Advanced Financial Accounting I
CHAPTER 3
1
Accounting for
Agriculture
By Debela Bonsa Ass. Prof. of Accounting and Finance
3.1. Accounting for Agriculture
• IFRS provides guidance concerning agricultural activities, which
span livestock, forestry, crops, orchards, fish farming, and related
activities.
• Agriculture covers many activities involving the enhancement of
living animals and plants, in order to increase their quantity or
quality.
• A business should recognize a biological asset only if all of the
following conditions are true:
• The business controls the asset;
• Future economic benefits related to the asset will flow to the business.
Either the fair value or cost of the asset can be measured in a reliable manner.
3.2. The Nature of Biological Assets
A biological asset should be measured when it is initially recognized, as
well as at the end of each reporting period.
The measurement should use the fair value of the asset, less any costs to
sell.
Fair value may not differ appreciably from cost when little biological transformation
has yet taken place, or if the biological transformation has little impact on price.
For example, the initial growth of a hardwood tree may be minimal, resulting in no
real change in value for a number of years.
When agricultural produce is harvested, the measurement should also be
at the fair value of the asset, less any costs to sell.
This measurement only takes place when the produce is harvested.
Subsequent to harvesting, produce is treated as inventory. For these
measurements, fair value is considered to be based on the current market
conditions in which market participants are willing to enter into
transactions.
Thus, the fair value of a biological asset or agricultural produce is not
necessarily the price at which an entity may have contracted to sell its
assets at some point in the future.
When a biological asset is initially recognized at its fair value less costs
to sell, any related gain or loss is recognized in profit or loss.
EXAMPLE
A calf is born at Cud Farms, so Cud recognizes a gain of £500
that reflects the market value of a newborn calf. One year later,
the price of the cow has risen to £2,200, so Cud recognizes a
gain of £1,700 to account for the increase in fair value. One year
after that, a glut of cows on the market drops the fair market
value to £1,900, so Cud recognizes a loss of £300.
Agricultural products measured continue to be measured in that
manner until the asset is disposed of.
A government grant related to a biological asset should be recognized
in profit or loss only when the following conditions are met:
The grant is unconditional;
All conditions associated with the grant have been met;
The grant is measured at fair value less costs to sell; and The grant
becomes receivable.
EXAMPLE
The local government issues a £100,000 grant to any farmer willing to operate a
farm in an area formerly zoned for heavy industrial use. The grant stipulates that a
farmer will be paid in full after having documented at least three consecutive years
of farming on the same land. Given this condition, a farmer cannot recognize the
grant until the required three-year period has elapsed.
Bearer Plants
A bearer plant is a plant that generates produce, such as an apple tree. The
plant itself is not an agricultural product. A bearer plant has the following
characteristics:
Is used in the production of agricultural produce;
Is expected to bear agricultural products for more than one season; and
Is not likely to be sold as agricultural produce.
Thus, wheat is not a bearer plant, since it is routinely harvested. Trees can be treated as
agricultural produce, if the intent is to cut them down to during the period.
Reconciliation: A reconciliation of the carrying amounts of biological
assets between the beginning and end of the period, including gains and
losses on changes in fair value less costs to sell, increases caused by
purchases, decreases caused by sales and items held for sale, decreases
caused by harvests, increases caused by business combinations, foreign
exchange differences, and other issues.
Restricted title. The carrying amounts of those biological assets whose titles are
restricted, and those amounts pledged as security.
• Risk management. Any financial risk management strategies applied to
agricultural activity.
EXAMPLE
Cud Farms discloses the following information in the notes accompanying its
financial statements: Cud Farms produces goat milk for a number of local school
districts. At year-end, Cud held 320 goats able to produce milk and 150 kids being
raised to produce milk in the future. During the year ended 20X2, the company
produced 88,000 gallons of goat milk, with a fair value less costs to sell of
£230,000. The fair value of milk is based on quoted prices in the local area.
The company is exposed to changes in the price of goat milk. There is no
expectation of reduced milk prices in the near future, so the company does not
engage in derivative transactions to offset this risk.
The management team reviews the milk price forecast on a weekly basis to
determine the ongoing need for more active financial risk management.
If the fair values of biological assets cannot be measured
reliably, disclose the following information:
• Conversion to fair value. If it becomes possible to measure assets
at fair value during the period, describe these assets, explain why fair
value can now be measured, and the impact of the change.
• Depreciation. The depreciation method used to ratably reduce the
cost of the assets.
• Description. A description of the assets produce lumber. An apple
tree is considered a bearer plant, even though it may eventually be
cut down and sent to a lumber mill; since its use as lumber is a
secondary application.
3.4. Presentation and Disclosure Issues
A business engaged in agriculture should disclose the following
information in the notes accompanying its financial statements:
• Commitments. Any commitments to develop or acquire biological
assets.
• Gain or loss. The aggregate gain or loss recognized in the reporting
period from the initial recognition of biological assets and agricultural
produce, and from changes in the fair value less costs to sell of
biological assets.
Groupings. Describe each group of biological assets, such as
groups of mature and immature assets. Mature assets have
reached a state in which they can be harvested or can sustain
ongoing harvests. Another possible grouping is bearer biological
assets, which are self- regenerating assets, such as fruit trees and
grape vines.
Nature of activities. The nature of the activities required for each group
of biological assets.
• Quantities. The physical quantities of each group of biological
assets at the end of the reporting period, as well as the amount
produced.
Estimates. The range of estimates within which the fair value is likely to be (if
possible).
Explanation. An explanation of why fair value cannot be measured in a
reliable manner.
Gains or losses. The gains or losses recognized on the disposal of biological assets
measured at cost, as well as a reconciliation for the period that includes impairment losses,
reversals of impairment losses, and depreciation.
Gross amounts. The gross carrying amount and
accumulated depreciation as of the beginning and end of
the reporting period.
Useful lives. The useful lives incorporated into
depreciation calculations.
If the entity has received government grants, disclose the
nature of these grants recognized in the period; any unfulfilled
conditions related to outstanding grants, and any significant
decreases that are expected in the amount of future government
grants.
The end
of
chapter
three
