Advanced FA I, Chapter Three: Accounting for Agriculture

CHAPTER THREE
ACCOUNTING FOR AGRICULTURE
Introduction
Accounting for agriculture is primarily guided by the International Accounting Standard (IAS) 41,
Agriculture, which governs the recognition, measurement, and disclosure of biological assets and
agricultural produce. The guidance in this chapter applies to biological assets on an ongoing basis, as well
as to agricultural produce when it is harvested.
3.1 Basic Terms and Scope
The following definitions are used in IAS 41;
Agricultural activity is 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 is the harvested product of an enterprise's biological assets (e.g., milk, coffee
etc.).
A biological asset is a living animal or plant controlled by an entity.
Biological transformation comprises the processes of growth, degeneration, production, and
procreation that cause qualitative or quantitative changes in a biological asset.
A group of biological assets is an aggregation of similar living animals or plants.
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.
Carrying amount is the amount at which an asset is recognized in the statement of financial
position.
Scope of IAS 41
The standard applies to the three elements that form part of, or result from, agricultural activity.
❖ Biological assets (plants and animals).
❖ Agricultural produce at the point of harvest.
❖ Government grants related to biological assets (such as grants received for managing agricultural
activities).
It does not apply to:
❖ Land related to agricultural activity (this falls under IAS 16 Property, Plant and Equipment).
❖ Intangible assets related to agricultural activities (such as licenses or patents, which are dealt with
under IAS 38 Intangible Assets).
3.2 The Nature of Biological Assets
Biological assets are the core income-producing assets of agricultural activities, held for their
transformative capabilities. Biological assets are unique because they are living and undergo continuous
biological transformation. Their value changes over time due to natural growth, production of new assets
(offspring or crops), and degeneration. Biological assets may be; Plants: include orchards, vineyards, and

Complied By Alemayo S. (MSc)

1
 Advanced FA I, Chapter Three: Accounting for Agriculture

timber forests. These biological assets grow over time and produce harvestable agricultural produce.
Animals: livestock such as cattle, sheep, poultry, and fish. Animals can be used for various purposes,
including milk production, meat, wool, or reproduction (creating new biological assets). Biological assets
play a critical role in agriculture-related industries and contribute to economic activity by yielding
agricultural produce.
Characteristics of Biological Assets
1) Biological transformation: the natural process through which living plants and animals grow, mature,
and generate produce. Examples of biological transformation include; a calf growing into an adult
cow, a fruit tree producing fruit, trees in a forest growing taller and thicker. Moreover, biological
transformation leads to various different outcomes.
A) Asset changes:
❖ Growth: increase in quantity and/or quality
❖ Degeneration: decrease in quantity and/or quality
B) Creation of new assets:
❖ Production: producing separable non-living products
❖ Procreation: producing separable living animals
We can distinguish between the importance of these by saying that asset changes are critical to the flow
of future economic benefits both in and beyond the current period, but the relative importance of new
asset creation will depend on the purpose of the agricultural activity. The IAS distinguishes therefore
between two broad categories of agricultural production system.
❖ Consumable: animals/plants themselves are harvested
❖ Bearer: animals/plants bear produce for harvest
2) Active Management: biological assets need to be actively managed by the entity, with input factors
such as feed, water, and care determining their output.
Biological assets can be held and accounted for by any business owner. However, because of their nature,
they are, typically, of the utmost importance individuals whose primary source of profit comes from
growing, selling, and shipping such goods (farmers). They are the same as the goods produced by other
companies that manufacture items made of plastic, paper, or other materials in terms of generating revenue
for the seller and accounting for loss if the goods are damaged or stolen. The only qualitative difference
is that the asset is living.
Biological assets, are difficult to maintain, constantly under the threat of change, both qualitatively and
quantitatively because they are living or have an active component. It simply means that plants, animals,
and the living things they produce (such as hens producing eggs or cows producing milk) have a period
of time where they must grow or be produced, a useful period during which they can be harvested, and a
limited amount of time during which they can be moved and sold before they deterioration or decay, or
otherwise become useless to consumers.
Biological assets change and depreciate naturally and more rapidly than other types of goods. Different
types of biological assets, such like other goods, can be in high or low demand, depending on the season.

Complied By Alemayo S. (MSc)

2
 Advanced FA I, Chapter Three: Accounting for Agriculture

They can also be lost or damaged, with the loss or damage usually due to things like unexpected periods
of rain or drought, cold weather, or the spread of a disease that wipes outcrops and/or livestock.
The table below provides examples of biological assets, agricultural produce, and products that are the
result of processing after harvest:

Types of Biological Assets

1) Bearer Biological Assets
Bearer biological assets are living plants or animals that are used repeatedly or continuously in the
production of agricultural produce over more than one reporting period, but they themselves are not
primarily intended for sale. Their primary purpose is to "bear" produces rather than be sold for their own
value. A bearer plants and animal are defined in IAS 41 as a plant that meets all the following criteria;
❖ is used in the production or supply of agricultural produce
❖ is expected to bear produce for more than one period and
❖ it is not intended to be sold as a living plant or harvested as agricultural produce, except for
incidental scrap sales (i.e., for firewood at the end of the plants productive life).

