(a) the nature and extent of government grants recognised in the financial statements;
(b) unfulfilled conditions and other contingencies attaching to government grants; and
(c) significant decreases expected in the level of government grants.
Effective date and transition____________________________________________________
58 This Standard becomes operative for annual financial statements covering periods beginning on or after 1 January 2003. Earlier application is encouraged. If an entity applies this Standard for periods beginning before 1 January 2003, it shall disclose that fact.
59 This Standard does not establish any specific transitional provisions. The adoption of this Standard is accounted for in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors.
Appendix
Illustrative examples
This appendix, which was prepared by the IASC staff but was not approved by the IASC Board, accompanies, but is not part of, IAS 41.
A1 Example 1 illustrates how the disclosure requirements of this Standard might be put into practice for a dairy farming entity. This Standard encourages the separation of the change in fair value less estimated point-of-sale costs of an entity’s biological assets into physical change and price change. That separation is reflected in Example 1. Example 2 illustrates how to separate physical change and price change.
A2 The financial statements in Example 1 do not conform to all of the disclosure and presentation requirements of other Standards. Other approaches to presentation and disclosure may also be appropriate.
Example 1 XYZ Dairy Ltd_______________________________________________________
Balance sheet
XYZ Dairy Ltd | Notes | 31 December | 31 December |
Balance sheet | | 20X1 | 20X0 |
ASSETS | | | | |
Non-current assets | | | | |
Dairy livestock - immature(a) | | 52,060 | | 47,730 |
Dairy livestock - mature(a) | | 372,990 | | 411,840 |
Subtotal - biological assets | 3 | 425,050 | | 459,570 |
Property, plant and equipment | | 1,462,650 | | 1,409,800 |
Total non-current assets | | 1,887,700 | | 1,869,370 |
Current assets | | | | |
Inventories | | 82,950 | | 70,650 |
Trade and other receivables | | 88,000 | | 65,000 |
Cash | | 10,000 | | 10,000 |
Total current assets | | 180,950 | | 145,650 |
Total assets | | 2,068,650 | | 2,015,020 |
EQUITY AND LIABILITIES | | | | |
Equity | | | | |
Issued capital | | 1,000,000 | | 1,000,000 |
Accumulated profits | | 902,828 | | 865,000 |
Total equity | | 1,902,828 | | 1,865,000 |
Current liabilities | | | | |
Trade and other payables | | 165,822 | | 150,020 |
Total current liabilities | | 165,822 | | 150,020 |
Total equity and liabilities | | 2,068,650 | | 2,015,020 |
(a) An entity is encouraged, but not required, to provide a quantified description of each group of biological assets, distinguishing between consumable and bearer biological assets or between mature and immature biological assets, as appropriate. An entity discloses the basis for making any such distinctions.
Income statement*
______________________________________
* This income statement presents an analysis of expenses using a classification based on the nature of expenses. IAS 1 Presentation of Financial Statements requires that an entity present, either on the face of the income statement or in the notes, an analysis of expenses using a classification based on either the nature of expenses or their function within the entity. IAS 1 encourages presentation of an analysis of expenses on the face of the income statement.
XYZ Dairy Ltd Income statement | Notes | Year ended 31 December 20X1 |
Fair value of milk produced | | 518,240 |
Gains arising from changes in fair value less estimated point-of-sale costs of dairy livestock | 3 | 39,930 |
| | 558,170 |
Inventories used | | (137,523) |
Staff costs | | (127,283) |
Depreciation expense | | (15,250) |
Other operating expenses | | (197,092) |
| | (477,148) |
Profit from operations | | 81,022 |
Income tax expense | | (43,194) |
Profit for the period | | 37,828 |
Statement of changes in equity*
____________________________
* This is one of several formats for the statement of changes in equity permitted by IAS 1.
XYZ Dairy Ltd Statement of changes in equity | Year ended 31 December 20X1 |
Balance at 1 January 20X1 Profit for the period | Share capital 1,000,000 | | Accumulated profits 865,000 37,828 | | Total 1,865,000 37,828 |
Balance at 31 December 20X1 | 1,000,000 | | 902,828 | | 1,902,828 |
Cash flow statement†
________________________
† This cash flow statement reports cash flows from operating activities using the direct method. IAS 7 Cash Flow Statements requires that an entity report cash flows from operating activities using either the direct method or the indirect method. IAS 7 encourages use of the direct method.
