MODULE 5: Agriculture

RELATED STANDARDS: IAS 41 – Agriculture and IFRS 13 –

Fair Value Measurement

INTRODUCTION
This chapter addresses every aspect of the accounting that one might
encounter in a farm, ranch, or related business. The intent is to not only explain
accounting concepts, but also to provide examples and show how an accounting
system can be constructed and operated. The course pays particular attention to
unique aspects of agricultural accounting that are not encountered in other
industries, including special valuation rules for inventory, hedging transactions,
dealing with cooperatives, and recording non-current farm assets. In short, this
course is an essential desk reference for anyone engaged in agricultural
operations.

Learning Objectives:
1. Identify the scope of IAS 41
2. Differentiate the following: biological assets, agricultural produce and
inventory.
3. State the initial and subsequent measurement of biological assets and
agricultural produce.
4. Account for government grants that are within the scope of IAS 41.

 Definition of Terms
 Agricultural activity – 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 – The harvested produce of the entity’s biological assets.
 Bearer plant – A living plant that: (a) is used in the production or supply of
agricultural produce; (b) is expected to bear produce for more than one period;
and (c) has a remote likelihood of being sold as agricultural produce, except
for incidental scrap sales.
 Biological asset – A living animal or plant.
 Biological transformation – It comprises the processes of growth,
degeneration, production, and procreation that cause qualitative or
quantitative changes in a biological asset.
 Costs to sell – Incremental costs directly attributable to the disposal of an
asset, excluding finance costs and income taxes.
 Group of biological assets – An aggregation of similar living animals or plants
 Harvest – The detachment of produce from a biological asset or the cessation
of a biological asset’s life processes.

 Scope
 IAS 41 applies to biological assets with the exception of:
 Bearer plants
 Agricultural produce at the point of harvest (after harvest, IAS 2 applies)
 Government grants related to these biological assets.
 IAS 41 does not apply to
 Land related to agricultural activity
 Intangible assets related to agricultural activity
 Government grants related to bearer plants, and bearer plants.
 However, it does apply to produce growing on bearer plants.

 Examples of assets under IAS 41

Identify whether each item listed is a biological assets, agricultural produce or
product after harvest
o Carcass o Cheese

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o Cotton plants o Picked tea leaves

o Dairy cattle o Sheep
o Grape vines o Sugar
o Harvested cane o Tobacco plants
o Harvested cotton o Trees in a timber plantation
o Yarn o Wine
o Palm oil o Wool
o Picked fruit

 Recognition
 An entity recognizes a biological asset or agriculture produce only when
 The entity controls the asset as a result of past events
 It is probable that future economic benefits will flow to the entity, and
 The fair value or cost of the asset can be measured reliably.

 Measurement
 Biological assets within the scope of IAS 41 are measured on initial recogni-
tion and at subsequent reporting dates at fair value less estimated costs to
sell, unless fair value cannot be reliably measured.
 In such case that fair value cannot be reliably measured, biological assets
shall be measured at cost less accumulated depreciation and any
accumulated impairment.
 Agricultural produce is measured at fair value less estimated costs to sell at
the point of harvest. Because harvested produce is a marketable commodity,
there is no 'measurement reliability' exception for produce.
 Fair value measurement of agricultural produce stops at point of harvest. After
such date,
IAS 2- Inventories shall apply (lower of cost and net realizable value).
 Point of sale costs
 Include commissions to brokers and dealers, levies by regulatory agencies
and commodity exchanges, transfer taxes and duties.
 Exclude transport and other costs necessary to bring the asset to a market.
 All costs related to biological assets that are measured at fair value are recog-
nized as expenses when incurred, other than costs to purchase biological
assets.

 Gain or loss on subsequent measurement

 The gain/loss on initial recognition biological assets at fair value less costs to
sell, and changes in fair value less costs to sell of biological assets during a
period, are included in profit or loss.
 A gain/loss on initial recognition of agricultural produce at fair value less costs
to sell are included in profit or loss for the period in which it arises.
 The change in fair value of biological assets is part physical (growth) change
and part unit price change. Separate disclosure of the two components is en-
couraged but not required.

