Introduction

IAS 41 prescribes the accounting treatment for biological assets, except for bearer plants, during the period of growth, degeneration, production and procreation and for the initial measurement of agricultural produce at the point of harvest.

Bearer plants are included within IAS 16’s scope. The produce growing on these bearer plants are within IAS 41’s scope.

Definitions

The following are the key definitions for the purposes of IAS 41:

• agricultural activity refers to 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;
• a biological asset is defined as a living animal or plant;
• biological transformation comprises the processes of growth, degeneration, production and procreation that cause qualitative or quantitative changes in a biological asset;
• agricultural produce is defined as the harvested produce of the entity’s biological assets;
• harvest is the detachment of produce from a biological asset or the cessation of a biological asset’s life processes; and
• costs to sell are the incremental costs directly attributable to the disposal of an asset, excluding finance costs and income taxes.

Agricultural activity covers a diverse range of activities such as raising livestock, forestry, cropping, cultivating orchards and plantations, floriculture, and aquaculture (including fish farming). Agricultural activities have three common features: capability to change, management of that change and measurement of change. The key feature that often differentiates agricultural activities from other related activities is the entity’s management of the biological transformation. For example, the entity may manage biological transformation by enhancing, or at least stabilising, conditions necessary for the process to take place (e.g., nutrient levels, moisture, temperature, fertility and light). Harvesting from unmanaged sources (such as open ocean fishing and deforestation) is not agricultural activity because it does not involve management of the resource.

It is clear from the definitions above that agricultural activity is not restricted to traditional farming operations, but will also apply to some entities operating in the bio-technology sector.

IAS 41 applies to the following when they relate to agricultural activity:

• Biological assets, except for bearer plants.
• Agricultural produce at the point of harvest.
• Government grants related to biological assets.

A biological asset is defined as “a living animal or plant” and include produce growing on bearer plants.

Biological assets Biological assets include, amongst others, the following: ·        Sheep, pigs, beef cattle, dairy cattle, poultry and fish. ·        Trees in a plantation. ·        Plants for harvest (such as wheat, maize and vegetables). ·        Trees, plants and bushes from which agricultural produce is harvested (such as fruit trees, tea bushes, vines, tobacco plants and sugar cane). Bearer plants are accounted for under IAS 16. All other biological assets when they relate to agricultural activity are accounted for under IAS 41.

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Other living organisms Are other living organisms such as cultures, cells, bacteria and viruses used in the pharmaceutical and biotechnology industries biological assets? Generally, such organisms would not be regarded as animals or plants under either the common or scientific usages of those words. The Collins English Dictionary defines a plant as “any living organism that typically synthesises its food from inorganic substances, lacks specialised sense organs, and has no powers of locomotion”. Arguably, such a definition could encompass cultures, etc. However, agricultural activity is the management by an entity of the biological transformation of biological assets for sale, into agricultural produce, or into additional biological assets. It is implicit throughout the standard that the kind of activities anticipated to be within its scope are ‘normal’, commonly understood agricultural activities. There is a further implication in IAS 41 that it applies to homogeneous (or, at least, highly comparable) assets or groups of assets. Many of the organisms used in the pharmaceutical and biotechnology industries are unique, or even patented, and therefore do not sit comfortably within the standard’s requirements. Cultures, cells, bacteria, viruses and similar organisms used in the pharmaceutical and biotechnology industries are not considered to be biological assets that fall within IAS 41’s scope. Also, the development of organisms for research purposes does not qualify as agricultural activity, as they are not being developed for sale or for transformation into agricultural produce or additional biological assets. However, if a pharmaceutical or biotechnology company does undertake agricultural activity (For example, it grows plants from which particular drugs are developed or it develops cultures for use in dairy products), that activity will fall within IAS 41’s scope.

For disclosure purposes, an entity is encouraged to distinguish between consumable and bearer biological assets or between mature and immature biological assets, as appropriate.

Consumable biological assets are those that are to be harvested as agricultural produce or sold as biological assets (For example, beef cattle or crops for harvest such as wheat). Bearer biological assets, on the other hand, are those from which other biological assets or agricultural produce are obtained (For example, dairy cattle or fruit trees).

Mature biological assets are those that have attained harvestable specifications (in the case of consumable biological assets) or are able to sustain regular harvests (in the case of bearer biological assets). Immature biological assets have not yet reached that stage.

Agricultural produce is defined as “the harvested produce of the entity’s biological assets”. IAS 41 applies to agricultural produce at the point of harvest.