XYZ Dairy Ltd Cash flow statement | Notes | Year ended 31 December 20X1 |
Cash flows from operating activities | | | |
Cash receipts from sales of milk | | 498,027 | |
Cash receipts from sales of livestock | | 97,913 | |
Cash paid for supplies and to employees | | (460,831) | |
Cash paid for purchases of livestock | | (23,815) | |
| | 111,294 | |
Income taxes paid | | (43,194) | |
Net cash from operating activities | | 68,100 | |
Cash flows from investing activities | | | |
Purchase of property, plant and equipment | | (68,100) | |
Net cash used in investing activities | | (68,100) | |
Net increase in cash | | 0 | |
Cash at beginning of period | | 10,000 | |
Cash at end of period | | 10,000 | |
Notes
1 Operations and principal activities
XYZ Dairy Ltd (‘the Company’) is engaged in milk production for supply to various customers. At 31 December 20X1, the Company held 419 cows able to produce milk (mature assets) and 137 heifers being raised to produce milk in the future (immature assets). The Company produced 157,584 kg of milk with a fair value less estimated point-of-sale costs of 518,240 (that is determined at the time of milking) in the year ended 31 December 20X1.
2 Accounting policies
Livestock and milk
Livestock are measured at their fair value less estimated point-of-sale costs. The fair value of livestock is determined based on market prices of livestock of similar age, breed, and genetic merit. Milk is initially measured at its fair value less estimated point-of-sale costs at the time of milking. The fair value of milk is determined based on market prices in the local area.
3 Biological assets
Reconciliation of carrying amounts of dairy livestock | 20X1 |
Carrying amount at 1 January 20X1 | 459,570 |
Increases due to purchases | 26,250 |
Gain arising from changes in fair value less estimated point-of-sale costs attributable to physical changes* | 15,350 |
Gain arising from changes in fair value less estimated point-of-sale costs attributable to price changes* | 24,580 |
Decreases due to sales | (100,700) |
Carrying amount at 31 December 20X1 | 425,050 |
________________________
* Separating the increase in fair value less estimated point-of-sale costs between the portion attributable to physical changes and the portion attributable to price changes is encouraged but not required by this Standard.
4 Financial risk management strategies
The Company is exposed to financial risks arising from changes in milk prices. The Company does not anticipate that milk prices will decline significantly in the foreseeable future and, therefore, has not entered into derivative or other contracts to manage the risk of a decline in milk prices. The Company reviews its outlook for milk prices regularly in considering the need for active financial risk management.
Example 2 Physical change and price change_______________________________________
The following example illustrates how to separate physical change and price change. Separating the change in fair value less estimated point-of-sale costs between the portion attributable to physical changes and the portion attributable to price changes is encouraged but not required by this Standard.
A herd of 10 2 year old animals was held at 1 January 20X1. One animal aged 2.5 years was purchased on 1 July 20X1 for 108, and one animal was born on 1 July 20X1. No animals were sold or disposed of during the period. Per-unit fair values less estimated point-of-sale costs were as follows: |
2 year old animal at 1 January 20X1 | 100 |
Newborn animal at 1 July 20X1 | 70 |
2.5 year old animal at 1 July 20X1 | 108 |
Newborn animal at 31 December 20X1 | 72 |
0.5 year old animal at 31 December 20X1 | 80 |
2 year old animal at 31 December 20X1 | 105 |
2.5 year old animal at 31 December 20X1 | 111 |
3 year old animal at 31 December 20X1 | 120 |
Fair value less estimated point-of-sale costs of herd at 1 January 20X1 (10 x 100) | 1,000 |
Purchase on 1 July 20X1 (1 x 108) | 108 |
Increase in fair value less estimated point-of-sale costs due to price change: | |
| 10 × (105 - 100) | 50 | | |
| 1 × (111 - 108) | 3 | | |
| 1 × (72 - 70) | 2 | | 55 |
Increase in fair value less estimated point-of-sale costs due to physical change: | | | |
10 × (120 - 105) | 150 | | |
1 × (120 - 111) | 9 | | |
1 × (80 - 72) | 8 | | |
1 × 70 | 70 | | 237 |
Fair value less estimated point-of-sale costs of herd at 31 December 20X1 | | | |
11 × 120 | 1,320 | | |
1 × 80 | 80 | | 1,400 |
| |
IAS 41 BC
Contents | paragraphs |
BASIS FOR CONCLUSIONS ON IAS 41 AGRICULTURE | |
BACKGROUND | B1-B2 |
THE NEED FOR AN INTERNATIONAL ACCOUNTING STANDARD ON AGRICULTURE | B3-B7 |
SCOPE | B8-B12 |
MEASUREMENT | B41-B40 |
Biological assets | B13-B40 |
