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Biological assets and how IAS 41 requires them to be treated in the financial statements.

Agriculture is one of the world’s largest industry. In some countries it is the mainstay of the gross domestic product. Yet until January 2003 when the IASB issued IAS 41 Agriculture, no major accounting standard setting body had issued a comprehensive pronouncement on this topic. IAS 41 introduced what some would say are radical changes in the way agricultural enterprises should account for biological assets.

IAS 41 Agriculture, define a biological asset as a living plant or animal Treatment

IAS 41 Agriculture prescribes the accounting treatment of agricultural activity. This relates to the transformation of biological assets (living animals and plants) into agricultural produce for sale or additional biological assets. Examples of biological assets are animals (livestock) such as sheep for wool and food production, or plants for crop such as cotton, sugar, tea, or timber (from forestry). Biological transformation occurs through natural growth procreation (breeding), production (milk) or degeneration (age). These cause qualitative or quantitative changes in a biological asset. The Standard only applies to the agricultural produce to the point of harvest, thereafter the produce is accounted under IAS 2 Inventory.

The two main accounting models are based on historical costs or fair values. Under the more traditional historical costing model the effects of biological transformation are not recognized when they occur, but at a later date, usually when they are realized. For some types of agriculture, for example growth of timber, this can take many years. If the revenues are recognized only at the end of the biological transformation, and the costs are incurred throughout the period, there is no matching (accruals principle) of costs and revenues.

The fair value model does not apply to agricultural land. This should continue to be accounted under IAS 16 Property, plant and equipment or IAS 40 Investment property. Both of these standards allow the use of the cost based value or the current (fair value) model.

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