Biological assets and agricultural produce The following table gives examples of biological assets, together with examples of the additional biological assets and/or agricultural produce that they yield: Biological assets Additional biological assets Agricultural produce Dairy cattle Calves Milk/Carcass/Hides Beef cattle Calves Carcass/Hides Fruit trees Saplings Fruit Wheat Seeds Wheat Sheep Lambs Carcass/Wool Trees Saplings/Seeds Felled trees/Rubber latex Vines Saplings/Seeds Harvested grapes

Agricultural activity is defined as “the management by an entity of the biological transformation of biological assets for sale, into agricultural produce, or into additional biological assets”.

Definition of agricultural activities A resource may be ‘managed’ by government, through the use of mechanisms such as licensing and quotas, but this does not of itself result in the activity being classified as an agricultural activity under IAS 41; what matters is whether the entity itself manages the resource. Agricultural activities do not include: holding investments in an unmanaged forest as a carbon sink, which gives rise to carbon credits that can either be sold or used to offset pollution caused by the entity; using animals such as greyhounds, horses, pigeons or whippets for racing; exhibiting performing animals (e.g., in a theme park); managing living assets that are not animals or plants, such as viruses and blood cells used in research; or cloning living organisms in order to produce antibodies by applying a process analogous to a manufacturing process rather than management of a biological transformation. To illustrate an agricultural activity which would meet the definition under IAS 41 consider the following example. Entity A is a plant breeding entity. Following the development of new plant breeds, Entity A uses the developed breeding seeds to multiply the seeds into basic seeds which will then be sold. The multiplication of seeds to be harvested for sale is an agricultural activity within the scope of IAS 41 because it represents a biological transformation process of biological assets managed by the entity for sale. The entity transforms the breeding seeds into seeds for sale using biological processes and this activity is, therefore, within the scope of IAS 41.

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Agricultural activity Examples of agricultural activity include: ·        Raising livestock, fish or poultry. ·        Stud farms (For example, breeding horses or cattle). ·        Forestry. ·        Cultivating vineyards, orchards or plantations. ·        Floriculture.

Biological transformation is defined as “the processes of growth, degeneration, production, and procreation that cause qualitative or quantitative changes in a biological asset”.

Biological transformation Biological transformation is a natural change in a biological asset. It includes growth of living animals or plants, reduction in output due to age or disease, and the production of new biological assets through a managed reproductive programme. The following are examples of biological transformation in the context of cattle: ·        Calves are born (procreation). ·        Calves grow into mature cattle (growth). ·        Dairy cattle yield milk (production). ·        Beef cattle are reared for meat (production). All of these changes are observable, measurable and have a direct relationship to future economic benefits. Hence, biological transformation has an effect on the value of biological assets.

Agricultural activities are distinguished by the fact that management facilitates and manages biological transformation and is capable of measuring the change in the quality and quantity of biological assets.

Management of biological transformation normally takes the form of activity to enhance, or at least stabilise, the conditions necessary for the process to take place. This management distinguishes agricultural activity from other activities. For example, harvesting from unmanaged sources (such as ocean fishing) is not an agricultural activity.

Management of biological transformation The following are examples of management of biological transformation: ·        Providing shelter and food for cattle as well as maintaining their health. ·        Growing fish in net cages for subsequent slaughter or sale. ·        A managed breeding programme carried out to produce animals for sale.

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Absence of management of biological transformation A company manages a game park in South Africa. It has stocked the park with a range of wild animals indigenous to South Africa, as well as exotic animals from other continents. The game park offers customers guided safari-type tours. The park is also used for incidental hunting as part of a culling programme. It is run with a view to profit, but this does not represent agricultural activity as there is, in this case, no management of the transformation of the biological assets; only control of the number of animals. Hence, the game park does not fall within IAS 41’s scope. Similarly, zoos, aquariums and other parks where animals are held mainly for recreational purposes rather than agricultural activity would not be within IAS 41’s scope. The breeding that takes place is incidental to the main activity of providing a recreational facility. It is likely that such animals should be accounted for as tangible assets in the scope of IAS 16.

The standard does not apply to the following:

• Land related to an agricultural activity is dealt with by IAS 16 or IAS 40.

Classification of agricultural land ultimately destined for sale An entity purchases land that it cultivates for agricultural purposes. The land will be used to grow various crops such as sugar cane, cotton and corn. The entity’s business plan is to continue with agricultural activity for a number of years, which will achieve two strategic objectives: first, to generate cash flows to fund investments; and, secondly, to demonstrate the viability of the land for agricultural purposes. At the end of the period, the land will be sold, in lots, to third parties. While the land is being used for agricultural purposes, it should be classified as property, plant and equipment. A transfer to investment property, inventory or non-current assets held for sale should only be made at the time that the criteria governing transfers are complied with. This is likely to coincide with the point at which the held for sale criteria in IFRS 5 are met.