Fair value versus cost | B13-B21 |
Treatment of point-of-sale costs | B22-B26 |
Hierarchy in fair value measurement | B27-B31 |
Frequency of fair value measurement | B32 |
Independent valuation | B33 |
Inability to measure fair value reliably | B34-B37 |
Gains and losses | B38-B40 |
Agricultural produce | B41-B46 |
Sales contracts | B47-B54 |
Land related to agricultural activity | B55-B57 |
Intangible assets | B58-B60 |
SUBSEQUENT EXPENDITURE | B61-B62 |
GOVERNMENT GRANTS | B63-B73 |
DISCLOSURE | B74-B81 |
Separate disclosure of physical and price changes | B74-B77 |
Disaggregation of the gain or loss | B78-B79 |
Other disclosures | B80-B81 |
SUMMARY OF CHANGES TO E65 | B82 |
Basis for Conclusions on IAS 41 Agriculture
This appendix, which was prepared by the IASC Staff but was not approved by the IASC Board, summarises the Board’s reasons for:
(a) initiating and proposing an International Accounting Standard on agriculture; and
(b) accepting or rejecting certain alternative views.
Individual Board members gave greater weight to some factors than to others.
Background__________________________________________________________________
B1 In 1994, the IASC Board (the ‘Board’) decided to develop an International Accounting Standard on agriculture and appointed a Steering Committee to help define the issues and develop possible solutions. In 1996, the Steering Committee published a Draft Statement of Principles (‘DSOP’) setting out the issues, alternatives, and the Steering Committee’s proposals for resolving the issues and inviting public comment. In response, 42 comment letters were received. The Steering Committee reviewed the comments, revised certain of its recommendations, and submitted them to the Board.
B2 In July 1999, the Board approved Exposure Draft E65 Agriculture with a comment deadline of 31 January 2000. The Board received 62 comment letters on E65. They came from various international organisations, as well as from 28 individual countries. In April 2000, the IASC Staff sent a questionnaire to entities that undertake agricultural activity in an attempt to determine the reliability of the fair value measurement proposed in E65 and received 20 responses from 11 countries. In December 2000, after considering the comments on E65 and responses to the questionnaire, the Board approved IAS 41 Agriculture (the Standard). Paragraph B82 below summarises the changes that the Board made to E65 in finalising the Standard.
The need for an International Accounting Standard on agriculture_______________________
B3 A main objective of the IASC is to develop International Accounting Standards that are relevant in the general purpose financial statements of all businesses. While most International Accounting Standards apply to entities in all activities, some International Accounting Standards, for example IAS 30 Disclosures in the Financial Statements of Banks and Similar Financial Institutions* and IAS 40 Investment Property, deal with issues that arise in particular activities. IASC has also undertaken industry-specific projects on insurance and extractive industries.
_________________________
* In August 2005, IFRS 7 Financial Instruments: Disclosures superseded IAS 30.
B4 Diversity in accounting for agricultural activity has occurred because:
(a) prior to the development of the Standard, assets related to agricultural activity and changes in those assets were excluded from the scope of International Accounting Standards:
(i) IAS 2 Inventories excluded ‘producers’ inventories of livestock, agricultural and forest products... to the extent that they are measured at net realisable value in accordance with well established practices in certain industries’;
(ii) IAS 16 Property, Plant and Equipment did not apply to ‘forests and similar regenerative natural resources’;
(iii) IAS 18 Revenue did not deal with revenue arising from ‘natural increases in herds, and agricultural and forest products’; and
(iv) IAS 40 Investment Property did not apply to ‘forests and similar regenerative natural resources’;
(b) accounting guidelines for agricultural activity developed by national standard setters have, in general, been piecemeal, developed to resolve a specific issue related to a form of agricultural activity of significance to that country; and
(c) the nature of agricultural activity creates uncertainty or conflicts when applying traditional accounting models, particularly because the critical events associated with biological transformation (growth, degeneration, production, and procreation) that alter the substance of biological assets are difficult to deal with in an accounting model based on historical cost and realisation.
