Accounting for Biological Assets

Rute Gonçalves, Patrícia Teixeira Lopes

• Publisher: Routledge
• Year: 2017
• ISBN:
  9781351246804
• Edition: 1
• Topic: Commerce
• Subtopic: Commerce Général

This book explores accounting for biological assets under IAS 41 – Agriculture, and explains the recent adjustments introduced by the IASB which allow firms to choose between cost or revaluation models concerning mature bearer plants.

Identifying the firm and country-level drivers that inform the disclosure and measurement practices of biological assets, this concise guide examines the value relevance of measuring those assets at fair value. It also analyses how firm and country-level drivers explain the differences in the disclosure level and practices used to measure biological assets under IAS 41. Finally, it evaluates whether there is a difference in the relevance of biological assets among the listed firms with high and low disclosure levels on biological assets.

Based on a major international study of a wide selection of firms and country-level drivers, this book is vital for standard setters, stakeholders, students, accountants and auditors who need to understand disclosure and measurement practices of biological assets under IAS 41.

1Overview

International Financial Reporting Standards (IFRS)¹ have been recognised as a set of high-quality accounting standards. Despite having already been adopted by almost 140 countries and other jurisdictions, there are firm and country-level differences that explain the existing gap in the goal of standardisation of those standards. This book explores this gap for biological assets under International Accounting Standard (IAS) 41 Agriculture. IAS 41 has motivated intense debate on accounting for agricultural activity, mostly due to introducing major changes in the measurement of biological assets. This book also explores the value relevance of fair value in biological assets.

As a first step, the book describes IAS 41 and explains its recent adjustments introduced by the International Accounting Standards Board (IASB). Secondly, in order to provide a better understanding of IAS 41 in listed firms, a topic that has received little academic attention, this research introduces two main accounting issues, namely: 1) to present the state of the art, to identify the firm and country-level drivers that explain disclosure and measurement practices of biological assets and to discuss the disclosure index and 2) to examine the value relevance of measuring those assets at fair value.

After discussing these accounting issues, the book provides worldwide evidence by exploring a selection of listed firms that comply with the criteria of having first adopted IFRS or equivalent standards before 2012. The following questions will be answered in this book. What is the disclosure level on biological assets in listed firms under IAS 41? What firm and country-level drivers explain the differences in the disclosure level on biological assets among listed firms? What firm and country-level drivers explain the differences in practices used to measure biological assets among listed firms? Is there a difference in the relevance of biological assets between listed firms with high and low disclosure levels on biological assets?

This book aims to help standard setters, firms’ stakeholders, students, accountants and auditors to better understand disclosure and measurement practices of biological assets and their drivers. Additionally, it contributes to the increased awareness of the market valuation implications of IAS 41 and to identify new areas of research on the issue of accounting for biological assets.

Note

1International Financial Reporting Standards (hereafter IFRS) are standards issued by the International Accounting Standards Board (IASB). Regulation (EC) no. 1606/2002 requires that listed firms in the European Union (EU) prepare their consolidated financial statements under IFRS for years beginning on or after January 1 2005. IFRS include International Accounting Standards (hereafter IAS) and their interpretations adopted by IASB from its predecessor, the International Accounting Standards Committee (IASC).

2International Accounting Standard 41 Agriculture

IAS 41 was originally issued in December 2000 and first applied to annual periods beginning on or after 1 January 2003. There are other IFRS that have made minor consequential amendments to IAS 41. They include IAS 1 Presentation of Financial Statements (as revised in December 2003 and in September 2007), IAS 2 Inventories (as revised in December 2003), Improvements to IFRS (issued in May 2008), IFRS 13 Fair Value Measurement (issued in May 2011), and amendments by Agriculture: Bearer Plants (Amendments to IAS 16 Property, Plant and Equipment and IAS 41, issued in January 2016).

Overview

IAS 41 prescribes the accounting treatment for biological assets during the period of biological transformation and for the initial measurement of agricultural produce at the point of harvest. In addition, the standard prescribes financial statement presentation and disclosures related to agricultural activity.

