PAS 41- Agriculture
PAS 41 shall be applied to account for the following when they relate to agricultural
activity:
a. Biological assets
b. Agricultural produce
c. Government grant related to a biological asset
3. Plant
4. Dairy cattle
5. Pigs
Harvested cane
Milk
Carcass
Sugar
Cheese
Sausage, cured ham
Again, the measurement of biological assets and agricultural produce is covered by
PAS 41 and the measurement of products after harvest is covered by PAS 2 on
inventories.
Note that PAS 41 is applied to agricultural produce at the point of harvest.
Agricultural activity or simply "agriculture".
Thereafter, PAS 2 on inventories shall be applied.
PAS 41 does not deal with the processing of agricultural produce after harvest.
This 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.
For example, the processing of grapes into wine is covered by PAS 2.
Examples of agricultural activity
Definition of terms
Biological assets are "living animals and living plants".
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.
Examples of biological assets
The following table provides examples of biological assets, agricultural produce and
products that are the result of processing after harvest.
Biological asset
1. Sheep
2. Trees in plantation
forest
Agricultural Produce
Wool
Felled Trees
Product after Harvest
Yarn, carpet
Logs, lumber
Agricultural activity covers a diverse range of activities such as the following:
1. Raising livestock
2. Annual or perennial cropping
3. Cultivating orchards and plantations
4. Floriculture
5. Aquaculture, including fish farming
Features of agricultural activity
Certain common features of agricultural activity are as follows:
a. Capability to change
Living animals and plants are capable of biological transformation.
b. Management of change
The agricultural activity must be "managed" to facilitate the biological
transformation by enhancing or at least stabilizing conditions necessary for the
process to take place, for example, nutrient levels, moisture, temperature,
fertility and light.
Such management distinguishes agricultural activity from other activities.
For example, harvesting from "unmanaged" sources, such as ocean fishing
and deforestation, is not agricultural activity.
c. Measurement of change
The change in quality or quantity brought about by biological transformation or
harvest is measured and monitored as a routine management function.
The future benefits are normally assessed by measuring the significant physical
attributes.
Measurement
A biological asset shall be measured on initial recognition and at the end of each
reporting period at fair value less cost of disposal.
Agricultural produce shall be measured at fair value less cost of disposal at the
point of harvest.
Biological transformation
Biological transformation comprises the processes of growth, degeneration,
production and procreation that cause qualitative or quantitative changes in a
biological asset.
Biological transformation results from the following types of outcomes:
1. Asset changes through:
a. Growth - an increase in quantity or improvement in quality of an animal or plant.
b. Degeneration - a decrease in quantity or deterioration in quality of an animal
or plant.
c. Procreation - creation of additional living animal or plant.
2. Production of agricultural produce such as latex, tea leaf, wool and milk.
Recognition
An entity shall recognize a biological asset or agricultural produce when:
a. The entity controls the asset as a result of past events.
b. It is probable that future economic benefits associated with the asset will flow
to the entity.
c. 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 and the branding or otherwise marking of the cattle on acquisition or birth.
Cost of disposal
Cost of disposal is the incremental cost directly attributable to the disposal of an asset.
In other words, cost of disposal is necessary for a sale to occur but that would not
otherwise arise, such as commission to broker and dealer, levy by regulatory agency
and commodity exchange, and transfer tax and duty.
Under the Basis for Conclusions on PAS 41, cost of disposal excludes transport cost,
finance cost and income tax.
Fair value of biological asset
There is a presumption that fair value can be measured reliably for a biological asset.
However, this presumption can be rebutted only on initial recognition for a biological
asset for which market determined prices are not available or estimates of fair value
are determined to be clearly unreliable.
In such a case, the biological asset shall be measured at cost less accumulated
depreciation and any accumulated impairment loss.
However, once the fair value of such a biological asset becomes clearly measurable,
the entity shall measure the biological asset at fair value less costs of disposal.
Fair value of agricultural produce
In all cases, an entity shall measure agricultural produce at the point of harvest at fair
value less cost of disposal.
Level 2 inputs include quoted prices for similar assets in an active market and quoted
prices for identical or similar assets in a market that is not active.
3. Level 3 inputs are unobservable inputs for the asset.
The fair value of agricultural produce at the point of harvest can always be measured
reliably.
Unobservable inputs are usually developed by the entity using the best available
information from the entity's own data.
The fair value measurement of agricultural produce stops at the point of harvest. After
that date, PAS 2 shall apply.
