Introduction and the Framework


IAS 41 defines the following terms



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IAS 41 defines the following terms:

  • IAS 41 defines the following terms:
  • Agricultural activity is 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
  • Agricultural produce is the harvested product of the entity’s biological assets
  • A biological asset is 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
  • A group of biological assets is an aggregation of similar living animals or plants
  • Harvest is the detachment of produce from a biological asset or the cessation of a biological asset’s life processes

Biological assets are recognized when:

  • IAS 41 – Recognition and Measurement
  • Biological assets are recognized when:
    • Entity controls the asset as a result of past events
    • Future economic benefits are probable and
    • Fair value or cost is reliably measurable

As biological assets grow and mature through biological transformation, they increase in value

  • IAS 41 – Recognition and Measurement
  • As biological assets grow and mature through biological transformation, they increase in value
  • Biological assets are measured at fair value less estimated costs to sell on initial recognition, unless fair value cannot be reliably measured
    • Costs to sell include commissions, taxes, and duties
  • Agricultural produce is measured at fair value less estimated costs to sell at the point of harvest. Where fair value is used, assets are remeasured at each reporting date

Fair value is felt to be the most relevant measure since many of these assets trade in active markets and therefore objective information on their current value is available

  • IAS 41 – Recognition and Measurement
  • Fair value is felt to be the most relevant measure since many of these assets trade in active markets and therefore objective information on their current value is available
  • Market values are more reliable and relevant than cost figures, which may be inconsistently accumulated from entity to entity due to differing choices regarding allocations
  • In general, fair value is determined by reference to a market price if an active market exists for the asset in its present location and condition
  • An active market is a market where the items traded are homogeneous and there are buyers and sellers and publicly available prices

Where an active market does not exist or where markets

  • IAS 41 – Recognition and Measurement
  • Where an active market does not exist or where markets
  • do not exist at all, the entity would do the following in attempting
  • to estimate fair value:
  • 1. First, try to estimate current market prices by looking at the prices of recent market transactions, market prices for similar assets, or sector benchmarks such as the price of cattle expressed by weight
  • 2. Second, if market-determined prices are not available for assets in their present condition, use a discounted cash flow approach to measure the value
    • This need not be carried out by an independent valuator
  • Cost may be close to fair value if there has been little or immaterial biological transformation

When using a discounted cash flow approach, the

  • IAS 41 – Recognition and Measurement
  • When using a discounted cash flow approach, the
  • entity would:
  • • Use a market-determined discount rate
  • • Exclude cash flows for financing, taxation, or replacing the asset after
  • harvest
  • • Incorporate risk by either using probability weighted cash flows or
  • adjusting the discount rate or some combination of the two; and
  • • Ensure assumptions for calculating the discount rate are consistent with
  • calculating the cash flows to avoid double-counting
  • Where the biological assets are attached to land, the fair value of the land and assets would be measured, and then the value of the land would be deducted since land is not covered by this standard

Contracts:

  • IAS 41 – Recognition and Measurement
  • Contracts:
  • If the entity has entered into a contract to sell the assets at a future date, the price fixed in the contract does not necessarily dictate the fair value since the contract price reflects an estimate of the future fair value and therefore includes a time value factor
  • In addition, the locked-in contract price may be higher or lower than the fair value at any point in time (spot price) due to changing market conditions and expectations
  • Where an entity has locked into a price to sell the assets at a price less than the current fair value, this would be reflected in the statements as an onerous contract and IAS 37 would apply

Costs related to the biological transformation process:

  • IAS 41 – Recognition and Measurement
  • Costs related to the biological transformation process:
    • May include planting, weeding, fertilizing, and others
    • Some feel that it is inconsistent to capitalize these costs in a fair value model and that they should be expensed
    • Others feel that they should be capitalized and only the net amount should be recognized as gain or loss in the statement of profit and loss
  • Gains and losses:
    • Gains or losses are recognized in income when they arise
    • This may result in a gain or loss arising upon initial recognition such as the birth of a calf


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