BBFA 2014 FINANCIAL REPORTING

IAS 41 / MFRS 141 Agriculture

1. Introduction

IAS 41 / MFRS 141 prescribes the accounting treatment, financial statement presentation,
and disclosures related to agricultural activity. It establishes the accounting treatment for
biological assets during their growth, degeneration, production and procreation, and for
the initial measurement of agricultural produce at the point of harvest. It does not deal
with processing of agricultural produce after harvest (for example, processing grapes into
wine, or wool into yarn).

It introduces a fair value model to agriculture accounting. This is a major shift away from
the traditional cost model widely applied in primary industry.

It applies to most (but not all) entities that grow or rear biological assets for profit. The
principle of the standard is that increases in value are recognised as the asset grows and
not solely on harvest or sale.

The following issues are being addressed by IAS 41 / MFRS 141:

• When should a biological asset or agricultural produce be recognised on the

statement of financial position?
• At what value should a recognised biological asset or agricultural produce be
measured?
• How should the differences in value of a recognised biological asset or agricultural
produce between two year-end dates be accounted for?

2. Scope

IAS 41 / MFRS 141 applies to:

• biological assets (with the exception of bearer plants) related to managed
agricultural activity
• agricultural produce at the point of harvest
• government grants relating to a biological asset

It does not apply to:

• land related to agricultural activity (which is covered under IAS 16)
• intangible assets related to agricultural activity (IAS 38)
• government grants related to bearer plants (IAS 20) and
• bearer plants (IAS 16). However, the produce on those bearer plants are covered
under IAS 41 / MFRS 141.

Note: Bearer plants were excluded from the scope of IAS 41 / MFRS 141 by
Agriculture: Bearer Plants (Amendments to IAS 16 and IAS 41 / MFRS 141) which applies
to annual periods beginning on or after 1 January 2016. Under this amendment, bearer
plants (which are used solely to grow produce, for example grapevines and oil palm) were
brought into the scope of IAS 16 so that they are accounted for in the same way as
property, plant and equipment.

However, IAS 41 / MFRS 141 still apply to produce growing on the bearer plants.

1
 BBFA 2014 FINANCIAL REPORTING
3. Definition

❖ A bearer plant is 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 assets are living animals or plants

❖ A group of biological asset is an aggregation of similar living animals or plants.

❖ Agricultural activity is the management by an entity of the biological

transformation of biological assets for sale, into agricultural produce or into
additional biological assets.

❖ Biological transformation compromises the processes of

• growth,
• degeneration,
• production and
• procreation
that cause qualitative and quantitative changes in a biological asset

❖ Agricultural produce is the harvested product of an entity’s biological assets.

❖ Harvest is the detachment of produce from a biological asset or the cessation of a

biological asset’s life processes.

❖ Fair value is the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the measurement
date (IFRS 13)

❖ Cost to sell is the incremental costs directly attributable to the disposal of an asset,
excluding finance costs and income taxes. It may include commissions, levies,
transfer taxes and duties. It exclude transport and other costs necessary to get
assets to a market (these are taken into account in arriving at fair value).

2
 BBFA 2014 FINANCIAL REPORTING
Examples:

4. Biological assets

Biological assets are the core income-producing assets of agricultural activities, held for
their transformative capabilities. Biological transformation leads to various different
outcomes:
❖ 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

IAS 41 / MFRS 141 distinguishes between two broad categories of agricultural production
system i.e.

❖ Consumable biological assets

These are animals or plants which themselves are harvested. For example, a tree
that will be logged.

❖ Bearer biological assets

These are animals or plants which bear produce for harvest. For example, a
grapevine that bears fruit but which itself will not eventually become agricultural
produce.

3
 BBFA 2014 FINANCIAL REPORTING
5. Recognition

• Biological asset

IAS 41 / MFRS 141 specifies that an entity shall recognize a biological asset when

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

❖ It is probable that the future economic benefits associated with the asset
will flow to the entity; and
❖ The fair value or cost of the asset can be measured reliably.

In agricultural activity, control may be evidenced by, for example, legal ownership
of cattle, marking of the cattle on acquisition or birth. The future benefits are
normally assessed by measuring the significant physical attributes.

Examples of agricultural activity include: • Raising livestocks, fish or poultry •

Stud farms (for example, breeding horses or cattle) • Forestry • Cultivating
vineyards, orchards or plantations • Floriculture

• Agricultural produce

Agricultural produce follows the recognition criteria for biological asset as above.

Recognition ends when the produce enters trading activities or production

processes (eg milk is processed into cheese). The point of harvest represents the
transition between accounting for agricultural produce assets under IAS 41 / MFRS
141 and IAS 2 / MFRS 102. Fair value less costs to sell at the point of harvest
forms ‘cost’ for the purpose of IAS 2 / MFRS 102.

After harvest, the agricultural produce is measured at the lower of cost and net
realisable value in accordance with IAS 2 / MFRS 102 Inventory.

6. Measurement

❖ Initial measurement

➢ Biological assets

IAS 41 / MFRS 141 requires that all biological assets within the scope should on
initial recognition be measured at fair value less costs to sell.