B5 Most business organisations involved in agricultural activity are small, independent, cash and tax focused, family-operated business units, often perceived as not being required to produce general purpose financial statements. Some believe that because of this an International Accounting Standard on agriculture would not have widespread application. However, even small agricultural entities seek outside capital and subsidies, particularly from banks or government agencies, and these capital providers increasingly request financial statements. Moreover, an international trend towards deregulation, an increasing number of cross-border listings and more investment have resulted in increasing scale, scope, and commercialism of agricultural activity. This has created a greater need for financial statements based on sound and generally accepted accounting principles. For the above reasons, in 1994 the Board added to its agenda a project on agriculture.
B6 The DSOP specifically asked for views on the feasibility of developing a comprehensive International Accounting Standard on agriculture. Some commentators felt that the diversity of agricultural activity prevents the development of a single International Accounting Standard on accounting for all agricultural activities. Others said that different principles should attach to agricultural activity with short and long production cycles. Some cited the need to develop International Accounting Standards that are simple to apply and broad in application. Commentators on the DSOP also noted that agriculture is a significant industry in many countries, particularly in developing and newly industrialised countries. In many such countries it is the most important industry.
B7 After considering the comments on the DSOP, the Board reaffirmed its conclusion that an International Accounting Standard is needed. The Board believes that the principles set forth in the Standard have wide application and provide a clear set of principles.
Scope_______________________________________________________________________
B8 The Standard prescribes, among other things, the accounting treatment for biological assets and for the initial measurement of agricultural produce harvested from an entity’s biological assets at the point of harvest. However, the Standard does not deal with the processing of agricultural produce after harvest, since the Board did not consider it appropriate to undertake a partial revision of IAS 2 Inventories which deals with the accounting treatment for inventories under the historical cost system*. The processing after harvest is accounted for under IAS 2 or another applicable International Accounting Standard (for example, if an entity harvests logs and decides to use them for constructing its own building, IAS 16 Property, Plant and Equipment is applied in accounting for the logs).
____________________
* The term ‘historical cost system’ is no longer applicable owing to revisions made to IAS 2 in December 2003.
B9 Some may think of such processing as agricultural activity, particularly if it is done by the same entity that developed the agricultural produce (for example, the processing of grapes into wine by a vintner who has grown the grapes). While such processing may be a logical and natural extension of agricultural activity, and the events taking place may bear some similarity to biological transformation, such processing is not included within the definition of agricultural activity in the Standard.
B10 In particular, the Board considered whether to include circumstances where there is a long ageing or maturation process after harvest (for example, for wine production from grapes and cheese production from milk) in the scope of the Standard. Those who believe that the Standard should cover such processing argue that:
(a) such a long ageing or maturation process is similar to biological transformation and fundamental to assessing the performance of an entity; and
(b) many agricultural entities are vertically integrated and involved in, for example, producing both grapes and wine.
B11 The Board decided not to include such circumstances in the scope of the Standard because of concerns about difficulties in differentiating them from other manufacturing processes (such as conversion of raw materials into marketable inventories as defined in IAS 2). The Board concluded that the requirements in IAS 2 or another applicable International Accounting Standard would be suited to accounting for such processes.
B12 The Board also considered whether to deal with contracts for the sale of a biological asset or agricultural produce and government grants related to agricultural activity in the Standard. These issues are discussed below (see paragraphs B47-54 and B63-73).
Measurement________________________________________________________________
Biological assets
Fair value versus cost
B13 The Standard requires an entity to use a fair value approach in measuring its biological assets related to agricultural activity as proposed in the DSOP and E65, except for cases where the fair value cannot be measured reliably on initial recognition.
B14 Those who support fair value measurement argue that the effects of changes brought about by biological transformation are best reflected by reference to the fair value changes in biological assets. They believe that fair value changes in biological assets have a direct relationship to changes in expectations of future economic benefits to the entity.