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Classification of agricultural land where agricultural use is considered incidental Entity A purchases vacant land that is to be used for the construction of a shopping mall. Permissions and administrative approvals, which need to be obtained prior to the commencement of construction, are expected to take up to 18 months to obtain. Entity A uses the land for agricultural activity for the period prior to obtaining the required approvals. The agricultural use of the land can be seen as incidental to the principal objective of building a shopping mall. Classification of the land as investment property might be appropriate from initial recognition.

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Logging road not expected to be used during more than one period Entities in the forestry industry often construct roads to provide them with access to their forest holdings. These roads are typically referred to as ‘logging roads. An entity incurs costs in the construction of a temporary logging road that will be discarded once the forest area to which it provides access is cleared. Clearance of the land accessed by the road will take place over a three-month period. Any costs incurred in the construction of the logging road should be expensed as incurred, because the entity does not expect to use the logging road during more than one period as required by IAS 16.

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Logging road expected to be used during more than one period Entities in the forestry industry often construct roads to provide them with access to their forest holdings. These roads are typically referred to as ‘logging roads. An entity incurs costs in the construction of a logging road that is expected to provide future access to the entity’s forests. The road is expected to be used for a period of 10 years. The costs incurred in the construction of the logging road should be capitalised as an asset under IAS 16 and should be depreciated over the estimated useful life of 10 years. This is because the road will be used during more than one period and will enable the entity to access the future economic benefits embodied in its forests.

• Right-of-use assets arising from a lease of land related to agricultural activity are dealt with by IFRS 16.

• Intangible assets related to agricultural activity which are dealt with by IAS 38.
• Leases of bearer plants held by a lessee are within the scope of IFRS 16 but leases of biological assets other than bearer plants held by a lessee are within the scope of IAS 41.

• Agricultural produce after the point of harvest. It is likely that such produce will be inventory in the scope of IAS 2.

Treatment of consumable biological assets after harvesting Entity A raises cattle, slaughters them at its abattoirs and sells the carcasses to the local meat market. The cattle are biological assets while they are living animals. When they are slaughtered, biological transformation ceases and the carcasses meet the definition of agricultural produce. Hence, entity A should account for the cattle in accordance with IAS 41. At the point of harvest, the fair value less costs to sell of the carcasses is taken as the cost of the inventory for the purpose of IAS 2, which applies thereafter.

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Treatment of produce growing on bearer biological assets before and after harvesting Entity B is involved in planting vines, harvesting grapes and producing wine. While the grapes (the produce) grow on the vines, they are biological assets. When the entity harvests the grapes, their biological transformation ceases and they become agricultural produce. Entity B should account for the grapes on the vine in accordance with IAS 41. At the point of harvest, the harvested grapes should also be recognised at fair value less costs to sell and treated as inventory in accordance with IAS 2. The exclusion of agricultural produce, after the point of harvest, from IAS 41’s scope means that the standard does not deal with activity such as the processing of grapes into wine or raisins. The Board considered including such activity within IAS 41’s scope, but concluded that it could not be differentiated with sufficient clarity from other manufacturing processes.

• Bearer plants related to agricultural activity are dealt with by IAS 16. Produce growing on bearer plants remains within IAS 41’s scope.
• Government grants related to bearer plants are dealt with by IAS 20.

Contracts to sell biological assets are accounted for either under IFRS 9 (IAS 39) or as executory contracts. Contracts fall within IFRS9’s (IAS 39’s) scope if they meet the definition of a derivative or if they can be net settled and are not expected to result in the physical delivery of goods to meet the entity’s own purchase, sale or usage requirements.

Contract within IFRS 9’s (IAS 39’s) scope Entity A grows cocoa beans. At the beginning of the cocoa growing season, it enters into a contract to sell 100 tonnes of cocoa beans at a fixed price. Entity A has a past practice of settling similar contracts net, because it has entered into the contract as part of its hedging strategy and has no intention of making a physical delivery of the cocoa beans to this counterparty. Entity A has a contract to sell a non-financial item. The contract does not qualify for the ‘own use’ exemption in IFRS 9 (IAS 39), because entity A has a past practice of settling similar contracts net. Hence, this and all similar contracts fall within IFRS 9’s (IAS 39’s) scope and are measured at fair value in accordance with that standard.

