Among the various existing international accounting standards, IAS 41 – Agriculture was the pioneer in covering the primary sector. Thus, this standard introduced a major change in the cost and financial statement models. And this in relation to the companies that operate agricultural activities.
A market is characterized by offering its products and services through various work sectors, from the first to the quaternary. The primary sector is responsible for extracting raw materials or natural resources from the land for other sectors of the economy.
This means that any business that grows commodities or extracts materials from the land is classified as a primary sector business. Therefore, this sector is the first phase of any manufacturing process that encompasses the acquisition of raw materials.
Examples of companies operating in the primary sector range from mining to agriculture, including fishing and oil extraction. In other words, companies in the primary sector are generally those that aim to extract, harvest, and collect natural products from the earth and animal by-products.
Therefore, the reason this sector is called the primary sector is that it serves as the basis for the other sectors and products. After all, the companies that process and pack raw materials are also in the primary sector.
One of the great highlights of the primary sector is agriculture. It is nothing more than the art and science of cultivating soil and raising livestock. Which includes preparing plant and animal products for people to use or to distribute to markets. Therefore, agriculture provides most of the world’s food and textiles.
Due to the importance of the primary sector and especially agriculture, the body responsible for creating and issuing international accounting standards developed IAS 41. The one that is responsible for postulating information and parameters for agriculture
IAS 41 summary
Issued in 2000 and effective for annual periods beginning on or after January 1, 2003, IAS 41 provides information about agriculture. This standard was the first one issued that specifically covers the primary sector and agriculture.
IAS 41 – Agriculture is responsible for prescribing the accounting treatment, presentation of financial statements, and disclosure of what is related to agricultural activity.
Therefore, the objective of this accounting standard is to define accounting for agricultural activity. In other words, the transformation of biological assets, which are the living plants and animals, into agricultural products, which are the products that the company has harvested from its entity’s biological assets;
In addition, the standard generally requires the measurement of biological assets at the lower of fair value for sale. Which shows that it was IAS 41 that introduced a fair value model for agricultural accounting. This was a major change from the traditional cost model that was applied in the primary sector.
The CPC accounting pronouncement that corresponds to IAS 41
The opening of financial and accounting markets was one of the consequences of globalization. Globalization is a term that describes the process of social, political, cultural, and economic integration around the world.
This means that this word shows the growing interdependence that occurs between the world’s economies and populations. All as a consequence of the cross-border trade in goods and services instigated by the economic partnerships that have facilitated these movements.
Economic partnerships can only be established because of the unification and standardization of the accounting language. Thus, all companies, their managers and the market converge on a single standard. This was only possible thanks to the IAS until 2001 and the IFRS after 2001.
In Brazil, several entities have joined together to form the Accounting Pronouncements Committee, or CPC. Created in 2005 through CFC Resolution 1055/05, this committee studies, prepares, and issues technical documents on accounting. In order to disseminate and enable the issuance of standards in this area. And this is to standardize international standards with Brazilian accounting.
There are more than 50 pronouncements and each one is responsible for an important accounting theme. Thus, the one that represents IAS 41 – Agriculture is about biological assets and agricultural products is CPC 29.
CPC 29 – Biological assets and agricultural produce
Approved and issued in 2009, CPC 29 is the Brazilian technical and accounting pronouncement responsible for the accounting treatment and disclosure of agricultural products and biological assets. This happened only after the approval of Law 11.638/07.
Brazil is a country known for its raw materials and for exporting them, as well as its primary sector. Therefore, CPC 29 is of importance in directing and issuing information to the Brazilian rural sector.
And, mainly, after this Brazilian standard, the way of measuring that verified only the loss or profit on the sale of the asset was changed. Since this is the historical cost, it does not have such a reliable value. But then these assets are measured at fair value less cost to sell. Just as IAS 41 states.
Application of IAS 41
IAS 41 applies to biological assets in order to establish the accounting treatment for these assets. And this during their growth, degeneration, production and procreation. It is important to note that a biological asset is a living animal or plant.
IAS 41 – Agriculture is also used for the initial measurement of agricultural products at the point of harvest. Thus, its real application is for:
- Biological goods, such as living plants or animals, for example a tree plantation or orchard, cultivated plants, pigs, sheep and cattle, that relate to their respective agricultural activity. Such as livestock farming, forestry, annual or perennial crops, and fish farming.
- Agricultural products at the point of harvest;
- Government grants related to agricultural assets.
To which assets does IAS 41 not apply?
Even though some assets can be interpreted as biological assets, there are some exceptions to which IAS 41 does not apply. They are:
1. Carrier plants related to agricultural activity(IAS 16);
2. Products result from processing after harvest, for example wool that becomes yarn and grapes that become wine(IAS 2);
3. The land on which biological assets grow, regenerate and/or degenerate (IAS 16, IFRS 16 and IAS 40);
4. Any intangible asset associated with agricultural activity, such as licenses and rights(IAS 38);
5. Agricultural activity that does not have a specific management or standard. One example is the harvesting of ocean fisheries;
6. Minerals, oil, natural gas, and similar non-regenerative resources that are also not covered by an IAS.
What is a carrier plant?
A carrier plant is a living plant that is intended for use in the production or supply of agricultural products. Thus, this type of plant and its plantation has its recognition as property, plant and equipment, because its use is similar to the use of a machine.
