The reason is that although most of you do NOT deal with agriculture, it is still one of the most important industries in the world.
It is so important and so different from other industries that it has its own standard – IAS 41 Agriculture.
In many developing countries, agricultural activities represent one of the most important sources of income.
After all – we all need to eat (unless you’re breatharian). This tells it all about the importance of agriculture.
Unlike other industries, agriculture works with living animals and plants. By definition, living animals and plants are born, grow and die.
Therefore, a few problems arise when it comes to accounting for and reporting the results of agricultural businesses.
So, if you’re into agricultural business, or you just need to familiarize yourself, keep on reading. Maybe you’ll be surprised to find out that agriculture can hide in very improbable places!
Question #1: Is it agriculture?
The first and primary question when dealing with living plants and animals is – what is agricultural activity?
It is the management of the biological transformation (e.g. growth) of biological assets for (IAS 41.5):
- Sale, or
- into agricultural produce, or
- into additional biological assets.
You have to make your best effort to answer that question correctly, because the accounting and reporting depends on it.
Imagine you have a dog.
Logically, it is a living animal, and therefore it is a biological asset. You might think: “well, biological assets are governed by IAS 41, so I need to measure the dog at fair value at the end of each year”.
Not so fast.
Why do you have that dog?
Is it a guard dog, protecting your property and barking at everyone passing by?
If yes, then you should NOT apply IAS 41, but IAS 16 Property, plant and equipment and measure the dog at cost less accumulated depreciation.
The reason is that protecting the property is NOT an agricultural activity and IAS 41 does NOT apply.
Or, do you have that dog in order to produce and raise puppies and sell the puppies?
In this case, IAS 41 applies, because breeding and selling puppies is an agricultural activity.
So, if you think that OK, I’m not a farmer, so I don’t need to bother with IAS 41, you might be surprised where the agriculture can hide.
Just a few examples:
- Pharmaceutical companies
Some pharma companies grow their own plants in order to produce drugs. Yes, this is an agricultural activity and IAS 41 applies.
- Diary producers
If a company grows its own bacteria and cultures and then adds them to its yoghurts, well – this is an agricultural activity and IAS 41 applies.
- Jewelry producers
Some big jewelry producers produce their own pearls by planting foreign objects (such as pieces of shells or parasites) into the soft bodies of living oysters. Then, the oyster produces a pearl by secreting crystalline substance around the object to protect itself. Yes, this is an agricultural activity and IAS 41 applies.
On the other hand, not everything involving living plants or animals is agricultural activity.
Again, few examples:
The main purpose of the ZOO (and safari, recreational park, riding hall, etc.) is to make money from showing the animals off to the public – this is NOT an agricultural activity and IAS 41 does NOT apply (IAS 16 does).
Yes, animals living in the ZOO sometimes pair and produce a baby – but if it’s a natural process, not managed by the ZOO, it is NOT an agricultural activity.
The situation would be different when the ZOO would implement an active program of reproduction and managed that program. In this case, breeding animals would NOT be an incidental and ZOO would have to apply IAS 41.
All fishermen catching fish in the ocean can breathe with relief. If you are NOT actively farming fish, but you’re merely harvesting the fish from the ocean, it’s NOT an agricultural activity.
The reason is that fish grew naturally in the ocean, which was NOT an agricultural activity.
The same applies for hunting and other similar activities of harvesting biological assets from nature.
- “Working animals”
When you hold an animal primarily to do some work, such as cart-horses, guard dogs, elephant taxis, etc., then you do NOT apply IAS 41, because all these activities do NOT represent biological transformation.
Instead, IAS 16 is the right way to go.
Question #2: Is it a biological asset?
Very common misconception in the agriculture accounting is the belief that everything coming out of agriculture is a biological asset.
Biological assets are only living plants and animals.
The harvested products of biological assets are agricultural produce.
Apples, palm oil, pearls, milk, coffee beans, tea leaves – all this is agricultural produce.
Why do we bother?
Well, once you detach the agricultural produce from a biological asset, in other words – once you harvest the produce, it becomes your inventories and you apply IAS 2 Inventories.
At the moment of harvest, you should measure your new inventories at their fair value less costs to sell and subsequently, you measure them under IAS 2 at lower of cost and net realizable value.
You do NOT remeasure agricultural produce to fair value less cost to sell.
Question #3: Are biological assets always measured at fair value less costs to sell?
No, they are not.
It is true that the general rule in IAS 41 Agriculture is to measure all biological assets at fair value less costs to sell.
However, there are few exceptions:
- The biological asset is NOT a part of agricultural activity.
I’ve explained it above – guard dogs, fish caught in the ocean, etc.
- The biological asset is a bearer plant.
This is a relatively new thing in both IAS 41 and IAS 16 adopted in 2014.
A bearer plant is a living plant used in production or supply of agricultural produce that is expected to produce for more than 1 period.Special For You! Have you already checked out the IFRS Kit? It’s a full IFRS learning package with more than 30 hours of private video tutorials, more than 100 IFRS case studies solved in Excel, more than 120 pages of handouts and many bonuses included. If you take action today and subscribe to the IFRS Kit, you’ll get it at discount! Click here to check it out!
The examples are fruit trees, oil palms, vines etc.
As it was difficult and impractical to set the fair value of these assets at the end of each reporting period, they were taken out of IAS 41’s scope.
So, you can keep these assets at cost less accumulated depreciation under IAS 16.
Careful – this is only about plants, not animals. So, if you own expensive dogs and use them to breed new dogs, then sorry, it’s NOT a bearer plant.
- The fair value is not reliably measurable
When the fair value cannot be measurable, you can measure the asset at its cost less accumulated depreciation.
However, this is almost never relevant and IAS 41 says that the fair value CAN be measured reliably for biological assets.
Also, this exemption is available ONLY at initial recognition, never later. So, if you received the biological asset as a gift and market prices are not available, you would be able to use cost model.
Other situations are highly unlikely.
What about other issues?
In this article, I outlined just a few critical questions related to the correct reporting of agricultural activities.
We haven’t even touched other things, like how to set the fair value of biological assets and harvested produce, or example of accounting for agricultural activity from the beginning to the end. I plan to cover it in the future in some of my next articles.