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Contract outside IFRS 9’s (IAS 39’s) scope Entity B grows sugar beet. At the beginning of the growing season, it enters into a contract to sell its entire harvest to a local sugar processor at a fixed price. The contract is intended to be settled by the physical delivery of sugar beet in accordance with entity B’s normal sales requirements. There is no history of entity B settling similar contracts net. Accordingly, this contract falls outside IFRS 9’s (IAS 39’s) scope, so it is not measured at fair value. However, such a contract might meet the definition of an onerous contract under IAS 37 and would be measured in accordance with that standard. The existence of a contract, whether onerous or not, does not affect the biological asset’s fair value.

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Existence of an onerous contract Entity X grows salmon commercially for sale. It has entered into a contract to deliver the salmon in the future at a fixed price. At the reporting date, the contract price is lower than the current forward price used in the fair value less costs to sell discounted cash flow calculation of the salmon. The contract qualifies for the IFRS 9’s (IAS 39) ‘own use’ exception.  Does the existence of a fixed price sale contract, at a price below the current forward price of the biological asset, indicate that the contract might be onerous? An onerous contract might exist. An assessment will have to be performed by including the fair value less costs to sell of the biological asset, as it is measured at the reporting date, as one of the necessary costs to fulfil the contract. The implication is that the entity might simultaneously have a biological asset measured at fair value less costs to sell and a liability for an onerous contract. As the measurement under IAS 37 for onerous contracts only includes unavoidable costs, it will normally differ conceptually from the fair value measurement under IFRS 13.

Common activities in the agricultural sector include the use of grower contracts or outsourcing contracts whereby the cultivation of biological assets is outsourced to farmers. IAS 41 does not deal with grower contracts or outsourcing contracts. Consideration should be given to the requirements of IFRS 10, to establish whether the farming operation should be consolidated by someone other than the farmer. IFRS 16 (IFRIC 4), to assess whether the outsourcing contract contains a lease to which IFRS 16 applies. IFRS 15 (IAS 18), to establish whether a sale can be recognised on a transfer of the biological assets to the grower or farmer, for example, the sale of seeds and related products with an obligation to repurchase the harvested produce.

Bearer plants relating to agricultural activity

Bearer plants excluded from the scope of IAS 41

IAS 41 should not be applied to bearer plants or government grants related to such plants.

Bearer plants are excluded from the scope of IAS 41 and are instead accounted for under IAS 16. The Board determined that these assets are more appropriately accounted for under IAS 16 because, once mature, they are held by an entity solely to grow produce over their productive life. Under IAS 16, entities have a choice to measure these assets subsequent to initial recognition using either a cost model or a revaluation model.

Bearer plants – definition

A bearer plant is defined as a living plant that:

• is used in the production or supply of agricultural produce;
• is expected to bear produce for more than one period; and
• has a remote likelihood of being sold as agricultural produce, except for incidental scrap sales.

Examples of plants that usually meet the definition of a bearer plant and that are outside the scope of IAS 41 are tea bushes, grape vines, oil palms and rubber trees.

The following are not bearer plants:

• plants cultivated to be harvested as agricultural produce (e.g., trees grown for use as lumber);
• plants cultivated to produce agricultural produce when there is more than a remote likelihood that the entity will also harvest and sell the plant as agricultural produce, other than as incidental scrap sales (e.g., trees that are cultivated both for their fruit and their lumber); and
• annual crops (e.g., maize and wheat).

When bearer plants are no longer used to bear produce, they might be cut down and sold as scrap (e.g., for use as firewood). Such incidental scrap sales would not prevent the plant from satisfying the definition of a bearer plant.

Produce growing on bearer plants

Produce growing on bearer plants is a biological asset. IAS 41 does apply to such produce (e.g., tea leaves, grapes, oil palm fruit and latex).

The Basis for Conclusions on IAS 41 explains that the Board considers that such produce is a consumable biological asset and the growth of the produce directly increases the expected revenue from the sale of the produce; consequently, fair value measurement of the growing produce provides useful information to users of financial statements about an entity’s expected future cash flows.

The Board also observed that produce will ultimately be detached from the bearer plants and is normally sold separately, meaning it has a market value on its own; this is in contrast to many bearer plants that are unlikely to have an observable market value on their own because they can only be sold while attached to the land.

Notwithstanding the difficulties that may arise in practice when measuring produce growing on bearer plants at fair value less costs to sell, the Board decided to keep such produce within the scope of IAS 41 in order to maintain consistency with the accounting for produce growing in the ground. If an entity is unable to measure fair value reliably on the initial measurement of produce, relief may be available under IAS 41.

