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ACTG 6580

ACTG 6580. Chapter 17. Agriculture. Objectives. Introduction to IAS 41 including scope and key definitions Accounting treatment before and after harvest Accounting treatment before and after harvest Recognition criteria and fair value for biological assets & agricultural produce.

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ACTG 6580

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  1. ACTG 6580 Chapter 17 Agriculture

  2. Objectives • Introduction to IAS 41 including scope and key definitions • Accounting treatment before and after harvest • Accounting treatment before and after harvest • Recognition criteria and fair value for biological assets & agricultural produce

  3. Objectives • Examine the interaction between IAS 41 & IASs 16, 17, 20 & 40 • Describe the disclosure requirements of IAS 41 • The interaction between IFRS 13 and IAS 41

  4. Introduction to IAS 41 • IAS 41 Agriculture issued in 2001 • Industry specific standard • Industry considered to have enough unique issues to result in a separate standard • Emerging industry • Continues to be controversial

  5. Scope of IAS 41 • Applies to accounting for: • Biological assets • Agricultural produce at the point of harvest • Related government grants • Does not apply to the following assets related to agricultural activity: • Land • Intangibles

  6. Definitions • Agricultural activity – the management by an entity of the transformation of biological assets for sale, into agricultural produce, or into additional biological assets • Biological asset – a living animal or plant • Biological transformation – the processes of growth, degeneration, production and procreation that cause qualitative or quantitative changes in a biological asset • Harvest – the detachment of produce from a biological asset or the cessation of a biological assets life processes

  7. IAS 41 – Objective and Scope

  8. The Harvest Distinction

  9. The Recognition Criteria for Biological Assets & Agricultural Produce • The following must be met before a biological asset or agricultural produce can be recognized: • The entity controls the asset as a result of past events • It is probable that future economic benefits associated with the asset will flow to the entity • The fair value or cost can be reliably measured • Control can often be problematic – e.g. a vineyard may be owned by one entity but managed by another • Control determined by consideration of legal ownership and determining which party bears the risks and rewards of ownership

  10. 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 • Measured each balance sheet date • 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

  11. Fair Value Not Available • This fair value assumption can only be rebutted: • On initial recognition of a biological asset • Where market determined prices are not available and alternative estimates are clearly unreliable • In such cases the asset may be measured at cost less accumulated depreciation and impairment losses • Once fair value is able to be determined then it shall be applied

  12. Applying the Fair Value Measurement Requirement • IAS 41 para 15-25 notes the following: • Assets may be grouped according to significant attributes such as age or quality • Contract prices are not necessarily relevant as they may not represent current market value • If an entity has access to two different markets, the active market price should be based on the most relevant one

  13. FMV - No Active Market • 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

  14. FMV - No Active Market • 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

  15. Gains and Losses • IAS 41 requires the following gains and losses to be included in profit or loss for the period: • Biological assets - gains on initial recognition (eg when an animal is born) and gains and losses due to subsequent changes in fair value • Agricultural produce - gains on initial recognition at point of harvest • It is common for companies to separately disclose the fair value movements attributable to agricultural assets • Separate disclosure made either on the face of the Statement of Comprehensive Income or in the Notes to the financial statements

  16. Government Grants • Where biological assets are measured at fair value and a government grant is received, the grant is accounted for under IAS 41 • Treatment depends on whether the grant is conditional or unconditional • Unconditional grants are recognized as income when the grant becomes receivable • Conditional grants are recognized as income when the conditions attaching to the grant are met • IAS 20 applies if the assets are not accounted for at fair value

  17. Interaction Between IAS 41, IAS 16, IAS 40, & IAS 17

  18. Interaction Between IAS 41, IAS 16 IAS 40 & IAS 17

  19. Disclosures • IAS 41 para 40-57 provide disclosure requirements grouped under three sections: • General • Additional disclosures for biological assets where fair value cannot be measured reliably • Government grants

  20. The Interaction Between IFRS 13 & IAS 41 • IFRS 13 requires use of “principal market” or “the most advantageous market” • IAS 41 requires use of “most relevant market” • In practice the same market as IFRS 13 • Overall IFRS 13 is not expected to result in significant changes to the application of IAS 41

  21. Homework • Exercises 17.3, 17.6, 17.7 • DUE THURSDAY, DECEMBER 12

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