Recognition and Measurement of Biological Asset and Agricultural Produce

The main objective of IAS 41, Agriculture is to prescribe the accounting treatment and disclosures related to agricultural activity. This Standard applies to biological assets, agricultural produce at the point of harvest, and government grants. The Standard does not apply to land related to agricultural activity, which is covered by  IAS 16, Property, Plant and Equipment, and IAS 40, Investment Property, or to intangible assets related to agricultural activity, which are covered by IAS 38, Intangible Assets.

IAS 41 defines Agricultural Activity as 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. It covers a diverse range of activities, for example : raising livestock, forestry, annual or perennial cropping, cultivating orchards and plantations, floriculture and aquaculture (including fish farming).

Agricultural Produce is the harvested product of the entity’s biological assets. A Biological Asset is a living animal or plant. For examples, Sheep is the biological assets and wool is the agricultural produce. Trees in a plantation forest and plants are biological assets, while felled trees, cotton, harvested cane are the agricultural produce. Dairy cattle is a biological assets, and milk is the agricultural produce.

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

1. the entity controls the asset as as result of past events;
2. it is probable that future economic benefits associated with the asset will flow to the entity; and
3. the fair value or cost of the asset can be measured reliably.

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. The only exception to this requirement is where the fair value cannot be measured reliably. While 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. Unlike a biological asset, there is no exception in case in which fair value cannot be measured reliably. According to IAS 41, agricultural produce can always be measured reliably.

IAS 41 defines Cost to Sell as the incremental costs directly attributable to the disposal of an asset, excluding finance costs and income taxes. And Harvest is the detachment of produce from a biological asset or the cessation of a biological asset’s life processes.

Entities often enter into contracts to sell their biological assets or agricultural produce at a future date. Contract prices are not necessarily relevant in determining fair value, because fair value reflects the current market in which a willing buyer and seller would enter into a transaction. As a result, the fair value of a biological asset or agricultural produce is not adjusted because of the existence of a contract.

A gain or loss arising on initial recognition of a biological asset and agricultural produce at fair value less costs to sell and also from a change in fair value less costs to sell of a biological asset shall be included in profit or loss for the period in which it arises (Hrd).