Key Concepts FOREIGN EXCHANGE

Chapter 30 – Agriculture Page 398 IAS 41 includes a table of examples which clearly sets out three distinct stages involved in the production of biological assets. Examples include the identification of dairy cattle as the biological asset, milk the agricultural produce and cheese the product that is processed after the point of harvest. Another example is, vines are the biological asset, grapes the agricultural produce and wine the end product. IAS 41 does not apply to agricultural lands IAS 16 Property, plant and equipment and IAS 40 Investment property apply instead, nor to intangible assets related to agriculture IAS 38 Intangible assets applies. Illustration 1 Calves and cows are biological assets as they are living animals. Beef and milk are agricultural produce. Apples are agricultural produce. The related trees and orchards are biological assets. 4 Recognition and Measurement A biological asset or agricultural produce should only be recognised when: [IAS 41.10]  the entity controls the asset as a result of past events, for example the acquisition of dairy cattle. The past event is the purchase, and control is obtained as the entity is now the legal owner;  it is probable that future economic benefits will flow to the entity, because the dairy cattle will produce milk which can be sold or processed into cheese and sold; and  fair value, or cost, of the asset can be measured reliably. A biological asset should initially be measured at its fair value less estimated point of sale costs, such as duty and commission to brokers or dealers. [IAS 41.12] Point of sale costs do not include any costs that are necessary to get the asset to a market, for example transport. Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction. Where an active market exists for a biological asset, the quoted price in the market is the appropriate fair value. [IAS 41.8] Where an active market does not exist, then fair value may be derived by using:  the most recent transaction in the market, assuming that similar economic conditions exist at the time of the transaction and at the end of the reporting period; or  market prices for similar assets with appropriate adjustments to reflect differences; or  sector based benchmarks, for example the value of meat per kilogram. IAS 41 includes the presumption that it will be possible to fair value a biological asset. But if fair value cannot be measured reliably at the time of initial recognition, then the biological asset should be recognised at cost less accumulated depreciation and impairment losses i.e. the decrease in the recoverable amount of an asset. Fair value should then be used as soon as a reliable measurement can be made. [IAS 41.30] At subsequent period ends a biological asset should continue to be measured at its fair value. Once a biological asset has been measured at fair value, it is not permissible to revert to cost. Chapter 30 – Agriculture Page 399 Agricultural produce should be measured at its fair value, less estimated point of sale costs at the point of harvest. Subsequent measurement is by reference to IAS 2. It will always be possible to fair value the agricultural produce since, by its very nature, there must be a market for it. [IAS 41.13] Grouping biological assets, or agricultural produce, according to significant attributes, such as age or quality, may help to establish fair value. Such groupings should be consistent with attribute groupings that are used in the market as a basis for pricing, for example, by wine vintage. Illustration 2 Some biological assets are physically attached to land, for example tree plantations, and it is necessary to value the land and biological assets together as one asset, even though agricultural land is not within the scope of IAS 41. To obtain the fair value of the biological assets, the fair value of the land element should be deducted from the combined fair value. A farmer wishing to value an apple orchard, in circumstances where there is no separate valuation for the orchard from that for the land on which it is grown, would value it at the combined fair value of the land and orchard, less the estimated fair value of land. Land is dealt with under IAS 16 or IAS 40. 5 Gains and Losses Gains or losses arising on the initial recognition at fair value of a biological asset and agricultural produce should be reported directly in profit or loss for the period in which they arise; for example a gain may arise on the birth of a calf. Subsequent changes in the fair value should also be reported directly in profit or loss. [IAS 41.26] Gains or losses on the initial recognition of agricultural produce should also be included in profit or loss in the period in which they arise. Such gains or losses may arise as a result of harvesting, because the harvested crop may be worth more than the unharvested crop. In this case a gain would arise. [IAS 41.28] 6 Government Grants IAS 41 contains its own requirements in respect of government grants, because it uses the fair value model. An unconditional government grant received in relation to biological assets should be recognised as income when it becomes receivable. [IAS 41.34] Conditional grants are recognised when the conditions for obtaining the grant are met. It may be possible to recognise part of the grant as some of the conditions are met; for example, where as a condition of a grant an entity is required to farm in a specific location over a number of years, part of the grant should be recognised each year. [IAS 41.35] Government grants recognised during the period should be separately identified and any unfulfilled conditions attaching to such grants should be explained. An indication should be given in the financial statements where there is expected to be a decrease in the amount of government grants receivable in future periods. IAS 20 Accounting for government grants and disclosure of government assistance applies to Chapter 30 – Agriculture Page 400 government grants relating to biological assets measured at cost less accumulated depreciation and accumulated impairment losses. 7 Disclosure IAS 1 Presentation of financial statements requires biological assets to be separately presented in the statement of financial position. [IAS 41.39] Gains and losses arising on the initial recognition of biological assets and agricultural produce and from changes in fair value of biological assets should be separately disclosed. In addition a description of each group of biological assets is required, with quantification encouraged. [IAS 41.40, 41.41] IAS 41 encourages the entity to distinguish between consumable and bearer assets, or between mature and immature assets as appropriate. A consumable biological asset is one that is harvested as agricultural produce or sold as biological assets. A bearer biological asset is self-regenerating rather than harvested for its agricultural produce. For example, livestock intended for the production of meat are consumable biological assets whereas livestock held for dairy farming are bearer assets. Similarly, trees grown for lumber are consumable assets whereas fruit trees are bearer assets. A description of the nature of activities involving an entity’s biological assets by group should be included in the financial statements, as well as information on the physical quantity of biological assets and their estimated outputs. [IAS 41.46] A number of disclosures are required about the fair value of biological assets and agricultural produce. Such disclosures should include details about the methods used to fair value the assets and the significant assumptions used as part of that process. Disclosure should also be made of the fair value of agricultural produce harvested. [IAS 41.47, 41.48] An entity should disclose details of any biological assets where title is restricted in some way or where the assets have been pledged as security. Any commitment in relation to the purchase or development of biological assets should also be explained. [IAS 41.49] A full reconciliation should be included of changes in fair value during the period. [IAS 41.50] Illustration 3 A herd of 5 four year old animals was held on 1 January 2007. On 1 July 2007 a 4½ year old animal was purchased. The fair values less estimated point of sale costs were as follows: 4 year old animal at 1 January 2007 CU200 4½ year old animal at 1 July 2007 CU212 5 year old animal at 31 December 2007 CU230 The movement in the fair value less estimated point of sale costs of the herd can be reconciled as follows: At 1 January 2007 5 x CU200 CU1,000 Purchased CU212 Change in fair value the balancing figure CU168 At 31 December 2007 6 x CU230 CU1,380