## **Learning Outcomes**

After reading this article, you will be able to explain the scope and objectives of IAS 41 Agriculture, define and distinguish biological assets and agricultural produce, apply the fair value measurement model, and handle related government grants. You will also be able to identify key disclosure requirements and common exam pitfalls involving this standard.

## **ACCA Strategic Business Reporting (SBR) Syllabus**

For ACCA Strategic Business Reporting (SBR), you are required to understand industry-specific accounting issues. This article covers syllabus areas relevant to agriculture, especially the measurement and reporting of biological assets and agricultural produce. Focus your revision on the following points:

- The application, scope and definitions of IAS 41 Agriculture
- Recognition and measurement of biological assets and agricultural produce
- Fair value less costs to sell as a measurement basis
- Handling of government grants related to agricultural activity
- Disclosure requirements for biological assets and agricultural produce
- Links to non-current assets and inventory standards where appropriate

## **Test Your Knowledge**

_Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision._

1. According to IAS 41, which one of the following best describes a biological asset?  
   a) Land held for future appreciation  
   b) Harvested wheat in storage  
   c) A living sheep  
   d) A tractor used on a farm
2. How should a gain arising from a change in fair value of a biological asset at the reporting date be presented?  
   a) In other comprehensive income  
   b) In equity  
   c) In profit or loss  
   d) As a prior period adjustment
3. When is it appropriate under IAS 41 to measure a biological asset at cost less accumulated depreciation and impairment?
4. Explain briefly what happens to agricultural produce after the point of harvest.

## **Introduction**

IAS 41 Agriculture addresses the unique accounting challenges of agricultural activity—managing living animals and plants for sale, harvesting, or the production of additional biological assets. Unlike manufactured goods, biological assets grow or transform, so their fair values change over time. This standard prescribes the initial and subsequent measurement for living assets and harvested produce, and interacts closely with other standards such as IAS 2 Inventories and IAS 16 Property, Plant and Equipment.

> **Key Term: Biological asset**  
> A living animal or plant.
>
> **Key Term: Agricultural produce**  
> The harvested product from a biological asset at the point of harvest.
>
> **Key Term: Fair value less costs to sell**  
> The price that would be received to sell an asset in an orderly transaction between market participants, minus the costs directly attributable to sale.

## Overview and Scope of IAS 41

IAS 41 applies to biological assets, agricultural produce at the point of harvest, and some government grants related to biological assets measured at fair value. Common examples include livestock, crops growing on a field, or fruit on trees. Land, bearer plants that produce agricultural produce (like grapevines), and harvested produce after the point of harvest are covered by other standards.

## Recognition of Biological Assets

To recognise a biological asset in the statement of financial position, all of the following must apply:

- 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

## Measurement Model

Upon recognition, and at each reporting date, biological assets must be measured at fair value less costs to sell. If fair value cannot be reliably measured (rare under IAS 41), the asset is measured at cost less accumulated depreciation and impairment. Once fair value becomes reliably measurable, revalue the asset accordingly.

### **Worked Example 1.1**

On 1 January, Farmer A purchases a flock of 100 sheep. As of the reporting date (31 December), similar sheep are sold in the principal market for \$120 each, with auction costs of \$5 per sheep. What amount should Farmer A recognise for the sheep in the financial statements at year end?

> **Answer:**  
> Fair value per sheep = \$120; costs to sell = \$5  
> Fair value less costs to sell: \$120 - \$5 = \$115 per sheep  
> Total valuation: 100 x \$115 = \$11,500.  
> The flock is measured at \$11,500 at the reporting date.
>
> **Exam Warning**  
> In the exam, clearly distinguish biological assets (measured at fair value less costs to sell) from agricultural produce (measured at the same basis only at the point of harvest, then transferred to inventory at that amount).

## Gains and Losses

Any gain or loss arising from changes in fair value less costs to sell of a biological asset or from its initial recognition is recognised in profit or loss for the period. This treatment provides timely, relevant information about the impact of biological transformation and changes in market prices.

## Inability to Measure Fair Value

IAS 41 presumes fair value can normally be determined reliably. Only in exceptional cases, typically for an asset acquired close to harvest or where market-determined prices are unavailable, is cost less depreciation and impairment acceptable.