Gain and loss
This means that the inventory shall be measured at the lower of cost and net realizable
value after harvest.
A gain or loss arising on initial recognition of a biological asset at fair value less costs
of disposal and any subsequent changes in fair value less costs of disposal shall be
included in profit or loss.
The harvested product is recorded by debiting inventory and crediting gain from
change in fair value of agricultural produce.
A loss may arise on initial recognition of a biological asset because costs of disposal
are deducted in determining fair value less costs of disposal of a biological asset.
Definition of fair value
A gain may arise on initial recognition of a biological asset, for example, when a calf
is born.
Under PFRS 13, fair value is defined as the price that would be received to sell an
asset in an orderly transaction between market participants at the measurement date.
PFRS 13, paragraph 72, enumerates the fair value hierarchy or best evidence of fair
value as follows:
1. Level 1 inputs are the quoted prices in an active market for identical
assets.
An active market is a market in which transactions for the asset or liability take place
with sufficient regularity and volume to provide pricing information on an ongoing basis.
A principal market is the market with the greatest volume and level of activity for the
asset or liability.
2.
Level 2 inputs are inputs that are observable either directly or indirectly.
A gain or loss may arise on initial recognition of agricultural produce as a result of
harvesting which shall also be included in profit or loss.
An entity shall disclose the aggregate gain or loss arising on the initial recognition of
biological assets and agricultural produce and from the change in fair value less costs
of disposal of biological assets.
Agricultural land
Agricultural land is not deemed a biological asset. The principles espoused in PAS 41
for biological assets and agricultural produce do not apply to agricultural land.
The requirements of PAS 16 which are applicable to property, plant and equipment
apply equally to agricultural land for purposes of measurement.
Biological assets attached to land
Biological assets are often physically attached to land, for example, trees in a
plantation forest.
The IASB decided that bearer plants should now be accounted for in the same way as
property, plant and equipment in IAS 16 because the operation of bearer plants is
similar to that of manufacturing.
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, for the biological
assets and land as a package.
Bearer plants are used solely to grow agricultural produce over several periods.
An entity may use information regarding the combined assets to determine the fair
value of the biological assets.
Once a bearer plant is mature, apart from bearing produce, the biological
transformation is no longer significant in generating future economic benefit.
For example, the fair value of the land may be deducted from the fair value of the
combined assets to arrive at the fair value of the trees in the plantation forest.
The only significant future economic benefit it generates comes from the agricultural
produce it creates.
Government grant
Agricultural produce growing on bearer plants
An unconditional government grant related to a biological asset that has been
measured at fair value less cost of disposal shall be recognized as income when the
grant becomes receivable.
The agricultural produce growing on bearer plants remains within the scope of IAS 41.
If a government grant related to a biological asset measured at fair value less cost of
disposal is conditional, the grant shall be recognized as income only when the
conditions attaching to the grant are met.
If a government grant relates to a biological asset measured at cost less any
accumulated depreciation and any accumulated impairment losses, PAS 20 on
"government grant" is applied.
Amendment for bearer plants
Prior to the IASB amendment, bearer plants are considered biological assets included
within the scope of IAS 41 and measured at fair value less cost of disposal.
At the end of their productive life, the bearer plants are usually scrapped.
In other words, the agricultural produce as it grows is measured at the end of each
reporting period prior to harvest at fair value less cost of disposal.
Once harvested, the agricultural produce is measured at fair value less cost of disposal
at the point of harvest.
Definition of bearer plant
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.
c. Has a remote likelihood of being sold as agricultural produce, except for
incidental scrap sales.
In other words, a bearer plant is a living plant that is used solely to grow agricultural
produce over the productive life.
At the end of productive life, the bearer plant is usually scrapped.
A bearer plant that no longer bears produce is commonly cut down and sold as scrap
at the end of the productive life.
The incidental scrap sales would not prevent the plant from being a bearer plant.
A plant may have a dual use, namely:
a. The plant is cultivated for bearing agricultural produce.
b. The plant itself is being sold either as a living plant or an agricultural produce.
For example, rubber trees may be cultivated to grow rubber milk as agricultural
produce and at the same time, may be sold as living plant or cut down at the end of
the productive life to be sold as lumber or wood.
Examples of bearer plants
a. Trees that produce fruits are bearer plants while the fruits growing on the trees
are agricultural produce until harvested.
In this case, the rubber trees are recognized as biological asset because of the dual
use.
In an oil palm plantation, a coconut tree is the bearer plant and the fruit is the
agricultural produce.
