IAS 41: Agriculture Accounting

1. Introduction to IAS 41 Agriculture

International Accounting Standard (IAS) 41, “Agriculture,” aims to regulate the accounting treatment, financial statement presentation, and disclosures related to agricultural activity. Issued by the International Accounting Standards Committee (IASC) in 2000 and adopted by the International Accounting Standards Board (IASB) in 2001, it represents a significant shift from historical cost accounting towards fair value accounting for biological assets. This standard is particularly important for developing countries where agriculture is a major economic sector.

Key Definitions:

• Agricultural Activity: “The management by an entity of the biological transformation of biological assets for sale, into agricultural produce, or into additional biological assets.” (NZ-IAS-41.pdf, IAS41.pdf) This includes activities like raising livestock, forestry, cropping, cultivating orchards, floriculture, and aquaculture. (IAS41.pdf)
• Biological Asset: A “living animal or plant.” (NZ-IAS-41.pdf, IAS41.pdf)
• Agricultural Produce: “The harvested product of the entity’s biological assets.” (NZ-IAS-41.pdf, IAS41.pdf) Examples include wool from sheep, logs from trees, milk from dairy cattle, and harvested fruit from fruit trees. (NZ-IAS-41.pdf, IAS41.pdf)
• Biological Transformation: Processes such as “growth, degeneration, production, and procreation that cause qualitative or quantitative changes in a biological asset.” (NZ-IAS-41.pdf, IAS41.pdf)
• Harvest: “The detachment of produce from a biological asset or the cessation of a biological asset’s life.” (NZ-IAS-41.pdf, IAS41.pdf)
• Costs to Sell (Point-of-Sale Costs): “Incremental costs directly attributable to the disposal of an asset, excluding finance costs and income taxes.” (gtal_2016_factsheet-ias41-agriculture.pdf, HKAS41.pdf) This includes commissions, levies, and transfer taxes, but excludes transport and other costs to get assets to market. (IAS41_BC_1-22.pdf)

2. Scope of IAS 41

IAS 41 primarily applies to:

• Biological Assets: Living animals and plants, with a notable exception for bearer plants. (NZ-IAS-41.pdf, IAS41.pdf)
• Agricultural Produce: Specifically at the point of harvest. (NZ-IAS-41.pdf, IAS41.pdf)
• Government Grants: Those related to biological assets. (NZ-IAS-41.pdf, IAS41.pdf)

Exclusions from Scope:

• Land related to agricultural activity: Covered by IAS 16 (Property, Plant and Equipment) or IAS 40 (Investment Property). (NZ-IAS-41.pdf, IAS41.pdf)
• Intangible assets related to agricultural activity: Covered by IAS 38 (Intangible Assets). (NZ-IAS-41.pdf, IAS41.pdf)
• Bearer plants related to agricultural activity: These are now covered by IAS 16 (Property, Plant and Equipment) as of June 2014 amendments. (NZ-IAS-41.pdf, IAS41.pdf, HKAS41.pdf)
• Bearer Plant Definition: “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 (except scrap sales).” (NZ-IAS-41.pdf) Examples include tea bushes, grape vines, oil palms, and rubber trees. (HKAS41.pdf)
• Produce on Bearer Plants: While bearer plants themselves are excluded, “the produce growing on those bearer plants” (e.g., tea leaves, grapes, oil palm fruit, latex) is within the scope of IAS 41 and must be measured at fair value less costs to sell. (IAS41.pdf, IAS41_BC_1-22.pdf, HKAS41.pdf)
• Government grants related to bearer plants: These are covered by IAS 20 (Accounting for Government Grants and Disclosure of Government Assistance). (NZ-IAS-41.pdf, IAS41.pdf)
• Right-of-use assets from leased agricultural land: Covered by IFRS 16 (Leases). (NZ-IAS-41.pdf, IAS41.pdf)
• Processing of agricultural produce after harvest: IAS 41 applies only at the point of harvest. Thereafter, IAS 2 (Inventories) or other applicable standards apply. For example, processing grapes into wine or wool into yarn is not covered by IAS 41. (NZ-IAS-41.pdf, IAS41.pdf)

3. Recognition and Measurement

An entity must recognise a biological asset or agricultural produce if:

• The entity controls the asset as a result of past events.
• It is probable that future economic benefits will flow to the entity.
• The fair value or cost of the asset can be measured reliably. (NZ-IAS-41.pdf, IAS41.pdf)

Measurement of Biological Assets:

• Initial and Subsequent Measurement: Biological assets are measured at “fair value less estimated point-of-sale costs (except where fair value cannot be estimated reliably).” (NZ-IAS-41.pdf, IAS41.pdf)
• Fair Value Principle: The core principle of IAS 41 is that “the increase in value associated with capital assets should be recognised as the asset grows and not solely at the date of harvest or sale.” (6.-Financial-Accounting-in-the-Agriculture-Sector-v6.pdf) This reflects the direct impact of biological transformation on the asset’s value. (HKAS41.pdf)
• Inability to Measure Fair Value Reliably: There is a presumption that fair value can be measured reliably for biological assets. However, this can be rebutted only on initial recognition if quoted market prices are unavailable and alternative fair value measurements are clearly unreliable. In such cases, the biological asset is stated “at cost less accumulated depreciation and accumulated impairment losses.” (NZ-IAS-41.pdf, IAS41.pdf) Once fair value becomes reliably measurable, the entity must switch to fair value measurement. (NZ-IAS-41.pdf, IAS41.pdf) This exception is not an accounting policy choice but is based on reliability. (HKAS41.pdf)

Measurement of Agricultural Produce:

• At Point of Harvest: Agricultural produce is measured at “fair value less costs to sell at the point of harvest.” (NZ-IAS-41.pdf, IAS41.pdf)
• Subsequent Measurement: This fair value at harvest becomes the “cost at that date when applying NZ IAS 2 – Inventory or another applicable NZ IFRS.” (NZ-IAS-41.pdf) This means that after harvest, agricultural produce is treated as inventory. (215.pdf) IAS 41 assumes that the fair value of agricultural produce at harvest can always be reliably measured. (IAS41.pdf)

Fair Value Determination:

• Active Market: If an active market exists, the quoted price is the appropriate basis. (NZ-IAS-41.pdf, IAS41.pdf) An active market requires homogenous items, willing buyers and sellers, and publicly available prices. (NZ-IAS-41.pdf)
• No Active Market: If no active market exists, market-determined prices (e.g., most recent transaction prices) or the present value of expected net cash flows are used. (IAS41.pdf) Discounted cash flow (DCF) models are often used for Level 3 assets (least “mark-to-market”). (6.-Financial-Accounting-in-the-Agriculture-Sector-v6.pdf)
• Exclusions from Fair Value Calculation: Cash flows for financing assets or re-establishing biological assets after harvest (e.g., replanting costs) are not included. (IAS41.pdf) Taxes are also excluded from cash flows used to determine fair value. (IAS41_BC_1-22.pdf)
• Cost as Approximation: Cost may sometimes approximate fair value, especially when little biological transformation has occurred or its impact on price is immaterial. (IAS41.pdf)
• Grouping: Fair value measurement can be facilitated by grouping assets by significant attributes like age or quality. (IAS41.pdf)
• Land-Attached Assets: For biological assets physically attached to land (e.g., plantation trees), their fair value less point-of-sale costs is measured separately from the land, even if an active market exists only for the combined assets. (IAS41.pdf, HKAS41.pdf)

Fair Value Gains and Losses:

• Initial Recognition and Subsequent Changes: Any gain or loss arising from the initial recognition of a biological asset at fair value less point-of-sale costs, and from subsequent changes in its fair value, is “included in profit or loss in the period in which it arises.” (NZ-IAS-41.pdf, IAS41.pdf)
• Agricultural Produce: Gains or losses on the initial recognition of agricultural produce at fair value less costs to sell are also recognised in profit or loss. (NZ-IAS-41.pdf, IAS41.pdf)
• Rationale: This immediate recognition in the income statement reflects the effects of biological transformation and improves the relevance of financial statements for decision-making. (215.pdf)
• Volatility: This approach can lead to “higher volatility of the annual result and in this way, at a higher prognosis risk for the users of the financial statement.” (215.pdf)

4. Government Grants

• Unconditional Grants: An unconditional government grant related to a biological asset measured at fair value less estimated point-of-sale costs is “recognised as income when, and only when, the government grant becomes available.” (NZ-IAS-41.pdf)
• Conditional Grants: A conditional government grant is “recognised as income when and only when, the conditions of the grant are met.” (NZ-IAS-41.pdf) This includes grants requiring an entity not to engage in specified agricultural activity. (IAS41.pdf)
• Difference from IAS 20: IAS 41 mandates a different treatment from IAS 20 (Accounting for Government Grants and Disclosure of Government Assistance) for grants related to biological assets measured at fair value. IAS 20 applies only if the biological asset is measured at cost less depreciation and impairment. (IAS41.pdf, IAS41_BC_1-22.pdf)

5. Disclosure Requirements

IAS 41 mandates extensive disclosures to provide transparency:

• Aggregate Gain/Loss: Disclosure of the total gain or loss from initial recognition of biological assets and agricultural produce, and from changes in fair value of biological assets. (NZ-IAS-41.pdf, IAS41.pdf)
• Description of Biological Assets: A narrative or quantified description of each group of biological assets. Entities are encouraged to distinguish between consumable and bearer, or mature and immature assets. (NZ-IAS-41.pdf, IAS41.pdf)
• Nature of Activities and Physical Quantities: If not disclosed elsewhere, the nature of activities involving each group of biological assets, and non-financial measures or estimates of physical quantities of biological assets at period end and agricultural produce output. (gtal_2016_factsheet-ias41-agriculture.pdf, IAS41.pdf)
• Restrictions and Commitments: Disclosure of biological assets with restricted title or pledged as security, and commitments for development or acquisition of biological assets. (gtal_2016_factsheet-ias41-agriculture.pdf, IAS41.pdf)
• Financial Risk Management: Strategies related to agricultural activity. (gtal_2016_factsheet-ias41-agriculture.pdf, IAS41.pdf)
• Reconciliation of Carrying Amounts: A reconciliation of changes in biological asset carrying amounts, including gains/losses from fair value changes, purchases, sales, harvests, business combinations, exchange differences, and other changes. (NZ-IAS-41.pdf, IAS41.pdf)
• Separate Disclosure of Physical and Price Changes: Encouraged, but not mandatory, especially for production cycles over one year, as it helps appraise performance and future prospects. (HKAS41.pdf)
• Inability to Measure Fair Value: If a biological asset is measured at cost due to unreliable fair value, detailed disclosures are required, including the reason fair value cannot be reliably measured, the estimation range, depreciation method, useful lives/rates, and gross carrying amount. (gtal_2016_factsheet-ias41-agriculture.pdf, IAS41.pdf)
• Government Grants: Nature and extent of grants, unfulfilled conditions, and expected significant decreases in grant levels. (NZ-IAS-41.pdf, IAS41.pdf)

6. Rationale and Impact of IAS 41

Benefits of Fair Value Accounting:

• Improved Relevance: Fair value accounting for biological assets provides a more “accurate and consistent financial accounting data that incorporates natural capital risks,” enhancing “price informativeness” and allowing better evaluation of management performance and future economic benefits. (215.pdf, 6.-Financial-Accounting-in-the-Agriculture-Sector-v6.pdf)
• Timely Recognition of Transformation: It allows for the immediate representation of the biological transformation process in financial statements, which is crucial for the agriculture sector where production incomes can appear much later under historical cost methods. (215.pdf)
• Comparability: Fair value measurement enhances comparability and understandability when similar assets are measured on the same basis, regardless of their origin (home-grown or purchased). (HKAS41.pdf)

Challenges and Criticisms:

• Reliability Concerns: Opponents argue that fair value is sometimes not reliably measurable, especially for assets without active markets or long growth periods, leading to subjective assumptions. (HKAS41.pdf)
• Volatility of Earnings: Recognising unrealised gains and losses in profit or loss can increase earnings volatility. (HKAS41.pdf)
• Complexity and Cost: Determining fair value, especially for Level 3 assets using DCF models, can be complex, introducing uncertainty if based on unreliable assumptions and requiring significant input data. (6.-Financial-Accounting-in-the-Agriculture-Sector-v6.pdf, Dialnet-ImplementationOfIAS41Agriculture-9257994.pdf)
• Analyst Concerns: Some analysts find fair value information for bearer biological assets less useful, citing its reliance on assumptions and its non-cash nature, often adjusting reported profits to exclude biological gains/losses. (agri-0912-13b.pdf)
• Misleading Information: Inaccurate application of IAS 41 can lead to misleading financial reporting, misinterpreting the company’s value, performance, and environmental impact. (6.-Financial-Accounting-in-the-Agriculture-Sector-v6.pdf) Case studies like Zoneco Group (scallop die-offs) and Noble Group (palm oil asset write-downs) highlight these risks, leading to delistings and asset impairments. (6.-Financial-Accounting-in-the-Agriculture-Sector-v6.pdf)