B15 Those who support fair value measurement also note that the transactions entered into to effect biological transformation often have only a weak relationship with the biological transformation itself and, thus, a more distant relationship to expected future economic benefits. For example, patterns of growth in a plantation forest directly affect expectations of future economic benefits but differ markedly, in timing, from patterns of cost incurrence. No income might be reported until first harvest and sale (perhaps 30 years) in a plantation forestry entity using a transaction-based, historical cost accounting model. On the other hand, income is measured and reported throughout the period until initial harvest if an accounting model is used that recognises and measures biological growth using current fair values.
B16 Further, those who support fair value measurement cite reasons for concluding that fair value has greater relevance, reliability, comparability, and understandability as a measurement of future economic benefits expected from biological assets than historical cost, including:
(a) many biological assets are traded in active markets with observable market prices. Active markets for these assets provide a reliable measure of market expectations of future economic benefits. The presence of such markets significantly increases the reliability of market value as an indicator of fair value;
(b) measures of the cost of biological assets are sometimes less reliable than measures of fair value because joint products and joint costs can create situations in which the relationship between inputs and outputs is ill-defined, leading to complex and arbitrary allocations of cost between the different outcomes of biological transformation. Such allocations become even more arbitrary if biological assets generate additional biological assets (offspring) and the additional biological assets are also used in the entity’s own agricultural activity;
(c) relatively long and continuous production cycles, with volatility in both the production and market environment, mean that the accounting period often does not depict a full cycle. Therefore, period-end measurement (as opposed to time of transaction) assumes greater significance in deriving a measure of current period financial performance or position. The less significant current year harvest is in relation to total biological transformation, the greater the significance of period-end measures of asset change (growth and degeneration). In relatively high turnover, short production cycle, highly controlled agricultural systems (for example, broiler chicken or mushroom production) in which the majority of biological transformation and harvesting occurs within a year, the relationship between cost and future economic benefits appears more stable. This apparent stability does not alter the relationship between current market value and future economic benefits, but it makes the difference in measurement method less significant; and
(d) different sources of replacement animals and plants (home-grown or purchased) give rise to different costs in a historical cost approach. Similar assets should give rise to similar expectations with regard to future benefits. Considerably enhanced comparability and understandability result when similar assets are measured and reported using the same basis.
B17 Those who oppose measuring biological assets at fair value believe there is superior reliability in cost measurement because historical cost is the result of arm’s length transactions, and therefore provides evidence of an open-market value at that point in time, and is independently verifiable. More importantly, they believe fair value is sometimes not reliably measurable and that users of financial statements may be misled by presentation of numbers that are indicated as being fair value but are based on subjective and unverifiable assumptions. Information regarding fair value can be provided other than in a single number in the financial statements. They believe the scope of the Standard is too broad. They also argue that:
(a) market prices are often volatile and cyclical and not appropriate as a basis of measurement;
(b) it may be onerous to require fair valuation at each balance sheet date, especially if interim reports are required;
(c) the historical cost convention is well established and commonly used. The use of any other basis should be accompanied by a change in the IASC Framework for the Preparation and Presentation of Financial Statements (the ‘Framework’). For consistency with other International Accounting Standards and other activities, biological assets should be measured at their cost;
(d) cost measurement provides more objective and consistent measurement;
(e) active markets may not exist for some biological assets in some countries. In such cases, fair value cannot be measured reliably, especially during the period of growth in the case of a biological asset that has a long growth period (for example, trees in a plantation forest);
(f) fair value measurement results in recognition of unrealised gains and losses and contradicts principles in International Accounting Standards on recognition of revenue; and
(g) market prices at a balance sheet date may not bear a close relationship to the prices at which assets will be sold, and many biological assets are not held for sale.
B18 The Framework is neutral with respect to the choice of measurement basis, identifying that a number of different bases are employed to different degrees and in varying combinations, though noting that historical cost is most commonly adopted. The alternatives specifically identified are historical cost, current cost, realisable value, and present value. Precedents for fair value measurement exist in other International Accounting Standards.
