Biological Asset-IAS 41

The simplest definition of a biological asset is a living plant or animal 

Agricultural Product – IAS 41 

The benefit from the biological asset is known as agricultural produce or we can say the harvested product of an entity’s biological asset is considered to be agricultural produce. Once that agricultural produce is processed, IAS 2 will be applied 

When to apply IAS 41 and IAS 2 

IAS 41 applies to biological assets throughout their lives, but IAS 41 applies to agricultural produce until the date of harvest. Once harvesting is done on that biological asset, IAS 2, which relates to inventory, will be applied to that biological asset. since the final processed product is now in our inventory. The moment they are separated from biological assets, IAS 2 will be applied 

Scope of IAS 41

Here, the scope of IAS 41 means that on which activities are we allowed to apply for IAS 41. Sir Mustafa Mirchawla has explained the scope of IAS 41 with practical examples in his lectures, which helps the students to understand this standard with more clarity.

By studying the scope of IAS 41, one can also get an idea of ​​the activities that are not permitted by this standard

What is agricultural activity?

It is the management of the biological transformation (e.g. growth) of biological assets : 

-For Sale

– Into agricultural produce

-Into additional biological assets

You have to make your best effort to answer this question correctly because accounting and reporting depend on it.

Firstly for IAS 41 agricultural activity is a must. now what do we mean by agricultural activity? It is the management of biological transformation into biological assets. If those biological assets are being managed for sale then this standard will be applied to such activities.

Secondly, we are doing an activity through which we are getting raw materials known as agricultural produce and then we process them to make finished goods for sale purpose

Thirdly, it is the management of the biological transformation of biological assets to acquire another biological asset. example breeding of animals. In such activity, IAS 41 will be applied 

Do we have to apply International Accounting Standards-41 on the following activities?

Whenever you need to identify, whether IAS 41 applies to any particular activity. ask yourself three major questions. Are we managing that biological asset for sale purposes? are we getting any agricultural produce from it? or do we manage it for breeding purposes?

You will easily get your answer if you have these three conditions in mind. apply these three conditions religiously whenever dealing with agricultural activities.

  1. Cultivation: Yes, we will apply IAS 41 on cultivating land because we are doing this for the management of biological transformation of biological assets. So this falls under the scope of IAS 41 
  2. Forest? Yes. because by maintaining forests we are doing biological transformation of biological assets
  3. Zoological Park: No, we will not apply IAS 41 on animals in the zoo, although they are a biological asset but doesn’t meet the three conditions set by this standard, they are not for sale purpose, they are not used for agricultural produce nor they are being kept for the breeding purpose. it is a place where various living animals are kept within enclosures, displayed to the public, and may be used for study. therefore this doesn’t fall under the scope of IAS 41. They are under the scope of IAS 16-Property, Plant, and Equipment.
  4. security pets/ dogs: no. you might be wondering why.  well, the answer is yes dog is considered to be a biological asset because it is a living animal and yes we do manage it by taking care of their necessities but those three fixed conditions set by the standard are also not meeting over here. security pets are not used for sale or business purposes nor they are for agricultural produce and they are not used for breeding purposes. Their main function is to provide security which in no way falls under IAS 41. 
  5. Ocean fishing: A straight NO! But the question is why? Although we are going to sell those fishes in the market it doesn’t meet the first condition of IAS , which is “ biological asset is a living plant or animal” and when we do ocean fishing it dies seconds after we take it out from the fishing net and mind it, before selling it we have dead fish in our stock means we were not dealing in living biological assets. that’s why this falls under IAS 2 and will be considered our inventory.
  6. Fishing farming: first of all do not confuse this with ocean fishing, there is a big difference, here we are dealing with living biological assets, we are managing them and we do sell them afterward, therefore yes! the Fishing farming activity does fall under IAS 41.
  7. Restaurants with seafood cuisine: Yes this also falls under IAS 41 scope.
  8. Woodyard: No! the moment you cut the wood from the tree it gets detached from the wood therefore it is considered to be dead and if we are not dealing in living biological assets then how can we apply IAS 41 since it breaches the first condition set by the standard? IAS 2 will be applied
  9. Pharamacuticles companies: no, IAS 41 will not be applied to such activities. although some of the medicine is acquired from plants, it doesn’t meet the strict conditions set by the standards.
 Characteristics of the biological asset 

We just cannot classify biological assets on the basis of factor that they are living or dead plant or animals, IAS 41 gives us the following common characteristics 

1.Capacity to change

2.Management of change

3.Measurement of change

Recognition Criteria of Biological Asset 

When do we record such biological assets in our books? Or in simplest form when do we enter such a transaction?

