Tuesday, December 10, 2013

[IFRS] IAS 41: Agriculture - Fair Value Consideration and Government Grants

Fair Value consideration
The entity must comply with the requirements of IFRS 13, Fair Value Measurement, while applying the fair value principles to value biological assets or agriculture produce.

Further, there is a presumption that fair value can be measured reliably for biological assets. If such presumption is rebutted, then the biological asset is valued at cost less accumulated depreciation and impairment loss, if any.

To determine fair value, the standard provides following guidance

1. Most preferred method: quoted market price in an active market
2. If the active market does not exists for assets, then
  • The most recent market transaction price for that type of asset, or
  • Market prices for similar or related assets, giving the effect of any difference in the asset, or 
  • Any sector benchmarks 

3. If reliable market price is not available, then
  • The expected cash flow from the asset is discounted at current market rate, to arrive at present value of asset cash flow. 
4. In some cases, the cost may approximate the fair value, if
  • Little biological transformation has taken place in the asset or the impact of biological transformation on price is immaterial.
The Fair value measurement for biological asset or agriculture produce is applicable only till the point of harvest, post which principles of IAS 2 Inventories are applied.

Gain or losses
The gain or losses, in following cases, is recognized in profit and loss account in the period in which it arises:

Biological asset:
  • Initial recognition at fair value less cost to sell
  • A change in fair value less estimated cost to sell
Agriculture Produce
  • Initial recognition at fair value less estimated point-of-sale costs
Government Grants
Although the accounting for government grants is dealt by IAS 20, 'Accounting for government grants and disclosure of government assistance’, IAS 41 provides specific guidance for the recognition of a grant in respect of biological assets.

A government grant may require an entity to engage in farming activities in particular locations or for specified period or not to engage into any agricultural activities.  Then the entity should recognize the grant as income, only when the conditions attached to the grant have been met.

Unconditional government grants received in respect of biological assets should be recognized as income only when government grant becomes receivables. The grant should be measured at fair value less costs to sell.