its examples: raising
livestock, cropping, cultivating orchards and
plantations, etc.),
 Biological transformation,
 Biological asset (living animal or plant),
 Bearer plant,
 Agricultural produce (harvested product of entity’s
biological assets), etc.

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 Definitions Cont’d….
 Agricultural activity:- It is the management of the biological
transformation (e.g. growth) of biological assets for sale, or
into agricultural produce, or into additional biological assets.
 Biological assets:- Living plants and animals.
 Agricultural produce:- The harvested products of biological
assets. For example, Apples, palm oil, pearls, milk, coffee
bean and tea leaves.
 Biological transformation:- Relates to the processes of
growth, degeneration, and production that can cause
changes of quantitative or qualitative nature in a biological
asset.
 Biological transformation leads to various different
outcomes.
Definitions Cont’d….
 Asset changes:
 Growth: increase in quantity and/or quality
 Degeneration: decrease in quantity and/or quality
 Creation of new assets:
 Production: producing separable non-living products

 Procreation: producing separable living animals

 Harvest is the detachment of produce from a biological

asset or the cessation of a biological asset’s life
processes.
 Once you harvest the produce, it becomes your
inventories and you apply IAS 2 Inventories.
Definitions Cont’d….
Q: Is managing animal-related recreational
activities agricultural activity?
A: No. Managing recreational activities – for
example, game parks and zoos – is not
agricultural activity. There is no management of
the transformation of the biological assets for
sale. Natural breeding that takes place is not a
managed activity and is incidental to the main
activity of providing a recreational facility.
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 Definitions Cont’d….
Q: Is ocean fishing agricultural activity?
A: No. Harvesting biological assets from
unmanaged sources, such as ocean fishing, is
not agricultural activity.

Q: Is fish farming agricultural activity?

A: Yes. Managing the growth of fish for
subsequent slaughter or sale is agricultural
activity within the scope of IAS 41. 11
Types of Biological Assets
(cont’d)
 Consumable biological assets:
Consumable biological assets are those that will
be either:
 Harvested as agricultural produce; for example
farmed fish, hogs for meat, trees grown for lumber
etc.; or
 Sold as biological assets; for example seedlings of
apple trees, young puppies, etc.
 Imagine you have a chicken farm and raise young chicks for further
sale. These young chicks are NOT an agricultural produce. Instead,
they are biological assets, because they are living animals (thus
meet the definition of a biological asset).
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Types of Biological Assets (cont’d)
 Bearer biological assets:
 Bearer biological assets are other than consumable
biological assets, for example apple tree held for
harvesting apple, or cattle for milk production.
 Bearer plants are defined in IAS 41 as a plant that meets
all the following criteria:
 It is used in the production or supply of agricultural produce
 It is expected to bear produce for more than one period

 It is not intended to be sold as a living plant or harvested as

agricultural produce, except for incidental scrap sales (i.e. for
firewood at the end of the plants productive life).
 A bearer plant is a living plant used in production or supply of
agricultural produce that is expected to produce for more than 1 14
period.
Agricultural produce
 Agricultural produce is the harvested produce of
the entity’s biological assets. Examples are apples,
eggs, milk, or meat.
 It excludes
 Produce after point of harvest(e.g. apple juice, cheese)
 Land on which biological assets grow
 Non-managed agricultural activity(e.g. ocean fishing)
 Be careful – products made from agricultural
produce are NOT agricultural produce anymore;
rather they are inventories.

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Agricultural land
 Agricultural land that you use for agricultural
activity is definitely within the scope of IAS
16 and measured using cost or revaluation
model.
 It is NOT an investment property under IAS
41, because you are using it for agriculture
(own revenue-generating activity).

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Example 1
Q: Is the growing of plants to be used in the
production of drugs an activity within the
scope of IAS 41?
A: Yes. If a pharmaceutical or biotechnology
entity grows plants from which particular drugs
are produced, that activity will fall within IAS
41’s scope.