Accounting after the point of harvest

IAS 41 deals only with the treatment of biological assets up to the point of harvest, and not with any further transformations that they may undergo thereafter. After the harvest is completed, the assets are generally accounted for under IAS 2. In more limited circumstances, they may be accounted for under another Standard; For example, if an entity harvests logs and decides to use them for constructing its own building, IAS 16 is applied in accounting for the logs.

The following table, reproduced from IAS 41:4, sets out a number of examples of biological assets, agricultural produce, and products that are the result of processing after harvest.

Specifically excluded from the scope of IAS 41 are ageing or maturation processes that occur after harvest (e.g., wine production from grapes and cheese production from milk). Some have argued for the inclusion of such processing within the scope of IAS 41 because it is a logical and natural extension of agricultural activity, and the events taking place are similar to biological transformation. However, the Board decided not to include such processes in the scope of the Standard because of concerns about difficulties in differentiating them from other manufacturing processes.

Other assets used in agricultural activity

IAS 41 does not address the accounting treatment for land on which agricultural activity is conducted, nor intangible assets (e.g., milk quotas) related to agricultural activity. These are covered by IAS 16, IAS 40, IFRS 16 and IAS 38.

Plant breeding: new plant development – example Entity A is a plant breeding entity. In the initial stages of the plant breeding process, Entity A must develop new varieties by selecting seeds and cross-breeding in a laboratory, as well as performing field tests. This process can take up to 12 years. The development of new breeds of plants is not within the scope of IAS 41; IAS 41 states that the Standard does not apply to intangible assets related to agricultural activity. The development of new breeds is accounted for in accordance with the requirements of IAS 38 relating to research and development costs.

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Biological assets and agricultural produce used as a source of fuel for vertically integrated operations – example Entity A is a manufacturer of steel products with vertically integrated operations. Entity A has a subsidiary, Subsidiary X, that owns and operates a eucalyptus tree plantation. The agricultural produce (i.e., felled eucalyptus trees) is processed by Subsidiary X to produce charcoal. The charcoal is sold to Subsidiary Y, another member of the consolidated group, and used to fire blast furnaces for the production of steel products. Subsidiary X does not sell the felled trees or the charcoal to entities outside of the consolidated group. The scope of IAS 41 includes an entity’s management of the biological transformation and harvest of biological assets for conversion into agricultural produce. Consequently, in the circumstances described, in its consolidated financial statements, Entity A should account for Subsidiary X’s biological assets (live eucalyptus trees) and agricultural produce at the point of harvest (felled trees) under IAS 41. Entity A should apply IAS 2 after the point of harvest for the processes needed to convert the felled trees into charcoal. While IAS 41 cites certain scope exceptions, it does not provide an exception for either (1) transactions with related parties, or (2) biological assets and agricultural produce used for internal consumption in vertically integrated operations.

Recognition

Biological assets, including produce growing on a bearer plant and agricultural produce, should be recognised when:

• an entity controls the asset as a result of past events;

• it is probable that future economic benefits associated with the asset will flow to the entity; and

• the fair value or cost of the asset can be measured reliably.

Point of recognition for offspring of biological assets A pregnant ewe is a biological asset, as defined by IAS 41. Its offspring will also be biological assets, but they will not be recognised as separate assets until the recognition criteria in paragraph 10 are satisfied. Control of livestock is normally evidenced by legal ownership and the branding or otherwise marking of the animal on acquisition, birth or weaning. Control of new-born lambs would therefore be evidenced on birth and not only on weaning. Separate biological assets will be recognised when the lambing has proved successful and the offspring are healthy. The value of the lamb before birth will affect the value of the ewe, and the ewe’s fair value will decrease after lambing.

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Point of recognition of bearer biological produce IAS 41 provides no specific guidance for produce growing on bearer plants, other than the general recognition criteria. Bearer produce is therefore likely to be recognised immediately after the preceding harvest. The entity controls the bearer produce, because it controls the bearer plant. The previous harvest is evidence that there will be future economic benefit. The fair value can be measured reliably in most cases, but could be close to zero. We would not expect a material gain on initial recognition of bearer produce immediately after the last harvest. Without any other evidence, fair value of the bearer produce would accrue evenly between harvests, taking into account major cash outflows related to periodic activities including fertilising, pruning or other value increasing activities. However, if evidence of specific growing cycles can be obtained, the fair value of the bearer produce could accrue exponentially. For example, fresh fruit bunches growing on palm oil plants should be fair valued while they grow and not only once it is harvested.