On initial recognition, if the fair value cannot be measured reliably because market-
determined prices or values are not available, then the biological assets can initially be
measured at cost and subsequently at cost less accumulated depreciation and
impairment losses. In determining cost, accumulated depreciation and accumulated
impairment losses, an entity considers IAS 16 and IAS 36 Impairment of Assets. Once
the fair value of such a biological asset becomes reliably measurable, an entity shall
measure it at its fair value less costs to sell.

4
 BBFA 2014 FINANCIAL REPORTING
➢ Agricultural produce

Agricultural produce at the point of harvest is recognized at the fair value less costs to
sell at point of harvest which will be the cost at that date when apply IAS 2 Inventories
or another applicable Standard.

❖ Subsequent costs related to biological assets

IAS 41 / MFRS 141 does not explicitly prescribe the accounting treatment for
subsequent costs related to biological assets. IASB mentioned that it is not necessary
to make the rules about the subsequent expenditures in agricultural activities, because
biological assets need to be re-measured to their fair value less cost to sell with all
changes in profit or loss and thus it does not matter how you treat the subsequent
expenditure.

➢ Companies can decide that

- all expenses that maintain the biological assets are expensed, for example,
routine vaccination of animals, pesticides with plants etc.
- all expenses that help increase the yield or outcome of the biological assets
would be capitalized, for example, food supplements or fertilizers.

Examples of subsequent costs include vaccinations of animals, pesticides with

plants, food supplements, feeding, veterinary services, planting, weeding,
irrigation, fertilizer, and harvesting and slaughtering costs.

❖ Subsequent measurement

IAS 41 / MFRS 141 requires that all biological assets within the scope should at EACH
year end be measured at fair value less costs to sell.

7. Measuring fair value

The primary indicator of fair value is the net market value (the quoted price in an active
market where the items are homogeneous, there are willing buyers and sellers and the
prices are available to the market).

There is a presumption that fair value can be measured reliably for a biological asset.
However, that presumption can be rebutted only on initial recognition for a biological
asset for which quoted market prices are not available and for which alternative fair
value measurements are determined to be clearly unreliable. In such a case, that
biological asset shall be measured at its cost less any accumulated depreciation and any
accumulated impairment losses. Once the fair value of such a biological asset becomes
reliably measurable, an entity shall measure it at its fair value less costs to sell.

The fair value measurement of a biological asset or agricultural produce may be facilitated
by grouping biological assets or agricultural produce according to significant attributes;
for example, by age or quality. An entity selects the attributes corresponding to the
attributes used in the market as a basis for pricing.

Cost may sometimes approximate fair value, particularly when:

5
 BBFA 2014 FINANCIAL REPORTING
(a) little biological transformation has taken place since initial cost incurrence (for
example, for seedlings planted immediately prior to the end of a reporting period or newly
acquired livestock); or

(b) the impact of the biological transformation on price is not expected to be material (for
example, for the initial growth in a 30-year pine plantation production cycle).
The standard specifically requires that fair value not be determined by reference to a future
sales contract. 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.

Biological assets are often physically attached to land (for example, trees in a plantation
forest). There may be no separate market for biological assets that are attached to the land
but an active market may exist for the combined assets, that is, the biological assets, raw
land, and land improvements, as a package. An entity may use information regarding the
combined assets to measure the fair value of the biological assets. For example, the fair
value of raw land and land improvements may be deducted from the fair value of the
combined assets to arrive at the fair value of biological assets.

8. Gains and losses

• Biological assets

A gain or loss arising on:

➢ initial recognition of a biological asset at fair value less costs to sell and

➢ 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.

A loss may arise on initial recognition of a biological asset, because costs to sell
to sell are deducted in determining fair value less costs to sell of a biological asset.

A gain may arise on initial recognition of a biological asset, such as when a calf
is born.

Changes to fair value can arise due to physical changes in the asset and price
changes in the market. Entities are encouraged to make a separate disclosure of
these two elements to facilitate performance appraisal.

In agricultural activity where the production cycle is less than one year (for
example, when raising chickens or growing cereal crops or mushroom growing),
the total change in carrying amount is reported in profit or loss in a single item of
income or loss.

• Agricultural produce

A gain or loss on initial recognition of agricultural produce at fair value less costs
to sell is included in the profit or loss for the period in which it arises.

6
 BBFA 2014 FINANCIAL REPORTING

A gain or loss may arise on initial recognition of agricultural produce as a result of

harvesting.

9. Presentation

Biological assets are presented separately from other non-current assets.

Non-current assets
Property, plant & equipment Include bearer plants
Biological assets To include:
➢ Produce growing on plants that require
more than 12 months from reporting
date to be ready for harvest
➢ Livestocks held for breeding purposes
only with a remote likelihood of being
sold
➢ Trees cultivated both for their lumber
and their fruits (eg, rubber trees grown
for both latex and their wood)

Current assets
Biological assets To include:
➢ Produce growing on plants that require
more than 12 months from reporting
date to be ready for harvest
➢ Livestocks held for breeding purposes
only with a remote likelihood of being
sold
➢ Trees cultivated both for their lumber
and their fruits (eg, rubber trees grown
for both latex and their wood)

Inventories To include inventories that are produced

from the agricultural produce (for eg: Black
tea or made tea produced from tea leaves)

7
 BBFA 2014 FINANCIAL REPORTING

10. Government grants

Unconditional government grant Conditional government grant

An unconditional government grant related If the grant is received before the
to a biological asset shall be recognised as conditions are met, record as
INCOME in profit or loss when, and only LIABILITY
when, the government grant becomes
receivable.

