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| Odunayo Adeniji |
odunjoy.adeniji@gmail.com
It is a no-brainer that all living things subsist on agriculture. This is because output from agriculture is used to sustain life on the earth, whether directly or indirectly. As a matter of fact, one major characteristic of living things is nutrition. Man and animals alike must eat. Therefore, accounting for agriculture cannot be overlooked.
Agriculture is very crucial to world economic growth. In 2018, agriculture accounted for 4 percent of global gross domestic product (GDP). World Bank Group, a leading financier of agriculture noted that agriculture may account for more than 25 percent of the GDP for some developing countries. As for Nigeria, 21.91 percent of the GDP in 2019 was contributed by agriculture. This clearly points to the fact that agricultural industries represent a vibrant source of generating revenue for most developing nations.
What is Agriculture?
Agriculture is the practice of farming. It involves the cultivation of crops and the rearing of animals.
IAS 41 – Agriculture focuses on agricultural activities. It spotlights the transformation of biological assets into agricultural produce. Thus, IAS 41 guides on the recognition, preparation, measurement and presentation of information relating to agricultural activities on the financial statements of business entities.
Agricultural activity
Agricultural activity is the management of the biological transformation (growth) of biological assets for the purpose of sale, or producing additional biological assets, or to generate agricultural produce. Agricultural activity is recognized and measured under IAS 41.
IAS 41 – Agriculture, applies solely to what is termed biological asset and agricultural produce at the point of harvest.
BIOLOGICAL ASSET
According to IAS 41, a biological asset is a living plant or animal. Agricultural produce, on the other hand refers to the harvested product of a biological asset belonging to a business entity.
However, there is a proviso to the above. Not all living plants and animals are covered by IAS 41, even though they qualify as biological assets. For a biological asset to be governed by IAS 41, it must pass through a process called biological transformation for the purpose of bringing forth additional biological asset(s), or agricultural produce, or for eventual sale. This process has to be managed by a business entity.
So technically, a biological asset goes through biological transformation (growth process) to maturity and then yields agricultural produce or additional biological assets. For instance, a dairy calf (biological asset) grows into a mature cow over time (biological transformation) to produce calf and milk (biological asset and produce).
Recognition and Measurement of Biological Asset
A plant or animal can only be recognized as a biological asset when three (3) conditions are met, that is,
· It is probable that future economic benefits will flow to the entity from the asset;
· The business entity has control over the asset; and
· The cost or fair value of the asset can be reliably measured.
Biological assets are recognized in the financial statements in two ways – the initial recognition and subsequent measurement. By initial recognition, it means a biological asset is appearing for the very first time in the financial statements of an entity. It is thus measured at fair value less costs to sell/cost of disposal. Fair value here represents the market price of the asset at the measurement date.
For subsequent measurement, biological assets are simply revalued to fair value less costs to sell at the reporting date.
Assets measured at initial recognition or subsequent measurement may result in either a gain or loss. This element of profit or loss is immediately recognized in the statement of profit or loss for the entity.
It is also important to note that biological assets are presented as a separate line item under non-current assets in the statement of financial position of an entity. It should never be lumped up with other tangible non-current assets (i.e. property, plants and equipment).
IAS 41 presumes that the fair value of biological assets can be measured reliably. However, there are times when the fair value (market value) of a biological asset is not readily available. In such instances, the standard provides the option to measure the biological asset at cost less accumulated depreciation and impairment losses at the reporting date.
Harvest
A harvest is said to occur when the produce of a biological asset is detached from it. This may however lead to the end of the life process of a biological asset as is common with any plant that produce just one harvest in its lifetime (e.g. maize, cassava, rice, wheat, etc.).
AGRICULTURAL PRODUCE
Agricultural produce is measured at the point of harvest at fair value less costs to sell. Any gain or loss realized is recognized immediately in the profit or loss account for the period (same as is applicable for any profit or loss realized on biological assets measurement).
Agricultural Produce and Inventory: the Tie
As mentioned earlier, IAS 41 applies solely to biological assets and agricultural produce at the point of harvest. Once harvested, the agricultural produce becomes inventory. Thus, IAS 41 ceases to apply as the harvested produce is now recognized as an item of inventory. It is now covered by IAS 2 – Inventory.
Consequently, the initial measurement value of harvested produce at the date of harvest (fair value less costs to sell) is recognized as the deemed cost of inventory. Under IAS 2, inventory is measured at the lower of cost and net realizable value
Assets Not Covered By IAS 41
Some agricultural asset classes are not recognized under IAS 41. They include:
1. Bearer Plants: These are plants that bear agricultural produce for more than one year. Also, it is highly probable that, except for incidental scrap disposals, bearer plants will not be sold as the harvested produce of biological assets. Examples include palm trees, orange trees grape vines etc.
Bearer plants are measured in accordance with IAS 16 – Property, Plants and Equipment (PPE). However, any unharvested produce on a bearer plant is a biological asset and is treated within the scope of IAS 41.
2. Land: Although, agricultural activities take place on land, it is outside the scope of IAS 41. Land is accounted for under IAS 16 (PPE) as a tangible non-current asset.
3. Intangible Assets Related to Agricultural Activities: These are governed by IAS 38 – Intangible Assets and are accounted for according to the Standard – Intangible Assets and are measured at cost or fair value less amortization. Examples are licenses and rights, production quotas, etc.
IAS 41 – Agriculture may be viewed by many as being a bit complicated but in reality, it is not. It is hoped that this article has been able to demystify this accounting standard to ensure adequate understanding for practical application.
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