7. Historical Context and Amendments

• Origin: IAS 41 was developed to address the diversity in accounting for agricultural activity, which was previously excluded from the scope of various IAS standards (e.g., IAS 2, IAS 16, IAS 18, IAS 40). (HKAS41.pdf, IAS41_BC_1-22.pdf)
• 2014 Bearer Plant Amendment: A significant amendment in June 2014 moved “bearer plants” from the scope of IAS 41 to IAS 16 (Property, Plant and Equipment). (NZ-IAS-41.pdf, IAS41.pdf) This change was largely driven by the view that bearer plants are analogous to manufacturing assets, used in the production of agricultural produce over multiple periods, with insignificant residual value. (agri-0912-13b.pdf, IAS41_BC_1-22.pdf)
• Dissenting Opinions: Some board members dissented, arguing that this change would “eliminate information about the fair value changes in bearer plants and the underlying assumptions used to estimate those changes,” which is critical for investors. (IAS41_BC_1-22.pdf, HKAS41.pdf) They contended that fair value measurement best reflects biological transformation throughout a bearer plant’s life cycle. (HKAS41.pdf)
• Subsequent Amendments: Other minor amendments have been made by IFRS 13 (Fair Value Measurement), IFRS 16 (Leases), and Annual Improvements to IFRS Standards (2018–2020), among others. (IAS41.pdf)

8. Practical Implications and Case Study

The implementation of IAS 41, particularly its fair value accounting, can significantly alter a company’s reported financial position.

Peruvian SME Case Study:

• A Peruvian forestry SME, facing difficulties obtaining bank financing under traditional historical cost accounting, decided to apply IAS 41 for its consumable biological assets (eucalyptus and capirona plantations). (Dialnet-ImplementationOfIAS41Agriculture-9257994.pdf)
• By valuing its biological assets at fair value using the “income approach” (discounted cash flows), the company showed a significantly higher asset value compared to historical cost (e.g., S/2,225,170 fair value vs. S/637,279 historical cost in 2018). (Dialnet-ImplementationOfIAS41Agriculture-9257994.pdf)
• Although banks remained risk-averse and denied loans due to their fixed-asset collateral policy, the SME successfully secured long-term financing from a new strategic investor who found the IAS 41-compliant financial statements, including detailed fair value calculations, “extremely relevant” for their investment decision. (Dialnet-ImplementationOfIAS41Agriculture-9257994.pdf)
• This case highlights the advantage of IAS 41 in providing a more realistic valuation of biological assets, which can be crucial for attracting private investment, especially in countries where historical cost is the norm for tax purposes. It suggests that voluntarily adopting IFRS can significantly improve access to capital for agricultural companies. (Dialnet-ImplementationOfIAS41Agriculture-9257994.pdf)

9. Comparison with Vietnamese Accounting Standards (VAS)

A review of IAS 41 against Vietnamese Accounting Standards (VAS) reveals key differences:

• Classification: IAS 41 classifies assets into biological assets (excluding bearer plants) and agricultural produce. VAS categorises cultivation into short-term, multi-harvest, and perennial crops, and livestock into breeding, milk, meat, and poultry. (rsm_ifrs_news_11_2019_en.pdf)
• Measurement:IAS 41: Requires biological assets to be measured at fair value less costs to sell (with an exception for unreliable fair value measurement). Gains/losses are immediately recognised in profit or loss. Agricultural produce is measured at fair value less costs to sell at harvest, then treated as inventory. (rsm_ifrs_news_11_2019_en.pdf)
• VAS: Biological assets and agricultural produce are measured at historical cost. No gain or loss is recorded until the sale of biological assets or agricultural produce. (rsm_ifrs_news_11_2019_en.pdf)
• Government Grants: IAS 41 recognises unconditional grants as income when receivable and conditional grants when conditions are met. VAS recognises grants as revenue when the enterprise fulfils government requests. (rsm_ifrs_news_11_2019_en.pdf)
• Disclosure: IAS 41 requires disclosure of descriptions of biological assets, gains/losses, fair value methods/assumptions, harvested produce fair value, restricted assets, commitments, and reconciliation of carrying amounts. VAS classifies biological assets as fixed assets or inventories, with perennial crops and breeding animals as fixed assets. (rsm_ifrs_news_11_2019_en.pdf)

Vietnam is moving towards adopting IFRS, recognising the need for a specific accounting standard for agriculture based on IAS concepts to enhance transparency and comparability. (rsm_ifrs_news_11_2019_en.pdf)

10. Conclusion

IAS 41 provides a comprehensive framework for accounting for agricultural activities, largely by mandating fair value measurement for biological assets and agricultural produce. This approach aims to provide more relevant and timely financial information about the biological transformation process, despite introducing challenges related to measurement reliability and earnings volatility. The standard’s evolution, particularly the reclassification of bearer plants, reflects ongoing efforts to refine its application and address practical concerns, while its successful voluntary adoption by companies like the Peruvian SME demonstrates its potential to unlock financing and foster economic growth in the agriculture sector.