IAS 41 AGRICULTURE

1 INTRODUCTION AND SCOPE

IAS 41 applies to biological assets, agricultural produce at the point of harvest, and government grants covered by IAS 41.34–41.35 when they relate to agricultural activity (IAS 41.1).

A biological asset is a living animal (e.g. a sheep) or plant. Agricultural produce is the harvested product (e.g. wool) of the entity's biological assets. Harvest is the detachment of produce from a biological asset or the cessation of the life processes of a biological asset (IAS 41.4–41.5).

Agricultural activity is the management by an entity of the biological transformation and harvest of biological assets for sale or for conversion into additional biological assets or into agricultural produce. Biological transformation comprises the processes of growth, degeneration, production, and procreation that cause quantitative or qualitative changes in a biological asset (IAS 41.5–41.7).

IAS 41 neither applies to land related to agricultural activity (see IAS 16 and IAS 40) nor to intangible assets related to agricultural activity (see IAS 38) (IAS 41.2).

IAS 41 applies to agricultural produce only at the point of harvest. Thereafter, IAS 2 or another applicable Standard is applied. Accordingly, IAS 41 does not deal with the processing of agricultural produce after harvest because such processing is not included within the definition of agricultural activity (IAS 41.3).

2 RECOGNITION

A biological asset or agricultural produce is recognized when all of the following criteria are met (IAS 41.10–41.11):

• The asset is controlled by the entity as a result of past events.
• It is probable that future economic benefits associated with the asset will flow to the entity.
• The fair value or the cost of the asset can be measured reliably.

These recognition criteria correspond with the general recognition criteria set out in the Conceptual Framework (F.49a and F.83).

3 MEASUREMENT

A biological asset is measured on initial recognition and at the end of each reporting period at fair value less costs to sell, unless fair value cannot be measured reliably (IAS 41.12). Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm's length transaction (IAS 41.8). Costs to sell are the incremental costs directly attributable to the disposal of an asset, excluding income taxes and finance costs (IAS 41.5). Gains or losses arising on initial and subsequent measurement of a biological asset at fair value less costs to sell are recognized in profit or loss (IAS 41.26–41.27).

Agricultural produce harvested from an entity's biological assets is measured at fair value less costs to sell at the point of harvest. After harvest, IAS 2 or another applicable Standard is applied instead of IAS 41. Fair value less costs to sell is the cost at the point of harvest for the application of IAS 2 or another applicable Standard (IAS 41.3 and 41.13). A gain or loss arising on initial measurement at fair value less costs to sell is recognized in profit or loss (IAS 41.28–41.29).

The fair value of an asset is based on its present location and condition. Thus, for example, the fair value of cattle at a farm is the price for the cattle in the relevant market less the transport and other costs of getting the cattle to that market (IAS 41.8–41.9). IAS 41 specifies a fair value hierarchy. If an active market exists for a biological asset or agricultural produce in its present location and condition, the quoted price in that market is used for determining the fair value (IAS 41.17). An active market is a market that meets all of the following conditions (IAS 41.8):

• The items traded within the market are homogeneous.
• Willing sellers and buyers can normally be found at any time.
• Prices are available to the public.

For biological assets there is a rebuttable presumption that fair value can be measured reliably. However, rebutting is only possible on initial recognition if specified criteria are met. If the presumption is rebutted, the biological asset is measured at its cost less any accumulated depreciation and any accumulated impairment losses. If the fair value of such a biological asset becomes reliably measurable at a later date, it is measured at fair value less costs to sell. There is an irrefutable presumption that the fair value of agricultural produce at the point of harvest can be measured reliably (IAS 41.30–41.33).

4 GOVERNMENT GRANTS

IAS 20 is applied to a government grant related to a biological asset measured at cost less any accumulated depreciation and any accumulated impairment losses (IAS 41.37–41.38). However, IAS 41 requires the following treatment for a government grant related to a biological asset measured at fair value less costs to sell (or when a government grant requires an entity not to engage in specified agricultural activity) that differs from IAS 20 (IAS 41.34–41.36):

• If the grant is unconditional, it is recognized in profit or loss when the grant becomes receivable.
• If the grant is conditional, it is recognized in profit or loss when the conditions attaching to the grant are met. If a government grant is paid to the entity before all of the conditions are met, a liability is recognized at an equal amount until all of the conditions are met.

5 EXAMPLES WITH SOLUTIONS

Example 3

Government grant

Entity E owns olive plantations, which contain a large number of olive trees. The olive trees are biological assets (IAS 41.5) and are measured at fair value less costs to sell (IAS 41.12).

On Jan 01, 01, a government grant of CU 2 for the olive trees becomes receivable. The grant is paid to E on the same date.

Version (a): The government grant is unconditional.

Version (b): Payment of the government grant is subject to the condition that E operates the olive plantations at least until Dec 31, 02. If this condition is not met, the whole grant of CU 2 has to be paid back. Assume that E finally meets this condition.

Version (c): Payment of the government grant is subject to the condition that E operates the olive plantations at least until Dec 31, 02. If this condition is not met, the terms of the grant allow part of it to be retained according to the time that has elapsed. Assume that E finally meets this condition.

Required

Prepare any necessary entries in E's financial statements as at Dec 31 for the years 01 and 02 regarding the government grant.

Hints for solution

In particular Section 4.

Solution (a)

An unconditional government grant is recognized in profit or loss when it becomes receivable (IAS 41.34):

Solution (b)

A conditional government grant is recognized in profit or loss when the conditions attaching to it are met. In this example the grant is paid to E on Jan 01, 01. At this date the condition is not met. Consequently, a liability is recognized at an equal amount, on Jan 01, 01 (IAS 41.35–41.36):

On Dec 31, 02, the condition is met. Therefore, the grant is recognized in profit or loss (IAS 41.35–41.36):

Solution (c)

In contrast to (b), income is recognized in profit or loss over time. This is because the grant only has to be repaid on a pro rata basis (according to the time that has elapsed) when E stops operating the olive plantations (IAS 41.35–41.36). Hence, on Dec 31, 01, 50% of the grant is recognized in profit or loss, because one of the two years has elapsed.

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