Recognise the government grant in profit or

loss when, and only when, the conditions
attaching to the government grant are
met.

Journal Journal
Dr Biological asset Dr Biologival asset
Cr Govt grant – Income (SOPL) Cr Deferred income (GG)

When the conditions are met:

Dr Deferred income (GG)
Cr Govt grant – Income (SOPL)

Terms and conditions of government grants may vary. For example, a grant may require
an entity to farm in a particular location for five years and require the entity to return all of
the grant if it farms for a period shorter than five years. In this case, the grant is not
recognised in profit or loss until the five years have passed. However, if the terms of the
grant allow part of it to be retained according to the time that has elapsed, the entity
recognises that part in profit or loss as time passes.

IAS 20 does not apply to a government grant on biological assets measured at fair value
less costs to sell. If a government grant relates to a biological asset measured at its cost
less any accumulated depreciation and any accumulated impairment losses, IAS 20 is
applied.

11. Disclosures

Extensive disclosure is required by IAS 41 / MFRS 141, including:

• the aggregate gain or loss for the period on: – initial recognition of biological
assets – initial recognition of agricultural produce – change in fair value less costs
to sell of biological assets
• a description of, and the nature of its activities involving, each group of biological
assets
• non-financial measures or estimates of the physical quantities of agricultural
produce output for the period and biological assets as at the year end date
• methods and significant assumptions in determining fair value
• the fair value less costs to sell of agricultural produce harvested for the period
8
 BBFA 2014 FINANCIAL REPORTING
• restrictions on title, pledges and commitments in respect of biological assets
• financial risk management strategies related to agricultural activity
• a reconciliation of changes in the carrying amount of those biological assets.

For biological assets measured at cost less any accumulated depreciation and any
accumulated impairment losses, the standard requires the following additional disclosure:

• a description of those biological assets

• an explanation of why fair value cannot be measured reliably
• the range of estimates within which fair value is highly likely to lie (if possible)
• the gain or loss recognised on disposal of those biological assets impairment losses
(if any), reversals of impairment losses (if any) and depreciation expense
• the depreciation method used
• the useful lives or the depreciation rates used
• the gross carrying amount and the accumulated depreciation at the beginning and
end of the period.

In addition, if the fair value of biological assets previously measured at cost less any
accumulated depreciation and any accumulated impairment losses subsequently becomes
reliably measurable, an enterprise should disclose a description of the biological assets, an
explanation of why fair value has become reliably measurable, and the effect of the
change.

Disclosure is also required in respect of government grants relating to managed

agricultural activity:

(a) the nature and extent of government grants recognised in the financial statements;
(b) unfulfilled conditions and other contingencies attaching to government grants; and
(c) significant decreases expected in the level of government grants.

Sources:
(1) ACCA Approved Workbook, Financial Reporting (FR), BPP Learning Media, 2021.
Chapter 14
(2) IAS 41 / MFRS 141 Agriculture
(3) Agriculture: Bearer Plants (Amendments to IAS 16 and IAS 41 / MFRS 141)
(3) Basis for Conclusions on MFRS 141 Agriculture

9
 BBFA 2014 FINANCIAL REPORTING

Additional practice questions

Question 1

Entity A is in the business of breeding prawns and planting mango trees for sale. It has 5
ponds to breed the prawns. Entity A also owns a tractor for its pond management. It also
acquired a patent to manage its ponds.

Required:

Briefly explain the classification of the items and the IFRS that applies to each item.

i. Prawns
ii. Ponds
iii. Tractor
iv. Acquired patent
v. Mango trees

Question 2

On 1 March 2021, a cow was purchased for RM2,000. If the cow is to be sold, a sales
commission of RM50 would be incurred.

How would the cow be initially measured and what is the gain/loss on initial
measurement?

Question 3

On 1 March 2021, a cow was purchased for RM2,000. A carriage inward of RM200 was
incurred. If the cow is to be sold, a carriage outward of RM100 and sales commission of
RM50 would have to be incurred.

Calculate the initial measurement of the cow and the gain/loss on the initial measurement.

Question 4

A calf was born on 1 April 2021. The estimated fair value of the calf is RM500. To sell the
calf, a sales commission of RM50 would be incurred.

Calculate how the calf would be initially measured and the gain/loss on initial recognition.

Question 5

A calf was born on 1 April 2021. The estimated fair value of the calf is RM500. To sell the
calf, a transportation cost of RM100 has to be incurred to bring the calves to the market
and a sales commission of RM50 would be incurred.

Calculate how the calf would be initially measured and the gain/loss on initial recognition.

10