However, the rubber trees are recognized as bearer plants when simply cut down and
sold for scrap upon maturity.
When immature, the coconut fruit can be harvested for drinking, known as "buko" juice
in the vernacular.
Judgment required
When mature, the coconut fruit can be processed to give oil, charcoal from the hard
shell and copra from the dried coconut flesh.
Determining whether a plant is a bearer plant is critical as it drives the subsequent
measurement of the plant.
Judgment is required in determining if the definition of bearer plant is met especially
in deciding whether the sales of the plant itself are incidental scrap sales.
b. In a vineyard, the grape vines are the bearer plants and the grapes are the
agricultural produce.
Separating bearer plant from agricultural produce
Not considered bearer plants
a. Trees grown to be harvested and sold as log or lumber are not bearer plants.
b. Annual crops which do not bear produce for more than one period and are held
solely to be harvested as agricultural produce such as corn and rice are not
bearer plants.
Before amendment, the bearer plant and the agricultural produce are considered to
be one single biological asset account presented as either current or noncurrent based
on the asset's useful life.
After amendment, the bearer plant and the agricultural produce are now reported as
two separate assets with different measurement model.
Plant with dual use
A plant with dual use is reported as biological asset and not as bearer plant.
Bearer plants are presented as noncurrent assets.
Agricultural produce is usually presented as a current asset unless it takes more than
one year to mature.
The carrying amount of bearer plants is depreciated on a systematic basis over the
useful life.
Measurement - immature bearer plants
The useful life of bearer plants is the number of years bearing agricultural produce.
Immature bearer plants are similar to an item of property, plant and equipment being
constructed before the intended use.
The IASB decided that bearer plants before maturity are measured at accumulated
cost in the same manner as self-constructed item of property, plant and equipment.
Accumulation of cost ceases when the bearer plants are in the location and condition
necessary for the intended use, meaning, the bearer plants already reach maturity.
Bearer plants are a qualifying asset under IAS 23 Borrowing costs. Specific and
general borrowing costs are capitalized in accordance with this standard.
The depreciation method shall reflect the pattern in which future economic benefits
from the plant are expected to be consumed by the entity.
An example is the production method but the use of other appropriate depreciation
method such as straight line is not prohibited.
The useful life of bearer plant should be reviewed at least at each financial year-end.
At the end of each reporting period, an entity should assess if there is any indication
that the bearer plant may be impaired by applying the requirements of IAS 36
Impairment of assets.
Accumulating cost of an immature bearer plant is a new concept.
Entities should be able to track and capture costs incurred for bearer plants during the
prematurity stage.
Measurement - mature bearer plants
There is no specific guidance on when a bearer plant reaches maturity.
Impairment indicators requiring impairment test include:
a. Drop in the market price of agricultural produce.
b. Natural phenomena, such as drought and flood.
c. Disease in plants causing decreased productivity.
d. Labor constraints
Measurement of agricultural produce
a. Agricultural produce as it grows
For example, a grape vine may take many years to produce the right quantity and
quality of fruit for a good wine.
Judgment is required and entities need an accounting policy to determine when bearer
plants reach maturity.
Agricultural produce growing on bearer plant is measured at fair value less cost of
disposal with changes recognized in profit or less as the produce grows.
Mature bearer plants are measured using either the cost model or revaluation model.
The policy adopted must be applied consistently.
In other words, agricultural produce is measured at the end of each reporting period
prior to harvest at fair value less cost of disposal.
b. Harvested produce
Harvested produce is measured at fair value less cost of disposal at the point of
harvest.
IAS 41 provides that the fair value of agricultural produce at the point of harvest can
always be measured reliably.
The fair value less cost of disposal at the point of harvest is the deemed cost of
inventories on the date IAS 2 Inventories is applied.
Bearer animals
Bearer animals, like bearer plants, may be held solely for the produce that they bear.
However, bearer animals have been explicitly excluded from the IASB amendment
and will continue to be accounted for under IAS 41.
The reason is that the measurement model would become more complex if applied to
bearer animals.
In other words, bearer animals continue to be reported as biological assets.
Animal-related recreational activities
Managing recreational activities, for example, game parks and zoos, is not agricultural
activity.
The reason is that there is no management of the transformation of the biological asset
but simply control of the number of animals.
The natural breeding that takes place is not a managed activity and is incidental only
to the main activity of providing a recreational facility.
Accordingly, animals related to recreational activities shall be accounted for in
accordance with PAS 16, Property, plant and equipment.