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 Example 2
Entity A raises cattle, slaughters them at its abattoirs and
sells the carcasses to the local meat market. Which of
these activities are in the scope of IAS 41?

The cattle are biological assets while they are living.

When they are slaughtered, biological transformation ceases

and the carcasses meet the definition of agricultural produce.

Hence, Entity A should account for the live cattle in

accordance with IAS 41 and the carcasses as inventory in
accordance with IAS 2 Inventories.
 Example 3
Entity B grows vines, harvests the grapes and produces wine.
Which of these activities are in the scope of IAS 41?
The vines are biological assets that continually generate crops of
grapes. When the entity harvests the grapes, their biological
transformation ceases and they become agricultural produce. The
vines continue to be living plants and should be recognised as biological
assets.
Assets such as wine that are subject to a lengthy maturation period are
not biological assets. These processes are analogous to the
conversion of raw materials to a finished product rather than biological
transformation.

Therefore, the entity should account for the grapevines in accordance

with IAS 16; the harvested grapes on date of harvest as per IAS 41;
harvested grapes after point of harvest and the production of wine
as inventory in accordance with IAS 2.
Example 4
An entity on adoption of IAS 41 has reclassified forest as biological
assets. The total value of the group’s forest assets is $2 million
comprising
 Freestanding trees …………$1,700,000

 Land under trees………………... 200,000

 Roads in forests …………………..100,000

Required
Show how the forests would be classified in the financial statements.
Solution
The forests would be classified as
 Biological assets ……………….…………….$1,700,000

 Noncurrent asset-land …………….………....….200,000

 Noncurrent assets—other tangible assets….....100,000

6. Recognition
An entity should recognize a biological asset or
agricultural produce when :
(a) the enterprise controls the asset as a result of past
events;
(b) it is probable that the future economic benefits
will flow to the enterprise; and
(c) the fair value or cost can be measured reliably.

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7. Measurement
 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.
 When the fair value cannot be measurable, you can
measure the asset at its cost less accumulated
depreciation.
 costs to sell- the incremental costs directly
attributable to the disposal of an asset, excluding
finance costs and income taxes.
 It include transport and other costs necessary to get
the assets to a market, brokers’ and dealers’
commissions, any levies by regulatory authorities and
commodity exchanges, and any transfer taxes and
duties.
Are biological assets always measured at fair
value less costs to sell?

 It is true that the general rule in IAS 41 Agriculture is to

measure all biological assets at fair value less costs to
sell. However, there are few exceptions:
 The biological asset is NOT a part of agricultural
activity. For example, guard dogs, fish caught in the
ocean, etc.
 The biological asset is a bearer plant. Fore example,
fruit trees, oil palms, vines etc..
 Those assets are measured at cost less
accumulated depreciation under IAS 16.
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Cont’d……….

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Cont’d……….
 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.
 At the moment of harvest, you should measure
your new inventories at their fair value less
costs to sell and subsequently, you measure
them under IAS 2 at lower of cost and net
realizable value.
 You do NOT re-measure agricultural produce to
fair value less cost to sell.
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The following table sums up the measurement of
agricultural assets
What? Example Measurement

Consumable
Seedlings of apple tree, Fair value less cost to sell
biological
chicken for sale, etc. at the reporting date
asset

Apple tree used to grow IAS 16 – cost model or

Bearer plant
and harvest apples revaluation model

Fair value less cost to sell

Bearer animal Cow held for milking
at the reporting date

Agricultural Fair value less cost to sell

Apples, eggs, milk…
produce at the harvest date

Agricultural IAS 16 – cost model or

Forestry land
land revaluation model
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Recognition & Measurement...
 Subsequent expenses relating to
agricultural Activity
 Such costs may include feeding, veterinary services,
planting, weeding, irrigation, fertilizer, and harvesting
and slaughtering costs.
 IAS 41 does not prescribe the treatment of such costs.
 Prior to adoption of IAS 41, many agricultural
businesses had policy of capitalizing some of these
costs.
 many entities now adopt a policy of treating all such
expenditure as a cost of production.
Recognition & Measurement…

