Agriculture

Question 1

Provide an example of a biological asset?

Answer 1

Biological assets would include living animals or plants.

Question 2

How is agricultural produce accounted for once it is harvested?

Answer 2

Up to the point of harvest, agriculture produce is classified in the Agriculture Section of the Handbook. Once the produce is harvested, the standard on Inventory is applicable and the asset would be accounted for as inventory, at lower of cost and net realizable value.

Question 3

What is the definition of a bearer plant?

Answer 3

A bearer plant is defined as follows:\n\n(a) It is used in the production or supply of agricultural produce;\n\n(b) It is expected to bear produce for more than one period; and\n\n(c) It has a remote likelihood of being sold as agricultural produce, except for incidental scrap sales.

Question 4

Give an example of a bearer plant?

Answer 4

Various types of bushes and trees that are planted with the intent that the produce which grows on it will be harvested, would be treated as bearer plants. An apple tree would be a bearer plant.

Question 5

Would a tree grown for its lumber be accounted for under the Agriculture Section of the Handbook?

Answer 5

A tree that is grown for its lumber is essentially harvested for its agriculture produce and is not considered a bearer plant. Therefore, it would fall into the Agriculture Section.

Question 6

If the main purpose of a tree is to supply produce (fruit) and once the tree is no longer able to provide produce, it will be cut down for firewood, how would one account for the tree?

Answer 6

The tree would be a bearer plant, as the primary purpose is to supply produce and it would fall into the PPE Standard of the Handbook. The fact that the tree would eventually be cut down and used for firewood, is considered as “incidental scrap sale” and does not impact the classification of the plant.

Question 7

In what Section of the Handbook does bearer plants fall, Agriculture or PPE?

Answer 7

Bearer plants fall into the PPE Section, IAS 16.

Question 8

In what Section of the Handbook does the produce that grows on bearer plants fall, Agriculture or PPE?

Answer 8

The produce that grows on bearer plants falls into the Agriculture Section of the Handbook, IAS 41.

Question 9

What Handbook section would one apply for government grants that relate to bearer plants, the section on agriculture (IAS 41) or the section on government grants (IAS 20)?

Answer 9

Government grants related to bearer plants should be accounted for in the Accounting for Government Grants Section (IAS 20) and the special rules for government grants related to biological assets do not apply to bearer plants.

Question 10

How does one account for a plant that has dual use - the plant bears produce and the plant is being sold as either a living plant or agricultural produce (beyond incidental scrap sales)?

Answer 10

Plants that have a dual use would not meet the definition of a bearer plant and would therefore not be accounted under IAS 16 (PPE). rather the full plant would be accounted for under IAS 41 (agriculture).

Question 11

How does one account for land used by an entity for agriculture purposes (e.g. the land is being used for farming)?

Answer 11

Land used for agricultural purposes would be accounted for under the PPE Standard (IAS 16).

Question 12

How would land owned by a third party and rented to an entity for agricultural purposes, be accounted for?

Answer 12

The land would be classified as investment property (IAS 40).

Question 13

How does one measure a biological asset?

Answer 13

Biological asset would be measured on initial recognition and at the end of each reporting period at its fair value less costs to sell, except in cases where fair value cannot be measured reliably.

Question 14

Are biological assets depreciated?

Answer 14

No

Question 15

Provide examples of what would be included in “costs to sell” and what costs would not be included in “costs to sell” when measuring a biological asset?

Answer 15

Costs to sell include incremental costs such as commissions, fees etc. Allocated costs would not be included. Costs to sell would also exclude finance costs and income taxes.

Question 16

When is it not appropriate to use fair value for agriculture assets?

Answer 16

The normal presumption is that fair value can be used to measure biological assets. However, this presumption can be rebutted only on initial recognition, if market prices or values are not available andalternative estimates of fair value are clearly unreliable.

Question 17

How should one account for a biological asset when fair value is not used?

Answer 17

The asset should be measured at cost and depreciation should be taken, similar to PPE.

Question 18

Are there situations where one would measure an agriculture asset at cost over the duration of its life?

Answer 18

Yes, assuming that the fair market value is not available or market prices are unreliable over the duration of the asset’s life. However, if at some point fair market value becomes reliable, the measurement basis should change to fair value less costs to sell.

Question 19

Can an entity value a biological asset at fair value less costs to sell and the later change the accounting to the cost method?

Answer 19

No Once an asset is measured based on fair value less costs to sell, the entity continues to use this basis until disposal (similar to investment property).

Question 20

What is the journal entry if a new born calf has a value of $100 and the cost to sell is $3?

Answer 20

The journal entry is:\n\nDr. Biological asset (calf) $97\n\nCr. Fair value gain on initial recognition of biological asset $97\n\n

Question 21

What is the journal entry if a new cow is purchased for $200 and the cost to sell is $7?

Answer 21

The journal entry is:\n\nDr. Biological asset (cow) $193\n\nDr. Fair value loss on initial recognition of biological asset $7\n\nCr. Cash $200\n\nThere is a loss because of the costs to sell which are deducted in determining fair value of the asset.