In other words, the function of the machine in a company as such is the production of the commodity. And, likewise, the function of the producing plant is the production of agricultural goods. With that, its three main characteristics are:
- They are used in the production or supply of agricultural products;
- They are expected to culminate in products for more than one period;
- They have a remote chance that companies will sell it as agricultural products.
Examples of carrier plants
Carrier plants include tea bushes, grape vines, and rubber trees. Just like a tree plantation that produces coffee beans.
With coffee beans and the other examples, when the plantation produces them, they need the company to recognize them as biological assets up to the point of harvest. From that moment of harvest they become inventories.
When they become inventories, bearer plants are accounted for using IAS 16. So as to accumulate the cost until maturity, and then leave them subject to depreciation and loss.
Thus, the re-evaluation model for carrier plants also applies. And the agricultural products from them are accounted for through IAS 41 and IAS 2.
IAS 16 and bearer plants
One international accounting standard that postulates about bearer plants is IAS 16. Therefore, for a plant to be within the scope of this standard, it must meet the following requirements:
- The plant is expected to carry out the process of producing or supplying agricultural products for more than one accounting period;
- The plantation should produce goods after two months.
- The company expects this planting to have a lifespan of 10 months, after which the land will be used for another purpose.
- The property cannot be sold as agricultural produce;
- Carrier plants should be recognized as inventories.
Recognition under IAS 41
Under IAS 41, for a company to recognize an asset as biological, it must control it as a result of past events. This means that this asset allows for future economic benefits to the company. Just as the fair value, or cost of the asset, is reliably measured.
Thus, IAS 41 specifies the tests and modes for a biological asset or agricultural produce to be recognized in the statement of financial position, which encompasses three issues:
- Control: the company must have ownership or control rights similar to ownership that result from a past event;
- Value: future economic benefits should be generated for the company from its ownership or control of the asset;
- Measurement: the cost or fair value of the asset can be measured reliably.
Measurement of biological assets and agricultural produce under IAS 41
For a biological asset to be accounted for and measured, they must follow IAS 41 and have the following accounting requirements:
- For bearer plants, you should use the accounting demonstrated by the international standard IAS 16;
- The measurement of other biological assets uses the lower fair value costs to sell;
- The measurement of agricultural products at the point of harvest also uses the lower fair value costs to sell;
- Any change in the fair value of the biological assets needs to include its profit or loss;
- The calculation of land-related biological assets is measured separately from the measurement of land.
This means that a biological asset is measured at its initial recognition and at the end of each reporting period. And this by means of its fair value less costs to sell. However, this will not happen if the fair value measurement is not reliable.
In relation to agricultural products, their measurement is at fair value less costs to sell at the point of harvest. However, since the harvested products are a tradable commodity, there is no measurement reliability exception for the products.
Fair value
The fair value of a biological asset or of an agricultural product is characterized by its market price minus costs to sell the product. It should be noted that costs to sell include commissions, transfer taxes, and duties and taxes.
This means that all costs that relate to the biological assets and agricultural produce that IAS 41 shows are measured at fair value. So they are recognized as expenses when incurred, in addition to considering their costs for the purchase of biological assets.
Thus, IAS 41 assumes that fair value is reliably measured for most biological assets. Except that this presumption is rebutted by a biological asset that, when initially recognized, does not have a quoted market price in an active market. That alternative fair value measurements are determined to be absolutely unreliable.
In those cases where fair value is not reliable, the asset is measured at cost less accumulated depreciation and impairment losses. But the company must still measure all its other biological assets at fair and no cost to sell.
If the circumstances of these assets change and their fair value becomes reliable, it will need to be calculated in the same way as the others. At fair value less costs to sell.
Government Grants
IAS 41 also informs about the recognition of government grants. Grants that establish relationships to biological assets that are measured at fair value less costs to sell are identified as income when the grant becomes receivable.
Therefore, conditional grants are distinguished as income only when the conditions attached to the grant are met.
Gains and losses
Every biological asset or agricultural product generates a gain or a loss. Thus, the gain on initial recognition of biological assets at fair cost of sale, and changes in fair value less costs to sell of biological assets during a period, are included in profit or loss.
Also, a gain on initial recognition in the result of harvesting agricultural products at fair value less costs to sell is included in the profit or loss for the period in which it arises.
IAS 41 and its importance for accounting
IAS 41 deals with gains and losses and the inability to measure fair value reliably. It also provides rules for government grants that relate to biological assets. It is therefore extremely important for companies in the primary sector that work with agriculture and the production of agricultural and such assets.
However, this international accounting standard has several points and information that need attention. This makes it essential that a company working in this sector knows about IAS and its information.
Therefore, any of these companies should look for a specialized accounting consulting service. And the goal is to correctly apply all the definitions in IAS 41, especially in relation to the measurement of biological assets and agricultural produce.
The CPCON group is a company that has been offering accounting consulting services to companies for more than ten years. These are not only from Brazil, but from the entire American continent. And these accounting services are wide-ranging, from asset services to assistance with the application of accounting standards. Including IAS 41 and what it postulates for agricultural products and biological assets, and agriculture as a whole.
So contact the CPCON group today to have all your questions answered. All excellent and experienced professionals will help you with any questions and with all the services you need!