 Financial statement presentation

 Biological assets shall be presented as a separate line item and classified as
noncurrent assets.
 Agricultural produce is considered as inventories. IAS 41 applies until point of
harvest and IAS 2 applies after harvest.
 Other accounts
 Agricultural land is accounted for under IAS 16 - Property, Plant and
Equipment.
 However, biological assets (other than bearer plants) that are physically
attached to land are measured as biological assets separate from the land.  In
some cases, the determination of the fair value less costs to sell of the biologi-

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cal asset can be based on the fair value of the combined asset (land, im prove-
ments and biological assets).
 Intangible assets relating to agricultural activity (for example, milk quotas) are
accounted for under IAS 38 - Intangible Assets.
 Unconditional government grants received in respect of biological assets
measured at fair value less costs to sell are recognized in profit or loss when
the grant becomes receivable.
 If such a grant is conditional (including where the grant requires an entity not
to engage in certain agricultural activity), the entity recognizes the grant in
profit or loss only when the conditions have been met.

 Disclosure
 General disclosure requirements in IAS 41 include:
 Aggregate gain or loss from the initial recognition of biological assets and
agricultural produce and the change in fair value less costs to sell during
the period.*
 Description of an entity's biological assets, by broad group
 Description of the nature of an entity's activities with each group of biologi-
cal assets and non-financial measures or estimates of physical quantities
of output during the period and assets on hand at the end of the period
 Information about biological assets whose title is restricted or that are
pledged as security.
 Commitments for development or acquisition of biological assets
 Financial risk management strategies
 Reconciliation of changes in the carrying amount of biological assets,
showing separately changes in value, purchases, sales, harvesting,
business combinations, and foreign exchange differences*
* Separate and/or additional disclosures are required where biological
assets are measured at cost less accumulated depreciation.
 Disclosure of a quantified description of each group of biological assets, distin-
guishing between consumable and bearer assets or between mature and
immature assets, is encouraged but not required.
 If fair value cannot be measured reliably, additional required disclosures
include:
 Description of the assets
 An explanation of why fair value cannot be reliably measured
 If possible, a range within which fair value is highly likely to lie
 Depreciation method
 Useful lives or depreciation rates
 Gross carrying amount and the accumulated depreciation, beginning and
ending
 If the fair value of the biological assets measured at their cost less any
accumulated depreciation and any accumulated impairment losses becomes
reliably measurable during the current period, an entity shall disclosed the
following: description of the biological assets, an explanation of why fair value
has become reliably measurable, and the effect of the change.
 Disclosures relating to government grants include the nature and extent of
grants, unfulfilled conditions, and significant decreases expected in the level of
grants.

 Fair value measurement (IFRS 13)

 Fair value hierarchy
1. Level 1 inputs – Quoted prices in active markets for identical assets or
liabilities that the entity can access at the measurement date.
2. Level 2 inputs – Inputs other than quoted market prices included within
Level 1 that are observable for the asset or liability, either directly or
indirectly.
3. Level 3 inputs – Unobservable inputs for the asset or liability.
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Illustrative Problems

1. Defined by IAS 41 as the harvested produce of the entity’s biological assets.

A. Agricultural activity C. Harvested crops
B. Agricultural produce D. Agricultural harvest

2. Defined by IAS 41 as the process that comprises of growth, degeneration,

production, and procreation that cause qualitative or quantitative changes in a
biological asset.
A. Biological transformation C. Agricultural transformation
B. Biological process D. Agricultural process

3. Defined by IAS 41 as a living animal or plant.

A. Agricultural assets C. Biological assets
B. Agricultural produce D. Biological produce

4. Bearer plant is a living plant that: (choose the exception)

A. Is used in the production or supply of agricultural produce.
B. Is expected to bear produce for more than one period.
C. Has a remote likelihood of being sold as agricultural produce, except for in-
cidental scrap sales.
D. Is included within the scope of IAS 41.

5. Which of the following is most likely to be classified as biological assets.

A. Sugar B. Wool C. Fruit-bearing trees D. All of the foregoing

6. Biological assets are measured at

A. Fair value
B. Fair value less cost to sell
C. Fair value less cost to sell at point of harvest
D. Lower of cost and net realizable value

7. Fair value hierarchy pertaining to quoted prices in active markets for identical
assets or liabilities that the entity can access at the measurement date.
A. Level 1 inputs B. Level 2 inputs C. Level 3 inputs D. Level 4 inputs

8. Subsequent to point of harvest, agricultural produced are measured at

A. Fair value
B. Fair value less cost to sell
C. Fair value less cost to sell at point of harvest
D. Lower of cost and net realizable value

9. Which of the following is incorrect regarding gains and losses on subsequent

measurement of biological assets and agricultural produce?
A. A gain or loss on initial recognition of agricultural produce at fair value less
costs to sell are included in profit or loss for the period in which it arises.
B. Changes in fair value less costs to sell of biological assets during a period,
are included in profit or loss.
C. Separate disclosure of the two components of change in fair value of bio-
logical assets as part physical change and part price change is required.
D. None of the foregoing

10. Ordinarily, biological assets are classified as

A. Separate line item of noncurrent assets
B. Part of plant, property & equipment
C. Separate line item of current
D. Part of inventories

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11. Which of the following shall be included as part of biological assets?