B19 The Board concluded that the Standard should require a fair value model for biological assets related to agricultural activity because of the unique nature and characteristics of agricultural activity. However, the Board also concluded that, in some cases, fair value cannot be measured reliably. Some respondents to the questionnaire, as well as some commentators on E65, expressed significant concern about the reliability of fair value measurement for some biological assets, arguing that:
(a) active markets do not exist for some biological assets, in particular for those with a long growth period;
(b) present value of expected net cash flows is often an unreliable measure of fair value due to the need for, and use of, subjective assumptions (for example, about weather); and
(c) fair value cannot be measured reliably prior to harvest.
Some commentators on E65 suggested that the Standard should include a reliability exception for cases where no active market exists.
B20 The Board decided there was a need to include a reliability exception for cases where market-determined prices or values are not available and alternative estimates of fair value are determined to be clearly unreliable. In those cases, biological assets should be measured at their cost less any accumulated depreciation and any accumulated impairment losses. In determining cost, accumulated depreciation and accumulated impairment losses, an entity considers IAS 2 Inventories, IAS 16 Property, Plant and Equipment and IAS 36 Impairment of Assets.
B21 The Board rejected a benchmark treatment of fair value and an allowed alternative treatment of historical cost because of the greater comparability and understandability achieved by a mandatory fair value approach in the presence of active markets. The Board is also uncomfortable with options in International Accounting Standards.
Treatment of point-of-sale costs
B22 The Standard requires that a biological asset should be measured at its fair value less estimated point-of-sale costs. Point-of-sale costs include commissions to brokers and dealers, levies by regulatory agencies and commodity exchanges, and transfer taxes and duties. Point-of-sale costs exclude transport and other costs necessary to get assets to a market. Such transport and other costs are deducted in determining fair value (that is, fair value is a market price less transport and other costs necessary to get an asset to a market).
B23 E65 proposed that pre-sale disposal costs that will be incurred to place an asset on the market (such as transport costs) should be deducted in determining fair value, if a biological asset will be sold in an active market in another location. However, E65 did not specify the treatment of point-of-sale costs. Some commentators suggested that the Standard should clarify the treatment of point-of-sale costs, as well as pre-sale disposal costs.
B24 Some argue that point-of-sale costs should not be deducted in a fair value model. They argue that fair value less estimated point-of-sale costs would be a biased estimate of markets’ estimate of future cash flows, because point-of-sale costs would in effect be recognised as an expense twice if the acquirer pays point-of-sale costs on acquisition; once related to the initial acquisition of biological assets and once related to the immediate measurement at fair value less estimated point-of-sale costs. This would occur even when point-of-sale costs would not be incurred until a future period or would not be paid at all for a bearer biological asset that will not be sold.
B25 On the other hand, some believe that point-of-sale costs should be deducted in a fair value model. They believe that the carrying amount of an asset should represent the economic benefits that are expected to flow from the asset. They argue that fair value less estimated point-of-sale costs would represent the markets’ estimate of the economic benefits that are expected to flow to the entity from that asset at the balance sheet date. They also argue that failure to deduct estimated point-of-sale costs could result in a loss being deferred until a sale occurs.
B26 The Board concluded that fair value less estimated point-of-sale costs is a more relevant measurement of biological assets, acknowledging that, in particular, failure to deduct estimated point-of-sale costs could result in a loss being deferred.
Hierarchy in fair value measurement
B27 The Standard requires that, if an active market exists for a biological asset, the quoted price in that market is the appropriate basis for determining the fair value of that asset. If an active market does not exist, an entity uses market-determined prices or values (such as the most recent market transaction price) when available. However, in some circumstances, market-determined prices or values may not be available for a biological asset in its present condition. In these circumstances, the Standard indicates that an entity uses the present value of expected net cash flows from the asset.
B28 E65 proposed that, if an active market exists for a biological asset, an entity should use the market price in the active market. If an active market does not exist, E65 proposed that an entity should consider other measurement bases such as the price of the most recent transaction for the same type of asset, sector benchmarks, and present value of expected net cash flows. E65 did not set a hierarchy in cases where no active market exists; that is, E65 did not indicate which basis is preferable to the other bases.
B29 The Board considered setting an explicit hierarchy in cases where no active market exists. Some believe that using market-determined prices or values; for example, the most recent market transaction price, would always be preferable to present value of expected net cash flows. On the other hand, some believe that market-determined prices or values would not necessarily be preferable to present value of expected net cash flows, especially when an entity uses market prices for similar assets with adjustment to reflect differences.