  1. Control, when you have physical control over the biological asset. this control is obtained by physical possession.
  2. Future economic benefit, probable chances of acquiring advantage from that biological asset.
  3. Cost reliably measured, means you can measure the cost of that asset.
The Fair Value Of A Biological Asset 

The standard requires the initial recording of the biological asset at fair value less cost to sell and also at the reporting date the asset will be recorded at fair value less cost to sell

.This standard requires recording every biological asset on fair value less cost to sell. but the question here is where to determine the fair value of a biological asset. all changes in the fair value will be treated in the profit and loss statement under the gain or loss account.

Example: you bought a cow for 1000$, and at the date of purchase the fair value and cost of the biological asset are the same. Now when you are selling that biological asset you will have to give 50 commission to process the sale transaction. This 50 $ will be recorded in the profit and loss statement.P&L account debit and biological asset credit. since the asset value is decreasing.

If at the beginning of the year, the value of the biological asset is $1000 and as the year ends the fair value goes up to $1500 because we invested some amount to enhance that biological asset. therefore this $500 will be booked as income in our profit and loss statement. This is an upward change in the FV of the asset.

Why is this change in fair value booked under the profit and loss account?

Because of the matching principle given by the IASB framework. Continuing the above example we are booking the upward change of fair value as income in our profit and loss account to match the expense we have recorded to enhance that biological asset’s fair value. The occurrence of such expenses led the fair value to increase.

Remember this IAS is tested in financial reporting-F7 as well as strategic business reporting SBR exams of ACCA.

Example of questions tested in the exam 

In the case of quarterly accounts and we are in the cultivation business, for example, we have a cleaned shaved land, the fair value here is 0 because there are no crops on the land and after doing some work at the end of the first quarter there are some bushes on the land now record the asset at fair value less cost to sell increase. this change will be recorded under profit and loss

The same thing will happen in the next quarter. in this second quarter, we also made some expenses due to which the fair value less cost to sell increased. This change will also be booked in the profit and loss statement 

But now, at the end of the third quarter, this is the date of harvesting this crop will be transferred from IAS41 to IAS 2. Although the fair value increases in comparison to the last quarter this change will also be recorded in the profit and loss statement like we have done before Now afterward the fair value of crops will be the cost of inventory once the IAS is shifted to IAS 2 (inventory )

Now we are in IAS 2, so if in the last quarter the fair value of an asset increases but now this change will not be booked under the profit and loss account because IAS 2 does not allow us to record upward valuation, although downward valuation of inventory is allowed. We will ignore the increase in fair value of the crop and will book the original cost at the time when the crop was shifted to IAS 2 as the cost of sale in the profit and loss statement.

In the end of the last quarter book the sales, subtract the cost of sales ( explained above ), and then calculate your gross profit. Remember that the increase in fair value after we have shifted the asset to IAS 2 is completely irrelevant. this is a kind of dodge the examiner can test on paper.

Such questions are not expected to be tested in the financial reporting ACCA exam but this example is related to the past paper of SBR ( strategic business reporting ) one of the professional papers of ACCA.basics of IAS 41 is tested in FR paper.

Another question made by Mustafa Mirchawala to study this IAS further 

For example, I deal in goats, and this biological asset does fall under IAS 41. at the beginning of 1st year, i had 6 goats and all of them were 3 years old whereas the fair value of each goat is $300 per goat. in mid-year, I bought another goat with a fair value of $400 and is 3.5 years old. At the end of the first year, I had a total of 7 goats and all of them were 4 years old but now the fair value less cost to sell is $600 as the past value of 6 goats was $300/goat. and one bought in the mid-year has a fair value of $400. now how to treat this?

All changes in fair value are to be taken to the profit and loss statement. First, sum up the fair value since the beginning of 7 goats. the answer will be $2200. now compare this with the fair value at the year-end which is $ 4200 now this $2000 is considered to be a fair value gain which will be treated in the profit and loss statement. you might be wondering how this change is treated in the statement of financial position. the answer is very simple you will record those 7 goats as biological assets on their year-end fair value which in this case is $4200.