A. Agricultural land
B. Biological assets (other than bearer plants) that are physically attached to
agricultural land
C. Intangible assets relating to agricultural activity
D. All of the foregoing

12. Conditional government grants received in respect of biological assets are

recognized in profit or loss
A. When the grant becomes receivable .
B. When the conditions have been met.
C. In the proportions in which depreciation expense on those assets is
recognized.
D. Any of the foregoing.

13. An entity shall disclose the following relating to government grants in respect
of biological assets, except
A. Accounting policy adopted for grants, including method of balance sheet
presentation.
B. Nature and extent of grants recognized in the financial statements.
C. Unfulfilled conditions and contingencies attaching to recognized grants.

D. Significant decreases expected in the level of grants.

14. Kamote Company has reclassified certain assets as biological assets. The
forest assets are as follows:
Freestanding trees P 5,100,000
Land under trees 600,000
Roads in forests 300,000
In Kamote’s statement of financial portion, what would be the total amount of
biological assets?
A. 5,100,000 B. 5,700,000 C. 5,400,000 D. 6,000,000

15. On December 31, Year 1, Kalabasa Inc. has harvested coffee beans costing
P3,000,000 and with fair value less cost to sell of P3,500,000 at the point
harvest.
Because of long aging and maturation process after harvest, the harvested
coffee beans were still on hand on December 31, Year 2. On such date, the
fair value less cost to sell is P3,900,000 and the net realizable value is
P3,200,000.
What is the measurement of the coffee beans inventory on December 31,
Year 2?
A. 3,000,000 B. 3,500,000 C. 3,200,000 D. 3,900,000

16. The following information pertains to the biological asset and agricultural
produced of Kamatis Company. The fair value less cost to sell of the
company’s vineyard was P25 million on June 30, Year 1. As of June 30, Year
2 Kamatis Company determines the following:
Fair value of the grapes harvested at March 31, Year P 5,000,000
Estimated point-of-sale costs of the grapes 100,000
Estimated point-of-sale costs of the vines 200,000
Fair value of the vines as of March 31, Year 2, prior to harvest 31,000,000
Kamatis Company determines that there is no change in fair value of the
vines between March 31, Year 2 and June 30, Year 2. What total amount of
gain should Kamatis Company report in its June 30, Year 2 statement of
comprehensive income as a result the change in the fair value of the biological
asset and agricultural produce?

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A. 800,000 B. 1,000,000 C. 4,900,000 D. 5,700,000

17. Kalabaw Company is in business of deer farming. A herd of 100 deer is held
throughout Year 1. The only change during the year is the increase in their
physical attributes due to ageing from two to three years. The relevant data
are as follows:
Fair value of a 2-year old deer at 1 January Year 1 P 3,000
Fair value of a 2-year old deer at 31 December Year 1 3,300
Fair value of a 3-year old deer at December 31 Year 1 4,800
How much is the increase in the fair value of the biological asset due to price
change?
A. 30,000 C. 180,000
B. 150,000 D. 480,000

18. Refer to no. 18. How much is the increase in the fair value of the biological
asset due to physical change?
A. 30,000 B. 150,000 C. 180,000 D. 480,000

19. Kuwago Company provided the following data regarding its biological assets:
Value of biological asset at acquisition cost on January 1, Year 1
P 600,000
Fair valuation surplus on initial recognition at
fair value on December 31, Year 1 P 700,000
Increase in fair value to December 31,
Year 2 due to price change 40,000
Increase in fair value to December 31,
Year 2 due to physical change 60,000
Decrease in fair value due to harvest 90,000
What is the carrying amount of the biological asset on December 31,
Year 2?
A. 1,400,000 B. 1,310,000 C. 1,300,000 D. 1,490,000

20. Refer to no. 19. What is the gain from change in fair value of biological asset
that should be reported in the Year 2 statement of comprehensive income?
A. 100,000 B. 800,000 C. 710,000 D. 10,000

- End of discussion

“Believe in yourself and all that you are. Know that there is something inside you
that is greater than any obstacle.” – Christian D. Larsons

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ANSWER KEY:
1. B 11. B
2. A 12. B
3. C 13. A
4. D 14. A
5. C 15. C
6. B 16. D
7. A 17. A
8. D 18. B
9. C 19. B
10. A 20. D

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