Question 22

How does one account for an agricultural grant that contains a condition that the land not be worked on for a period of 3 years?

Answer 22

A conditional grant related to agriculture can only be recognized when the conditions attached to the grant are met. Therefore, in this case the grant could only be recognized at the end of 3 years.

Question 23

How does an agricultural grant differ from a standard grant that falls into the Accounting for Government Grants Section IAS 20?

Answer 23

In IAS 20, a conditional grant can be recognized as long as there is reasonable assurance that the conditions will be met, similar to any accrual. In IAS 41, Agriculture, a conditional grant can only be recognized once all of the conditions are met.

Question 24

ABC owns a mango plantation. During the year ABC harvested 100,000 mangos. At the date of harvest the market value per mango was $0.21 and the incremental cost to sell the mangos was $0.01 per mango. ABC Inc. however sells the mangos through forward contracts. ABC Inc, entered into a forward contract to sell all of its harvest produced during the year for $0.18 a mango (net of selling costs). During the year 80,000 mangos were sold and the remainder were in inventory at year end. What is the balance sheet amount for the mangos and the impact on the income statement, if any, for those mangos which had not yet been sold by year end?

Answer 24

Given that ABC harvested 100,000 mangos during the year, there would have been 20,000 mangos in inventory at year end. At the time of harvest the mangos had a fair value less costs to sell of $0.20 ($0.21 - $0.01) so the value was $4,000. Note that under IAS 41 an entity specific value is not used, so the price in the forward contract would not be used. Hence at the date of harvest when the mangos are classified as inventory, they would have been valued at $4,000 (i.e. $4,000 is the initial cost base of the inventory).\n\nAs at year end, the mangos would be valued at the lower of cost and NRV. For the purpose of determining the NRV, the forward contract would be taken into account as NRV is an entity-specific value. Based on the forward contract the NRV is 20,000 mangos X $0.18 which equals $3,600. Hence based on valuing the inventory at the lower of cost and NRV the mango inventory at year end would be valued at $3,600 and there would be a writedown of $4,000 less $3,600 which equals $400.

Question 25

Wheatco Inc (WI) grows wheat on a farm in Saskatchewan. WI grew wheat during the first quarter; the fair value less cost to sell of the wheat at the end of the first quarter amounted to $60,000. By the end of the second quarter, the wheat had not yet been harvested and the value of the wheat based on wheat prices in the market in which the wheat is sold was $100,000. Transportation costs to bring the wheat to market is $1,000 and selling costs include a commission of 5% of the price of the wheat and transfer taxes of 2% of the price of the wheat. Selling costs also include an additional $300 which is based on a pro-ration of the $80,000 annual salary of the WI?s general manager, given that one of his responsibilities is sales. What is the amount at which the wheat would be measured on the balance sheet at the end of the second quarter and the gain that would be recognized in the income statement during the second quarter?

Answer 25

The wheat at the end of the second quarter would be measured based on fair value less the incremental costs to sell the wheat. The calculations would be as follows:\n\nThe fair value of wheat at a farm is the price for the wheat in the wheat market in which it is sold, less the transportation costs of getting the wheat to that market. Accordingly the fair value would amount to $100,000 less $1,000 equals $99,000. The costs to sell amount to commission of 5% of the fair value of the price of the wheat which amounts to $5,000 (i.e. $100,000 X 5%) plus transfer taxes of 2% of the price of the wheat which amounts to $2,000 (i.e. $100,000 x 2%) for a total of $7,000 of incremental selling costs. One would not deduct the pro-ration of the salary of the general manager as a selling cost as it is not incremental. Hence the fair value less cost to sell at the end of the first quarter would amount to:\n\nFair value of wheat of $99,000 less incremental selling costs of $7,000 equals $92,000.\n\nThe gain in the financial statements would be based on the fair value less costs to sell at the end of the second quarter of $92,000 and the fair value less costs to sell at the beginning of the second quarter of $60,000, which results in a gain during the second quarter of $32,000.\n\n

Question 26

Is wine considered agricultural produce and classified in the Agriculture Section of the Handbook?

Answer 26

No - The Agriculture Standard is applied to agricultural produce, which is the harvested product of the entity’s biological assets, only at the point of harvest. After harvested, the inventory section is applied. Vines are considered the biological asset and the grapes while on the vine are the agricultural produce covered by the standard. Wine is the product that is the result of processing after harvest, and would typically be inventory.

Question 27

Can biological assets or agricultural produce be grouped together in determining their fair value measurement?

Answer 27

Yes - Biological assets or agricultural produce may be grouped by age or quality to help determine fair value.

Question 28

Is a future contract to sell biological assets or agricultural produce relevant in determining fair value measurement?

Answer 28

No - Future contracts are not necessarily relevant in helping to determine fair value, as fair value should reflect current market conditions in which buyers and sellers would enter into a transaction.

Question 29

Would cost ever approximate fair value for a biological asset?

Answer 29

Yes - Cost may sometimes approximate fair value, particularly when there has been little biological transformation since initial cost or the impact of the biological transformation on price is not expected to be material.