As a basic rule, IAS 41 requires that biological assets shall be measured on initial recognition and at subsequent reporting dates at fair value less costs to sell, unless fair value cannot be reliably measured. This exception is only applied on initial recognition. Moreover, agricultural produce shall be measured at fair value less costs to sell at the point of harvest.

This standard includes different methods in assessing the fair value estimate. Market value is preferred, if reliable. When market-based prices are not available, fair value is the present value of expected net cash flows from the asset, discounted at a current market rate (the discounted cash flows method). In some situations, historical cost is an allowed treatment.

About IAS 41 and how it should be read

IAS 41 is set out in paragraphs 1–64. All of the paragraphs have equal authority but retain the IASC format of the standard when it was adopted by the IASB.

IAS 41 should be read in the context of its (a) objective and (b) basis for conclusions, (c) preface to IFRS and (d) conceptual framework for the financial reporting.

IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors provides a basis for selecting and applying accounting policies in the absence of explicit guidance.

Objective of IAS 41

The objective of IAS 41 is to prescribe the accounting treatment and disclosures related to agricultural activity.

The scope of IAS 41 and its exemptions

Scope. IAS 41 shall be applied to biological assets (except for bearer plants), agricultural produce at the point of harvest and government grants related to biological assets [IAS 41.1].

Exemptions from the scope. IAS 41 does not apply to land related to agricultural activity (IAS 16 and IAS 40 Investment Property); bearer plants related to agricultural activity (IAS 16); government grants related to bearer plants (IAS 20 Accounting for Government Grants and Disclosure of Government Assistance); intangible assets related to agricultural activity (IAS 38 Intangible Assets); and right-of-use assets arising from a lease of land related to agricultural activity (IFRS 16 Leases) [IAS 41.2]. Furthermore, IAS 41 does not apply to agricultural produce after the point of harvest. Such produce will be inventory and treated by IAS 2 Inventories [IAS 41.3].

Examples of biological assets, agricultural produce, and products that are the result of processing after harvest [IAS 41.4] are presented in Table 2.1.

Table 2.1.Examples of biological assets, agricultural produce and products that are the result of processing after harvest

Biological assets	Agricultural produce	Products that are the result of processing after harvest
Sheep Trees in a timber plantation Dairy cattle Pigs Cotton plants Sugarcane Tobacco plants Tea bushes ^(1) Grape vines ^(1) Fruit trees Oil palms ^(1) Rubber trees ^(1)	Wool Felled trees Milk Carcass Harvested cotton Harvested cane Picked leaves Picked leaves Picked grapes Picked fruit Picked fruit Harvested latex	Yarn, carpet Logs, lumber Cheese Sausages, cured hams Thread, clothing Sugar Cured tobacco Tea Wine Processed fruit Palm oil Rubber products

(1)These biological assets meet the definition of bearer plant; therefore, they are within the scope of IAS 16. Nonetheless, the corresponding produce growing, tea leaves, grapes, palm oil fruit and latex is within the scope of IAS 41.

Definitions

IAS 41 includes the following key terms:

a.Agricultural activity: the management of the biological transformation and harvest of biological assets for sale, or for conversion into agricultural produce or into additional biological assets [IAS 41.5];

b.Agricultural produce: the harvested produce of the entity’s biological assets [IAS 41.5];

c.Bearer plant: a living plant that is used in the production or supply of agricultural produce which 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 [IAS 41.5]; bearer plant excludes (a) plants cultivated to be harvested as agricultural produce (e.g. trees grown for use as lumber); (b) 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 (c) annual crops (e.g. maize and wheat) [IAS 41.5A];

d.Biological asset: a living animal or plant [IAS 41.5];

e.Biological transformation: the process of growth, degeneration, production and procreation that change the value or quantity of the biological asset [IAS 41.5];

f.Costs to sell: incremental costs directly attributable to the disposal of an asset (e.g. commissions to brokers and dealers, transfer taxes, duties and fees paid to regulatory agencies or commodity exchanges), excluding the cost of transporting the asset to market, finance costs and income taxes [IAS 41.5];

g.Harvest: the process of produce detaching from a biological asset or the cessation of its life [IAS 41.5];

h.Fair value: the price that would be received to sell an asset or paid to ...