> **Key Term: Biological transformation**  
> The processes of growth, degeneration, production, and procreation that cause qualitative or quantitative changes in a biological asset.

## Agricultural Produce at Point of Harvest

At the point of harvest, agricultural produce (e.g., milk, harvested wheat) is measured at fair value less costs to sell. This value becomes its "cost" for IAS 2 Inventories going forward—subsequent measurement then follows the lower of cost and net realisable value rule.

### **Worked Example 1.2**

Coastal Orchards grows apples on its trees, which are classified as biological assets. At the end of the season, 10,000 kg of apples are harvested. Market prices for apples at harvest are \$2 per kg; sales commissions and transport average \$0.10 per kg. How should the apples be measured on harvest?

> **Answer:**  
> Fair value at harvest: \$2 x 10,000 kg = \$20,000  
> Costs to sell: \$0.10 x 10,000 kg = \$1,000  
> Net amount: \$19,000  
> The apples are measured in inventory at \$19,000 at the point of harvest.

## Link with Other Standards

After harvest, agricultural produce is accounted for under IAS 2 Inventories. Land and bearer plants, such as tea bushes, are covered under IAS 16 Property, Plant and Equipment, unless the plants themselves are for sale (then IAS 41 applies).

## Government Grants

Government grants related to biological assets measured at fair value less costs to sell are recognised in profit or loss when receivable or when the conditions are met, as appropriate.

### **Worked Example 1.3**

An entity receives an unconditional government grant of \$10,000 for cattle raised on its farm, which are measured at fair value less costs to sell. When should the grant be recognised?

> **Answer:**  
> The unconditional grant is recognised in profit or loss when receivable, as there are no further conditions to fulfil.

## Disclosure Requirements

IAS 41 requires extensive disclosures, including:

- A description of each group of biological assets
- Reconciliation of the carrying amounts of biological assets at the beginning and end of the period
- Methods and assumptions used in determining fair value
- The amount of gain or loss recognised in profit or loss
- Explanations if fair value cannot be reliably measured

## Special Issues: Principal Market Versus Most Advantageous Market

When measuring fair value, the standard requires use of the principal market if one exists. If not, use the most advantageous market—the one which maximises net proceeds. Do not deduct transaction costs when determining the market but do deduct costs to sell.

### **Worked Example 1.4**

A farm can sell its cows in two active markets. In Market X, cows sell for \$1,000 each; selling costs are \$50. In Market Y, the selling price is \$950 with \$20 costs. The net price is \$950 (X) and \$930 (Y). Which market should be used to determine fair value less costs to sell?

> **Answer:**  
> The principal market is Market X (if this is where most transactions occur); otherwise, use the most advantageous market (Market X, as \$950 > \$930). Measure the cows at \$950 each.

## Transition from Biological Asset to Inventory

At harvest, agricultural produce is transferred from biological assets to inventory at fair value less costs to sell. Subsequent measurement follows IAS 2 Inventories (lower of cost and NRV).

## Summary

IAS 41 requires entities to measure biological assets at fair value less costs to sell at initial recognition and at each reporting date. Gains and losses from both physical changes (growth/harvest) and market prices are recognised in profit or loss. After harvest, agricultural produce is measured initially at fair value less costs to sell under IAS 41, then treated as inventory under IAS 2. Bearer plants and land are outside the scope of IAS 41 and are measured under other relevant standards.

## **Key Point Checklist**

_This article has covered the following key knowledge points:_

- Explain the scope and main objective of IAS 41 Agriculture
- Define biological assets and agricultural produce and distinguish between them
- Recognise and measure biological assets at fair value less costs to sell in both initial and subsequent measurement
- Account for agricultural produce at the point of harvest
- Understand government grant recognition related to biological assets
- Describe and apply disclosure requirements
- Identify common exam pitfalls (e.g., confusing inventory and biological assets, treatment at harvest)

## **Key Terms and Concepts**

- Biological asset
- Agricultural produce
- Fair value less costs to sell
- Biological transformation

Industry-specific and emerging topics - Agriculture (ias 41) overview