Change in IAS 41- Bearer plant 

First, clear the concept of the bearer plant. in modern accounting, this is treated under property plant and equipment which is IAS 16. Now in the case of IAS 16 remember that we do not sell the property plant or the equipment what we do sell is the output or finished product produced by them. the plant has been retained with us for multiple years. now in the case of ias 41, the bearer plant is not sold whereas the product from that tree is sold.

How bearer plant is similar to a property plant and equipment?

Because directly through the bearer plant we are not getting any value but the value is generated through its output. the second similarity is that both of them have a certain useful life after which they become scrapped. that’s why the bearer plant is classified as property plant and equipment.

What are bearer plants?

We are not talking about animals or crops here. they are only plants and such plants are accounted for under IAS 16.

  • Are expected to be used for more than 1 accounting period 
  • Used in production supply of agricultural produce
  • Not intended to be sold as a product in  themselves but can be sold for scrap 

If the above three conditions are met then the asset is considered to be a bearer plant 

Since we are dealing with the bearer plant is IAS 16 we all know that IAS 16 provides us with two measurement models to account for our asset. now it’s on the entity to choose the cost measurement model or deal with the revaluation measurement model Both of these are taught separately under the head of IAS16.

“International Accounting Standard IAS 41, Agriculture, is the first standard that specifically covers the primary sector. IAS 41 introduces a fair value model to agriculture accounting. This is a major shift away from the traditional cost model widely applied in primary industry“–ACCA Global

Tips to help you out – by Mustafa Mirchawala

Note no 1: No IAS 41 on land. standard board strictly prohibits this. On land we apply IAS 16 or IAS 40, here there are two conditions if that land is used by the entity or organization for their own use then IAS 16 will be applied and if the land is used for generating rental income then  IAS 40 will be applied but in no case, IAS 41 will be applied on land 

Note no 2:Whenever the word recognized is used with the biological asset it means that the asset is already recorded at fair value less cost to sell. this type of question has been tested in the past by examiners in financial reporting paper 

Note no 3: In the statement of financial position(SOFP), the fair value less cost to sell is recorded as the value of a biological asset 

Note no 4: IAS  41 will be applied to biological assets and agricultural produce. the cut and process is applied on IAS 2 dealing with inventory 

Note no 5: Biological asset is initially and at reporting date recognized at fair value less cost to sell same is the case with agricultural produce 

Conclusion:

In conclusion, after reading the guide on International Accounting Standard  (IAS 41) and its implications in the field of agriculture. As a fellow accounting student, I understand the excitement that comes with studying a topic like IAS 41, especially when it is introduced for the first time in our standard curriculum. This standard may seem a bit confusing, but it holds significant importance in our educational and professional journey.

It’s essential to understand the importance of reading this blog not only because IAS 41 is a crucial topic of the ACCA (Association of Chartered Certified Accountants) financial reporting exam but also because we will encounter IAS 41 again in the Strategic Business Reporting (SBR) exam, that why this IAS is highly relevant for FR students.

The above-mentioned practical examples are drawn from past papers on financial reporting. These examples are highly relevant for the preparation of exams. They provide a real-world context that enhances our understanding of this standard.

this article has covered the entire topic comprehensively However, should you encounter any queries or need further clarification, don’t hesitate to reach out to Mustafa Mirchawala, an expert in financial reporting. His expertise can be a valuable resource in understanding the complexities of IAS 41.

Lastly, to read the summarised points of the above topic, explore the FAQs section after reading this blog. It will address common doubts and provide additional insights and will help you to memorize the important points.

Frequently asked question (FAQ’s)

Q1. Can IAS 41 be applied to land, and what standards should be applied to land instead?

No, IAS 41 cannot be applied to land. Land is subject to either IAS 16 if used for the entity’s own use or IAS 40 if used for generating rental income.

Q2. What does it mean when the term “recognized” is used concerning biological assets?

When the term “recognized” is used with biological assets, it signifies that the asset has already been recorded at fair value less cost to sell.

Q3. How is the fair value less cost to sell recorded in the Statement of Financial Position (SOFP) for a biological asset?

The fair value less cost to sell is recorded as the value of a biological asset in the SOFP.

Q4. Which assets do IAS 41 apply to, and how is “cut and process” handled?

IAS 41 is applied to biological assets and agricultural produce. The concept of “cut and process” is addressed in IAS 2, which deals with inventory.

Q5. How are biological assets recognized initially and at the reporting date?

 Biological assets are initially and at the reporting date recognized at fair value less cost to sell, similar to agricultural produce.

Written By Warisha Shehzadi –  student of Mirchawala’s Hub Of Accountancy

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