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Noncurrent assets—land 200
Noncurrent assets—other tangible assets 100
2,000
RECOGNITION AND MEASUREMENT
An entity should recognize a biological asset or agricultural produce when the enterprise
• Controls the asset as a result of past events.
• It is probable that future economic benefits will flow to the entity.
Additionally, the fair value or cost of the asset should be able to be measured reliably. Any biological asset should be measured initially and at the end of each
reporting period, at its fair value less estimated point-of-sale costs. The only exception to this is where the fair value cannot be measured reliably.
Agricultural produce should be measured at fair value less estimated point-of-sale costs at the point of the harvest. Unlike a biological asset, there is no exception in
cases in which fair value cannot be measured reliably. According to IAS 41, agricultural produce can always be measured reliably. Point-of-sale costs include
brokers’ and dealers’ commissions, any levies by regulatory authorities and commodity exchanges, and any transfer taxes and duties. They exclude transport and other
costs necessary to get the assets to a market.
In deciding on the fair value for a biological asset or agricultural produce, it is possible to group together items in accordance with, for example, their age or quality.
Determination of fair value, especially in the case of biological assets or agricultural produce, could be challenging and in some cases is not straightforward since there
might be a tendency to use short cuts in the valuation process. IAS 41 cautions against this possibility and draws attention to situations where entities contract to sell
their biological assets or produce at a future date. The Standard points out that these contract prices do not necessarily represent fair value. Therefore, the fair value of a
biological asset or produce is not necessarily adjusted because of the existence of a contract. In many cases, these contracts may in fact be onerous contracts, as defined
in IAS 37.
If an active market exists for the asset or produce, then the price in that market may be the best way of determining fair value.
If an entity has access to different active markets, then the entity will choose the most relevant and reliable price, that is, the one at which it is most likely to sell the
asset.
If an active market does not exist, then these methods can be used to determine fair value:
• The most recent market transaction price
• Market prices for similar assets after adjustment to reflect any differences in the asset
• Any benchmarks within the sector, such as the value of cattle per kilogram
In some cases, market prices or values may not be available for an asset in its present condition. In these cases, the entity can use the present value of the expected
net cash flow from the asset. The IASB through its Annual Improvements Project, “Improvements to IFRS 2008,” amended the requirements relating to the use of the
discount rate. Prior to the amendment, IAS 41 required that the discount rate to be used should be the “pretax rate;” however, the Standard as amended requires a
current market-determined rate and permits this to be either a “pretax” or “posttax” rate depending on the valuation methodology used in determining fair value.
In some circumstances, costs may be an indicator of fair value, especially where little biological transformation has taken place or the impact of biological
transformation on the price is not expected to be significant.
GAINS AND LOSSES
Any gain on the initial recognition of biological assets at fair value less estimated point-of-sale costs and any changes in the fair value less estimated point-of-sale
costs of biological assets during the reporting period are included in profit or loss for the period. Any gain on the initial recognition of agricultural produce at fair value
less estimated point-of-sale costs will be included in profit or loss for the period to which it relates. All costs related to biological assets that are measured at fair value
are recognized in profit or loss when incurred, except for costs to purchase biological assets.
The Standard does not explicitly prescribe how to account for subsequent expenditure related to biological assets. A gain or loss can, therefore, arise when an
animal is born, plants and animals grow, plants are harvested, or animals generate agricultural produce. Losses can arise on the initial recognition of the purchase of
animals, as their fair value less estimated point-of-sale costs are likely to be less than the purchase price plus any transaction and transportation costs.
Facts
An entity has these balances in its financial records:
CASE STUDY 2
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