2) Consumable Biological Assets

Consumable biological assets are biological assets which do not meet all the above requirements.
Consumable biological assets are living plants or animals that are grown or reared primarily for sale or
harvest as agricultural produce. These assets are typically used for a single period, after which they are
either harvested, sold, or consumed.
Examples of consumable biological assets:
❖ Livestock raised for meat (beef cattle, pigs, chickens): these animals are reared with the intention
of being sold or slaughtered for their meat.
❖ Crops grown for harvest (wheat, corn, vegetables): these plants are cultivated to be harvested
once for sale or consumption.
❖ Forestry (timber trees): trees grown specifically for their wood, which will be harvested when
mature.
Complied By Alemayo S. (MSc)
3
 Advanced FA I, Chapter Three: Accounting for Agriculture

3.3 Recognition and Measurement of Biological Assets

Recognition Criteria
According to IAS 41, the biological assets should be recognized in the balance sheet when the following
criteria are fulfilled:
❖ The business controls the biological assets because of a past event.
❖ It is probable that the business will get future economic benefits from them.
❖ Fair value or cost of the biological asset can be measured reliably.
In agricultural activity, control may be evidenced by, for example, legal ownership of cattle and the
branding or otherwise marking of the cattle on acquisition, birth, or weaning. The future benefits are
normally assessed by measuring the significant physical attributes.
All biological assets shall be measured on initial recognition (at the time of procreation, germination of
crops, tree planting, etc.) and at subsequent balance sheet dates; and all agricultural produce harvested of
the biological assets shall be measured at the point of harvest.
Under IAS 41, biological assets are measured at fair value less costs to sell unless fair value cannot be
reliably measured. Costs to sell include commissions, taxes, and duties. The standard relies on fair value
because it better reflects the current economic reality of biological transformation, which directly impacts
the asset's value.
❖ Fair value measurement: biological assets are typically valued based on market prices, market
comparisons, or recent transactions involving similar assets.
❖ Costs to sell: include all incremental costs directly attributable to selling the asset, excluding
finance costs and income taxes (e.g., transportation, broker fees).
If fair value cannot be reliably measured (e.g., in the absence of an active market or relevant data),
biological assets are measured at cost less accumulated depreciation and impairment losses.
Agricultural produce at the point of harvest
Agricultural produce (e.g., milk, timber, or fruit) is measured at fair value less costs to sell at the point of
harvest. Once harvested, the produce becomes inventory and is no longer accounted for under IAS 41 but
under IAS 2 Inventories.
FV of a biological asset is the market value in a relevant and reliable active market between
knowledgeable and willing parties. In determining the FV of a biological asset one shall take into account
its location and condition. For example, the FV of animals held in a farm is their market price less
estimated transport and other costs necessary to get the animals to the market.
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. The same accounting applies when there is a change in fair value from period
to period.

Complied By Alemayo S. (MSc)

4
 Advanced FA I, Chapter Three: Accounting for Agriculture

Example 1: a calf is born at Cud Farms, so Cud recognizes a gain of Birr 500 that reflects the market value
of a newborn calf. One year later, the price of the cow has risen to Birr 2,200, so Cud recognizes a gain
of Birr 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 Birr 1,900, so Cud recognizes a loss of Birr 300.
Example 2: Spud Potato Farms harvests its Fall crop of potatoes, and recognizes a gain of Birr 150,000
in profit or loss as soon as the harvest is complete. It may not be possible to measure the fair value of a
biological asset upon its initial recognition. If so, measure the asset at its cost, less any accumulated
depreciation and accumulated impairment losses. If a fair value later becomes available on a reliable basis,
the asset should be revalued at the fair value.
If a biological asset was initially measured at its fair value less costs to sell, it must continue to be measured
in that manner until the asset is disposed of. In all cases, agricultural produce must be measured at its fair
value less costs to sell; this requirement is based on the assumption that fair values are always available
for agricultural produce.
Government Grants
An unconditional government grant related to a biological asset measured at its fair value less costs to sell
shall be recognized in profit or loss when, and only when, the government grant becomes receivable.
If a government grant related to a biological asset measured at its fair value less costs to sell is conditional,
including when a government grant requires an entity not to engage in specified agricultural activity, an
entity shall recognize the government grant in profit or loss when, and only when, the conditions attaching
to the government grant are met.

3.4 Presentation and Disclosure Issues

Presentation
Entities must present biological assets separately from other types of assets in their financial statements.
Typically, biological assets are classified as either current or non-current depending on whether they will
be realized within the normal operating cycle or not.
❖ Current biological assets: expected to be harvested or sold within the normal operating cycle (e.g.,
seasonal crops or short-term livestock).
❖ Non-current biological assets: longer-term assets such as orchards, timber plantations, or breeding
animals expected to generate benefits over multiple periods.
Income Statement Presentation
Gains and losses from changes in the fair value of biological assets are recognized directly in the profit or
loss for the period in which they occur.
Disclosure Requirements
IAS 41 requires extensive disclosures to ensure transparency about the valuation and management of
biological assets. Key disclosures include:
1) Description of Biological Assets
❖ Types of biological assets (e.g., crops, livestock).
Complied By Alemayo S. (MSc)
5
 Advanced FA I, Chapter Three: Accounting for Agriculture

❖ Nature of the entity’s agricultural activities.

2) Quantitative Information
❖ Quantities of biological assets (e.g., number of animals or hectares of crops).
❖ Physical changes in the biological assets during the period (e.g., births, harvests, sales, or deaths).
3) Measurement Information
❖ Methods used to determine the fair value of biological assets.
❖ Information about significant assumptions and estimates used in determining fair value.
❖ Explanation if fair value cannot be reliably measured and the rationale for using cost-based
measurement.
4) Financial Impact
❖ Gains or losses from changes in fair value recognized in the profit or loss.
❖ Detailed breakdown of revenue generated from the sale of agricultural produce.
❖ Any government grants related to biological assets (and how they were treated in the financial
statements).

Complied By Alemayo S. (MSc)

6