Gain or Loss
• The change in the fair value of biological assets is
twofold.
• There can be physical change through growth, and there
can be a price change.
• Any gain on the initial recognition of biological assets at
fair value less estimated point-of sale costs and any
changes in the fair value less estimated point-of-sale
costs of biological assets during the reporting period are
included in profit or loss for the period.

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 Illustration: Acquisition of biological
assets
1. XYZ Company acquired 40 1 year old cattle for milk
production at ETB 25,000 each. The current fair value of
these animals were ETB 27000 each; cost to sell of
ETB1000 for each animal.
Required: Prepare the journal entry to record the
transaction
Solution:

Biological Assets ………. 1,040,000

Gain on initial recognition…… 40,000
Cash ………………………… 1,000,000

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 Illustration: Acquisition of biological
assets
1. ABC Company acquired biological assets for a total price
of ETB1,000,000. The fair value less cost to sell at the
time of purchase was ETB 950,000.
Required: Prepare the journal entry to record the
transaction
Solution:

Biological Assets ………… 950,000

Loss on initial recognition …. 50,000
Cash ………………………….1,000,000

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 Illustration: Acquisition of biological
assets
3.Company X paid the following in his startup of Farm
business:
 Purchase price of 100 cows ETB1,000,000. Fair value
less cost to sell is ETB1,100,000
Cow feeds ETB 500,000
Supplements ETB 700,000
Salaries of farm hands ETB 370,000
Required: Prepare the journal entry to record the
transaction

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Illustration: Acquisition of biological
assets

Solution:
Biological Assets …………….. 1,100,000
Gain on initial recognition………. 100,000
Cash ……………………………1,000,000

Salaries expense ……………… 370,000

Supplies expense ……....…… 1,200,000
Cash ………………………. 1,500,000

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Illustration: Gain on change in fair value
Premium Company produces milk on its farms. As of January
1, 2020 Premium has a stock of 1,050 cows (average age, 2
years old).No animals were born or sold during the year. The
unit values less estimated cost to sell were.
2-year old animal at December 31,2020 ---- 4,500
3-year old animal at December 31,2020 ----- 5,000
2-year old animal at January 1,2020 ---------- 4,000
Requirements:
1.Forthe year 2020,what amount of gain on change in fair value will be
presented in the income statement
2.What portion of the gain on change in fair value can be attributed to price
change?
3.What portion of the gain on change in fair value can be attributed to
physical change?

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Solution 1:
3 year old animals 12/31 ----------- 5000
2 year old animal 1/1/20 ------------(4000)
Increase in FVLCTS 1000
Animals held X 1050
Gain on change in fair value 1,050,000
Solution 2:
2 year old animal 12/31/20 ---------- 4500
2 year old animal 1/1/20 ---------- (4000)
Increase in FVLCTS 500
X 1050
Price Change 525,000
Solution 3:
3 year old animals 12/31/20 ----------- 5000
2 year old animal 12/31/20 -------------(4500)
Increase in FVLCTS 500
Animals held X 1050
Physical Change 525,000
Test Your Understanding……
 Teddy started running a farm that is involved
in agricultural activity whereby it buys dairy
producing cows. At the start of the financial
year Ted purchased 1,000 dairy cows, with
an average age of 2 years old, for ETB 1.5
million

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Test Your Understanding……
Teddy has the following data on fair values of agricultural
activity:
Fair value less costs to sale
Start of year(ETB) End of year(ETB)

Two year old 1500 1550.25

cows(per cow)
Three year old 1590.80 1650.10
cows(per cow)
Explain the accounting treatment of the above in
the financial statements.
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