017: Subsequent expenditures in agriculture
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IFRS Question 017: How to account for expenses related to agricultural activity?
I work for a company that owns a few sheep farms. We are breeding sheep for sale and for the purpose of the production of sheep products like milk, cheese and other.
I know that we must apply IAS 41 for accounting of sheep and remeasure them at fair value less costs to sell at the end of the reporting period.
But, how shall we account for expenses like food for animals and veterinary costs?
IFRS Answer 017
I am sure that many accountants working in agricultural activities will appreciate the answer to this question and not only if you work in the animal production, but the similar questions pop out in the companies working with plants, like palm trees, wheat, vineyards and other.
In fact, my answer will not only relate to the animal food and veterinary expenses, but also to fertilizers, pesticides, removing the weed and other related expenses.
So how shall we account for these costs?
The rules in IAS 41 are missing…
Well, the trouble is that the standard IAS 41 Agriculture is silent on this topic.
There are no exact rules on how to present these costs.
Why?
I read the basis for conclusion related to IAS 41 – that’s a document explaining why the standard creators created the rules as they are.
It says that it is not necessary to make the rules about the subsequent expenditures in agricultural activities, because biological assets need to be remeasured to their fair value less cost to sell with all changes in profit or loss and thus it does not matter how you treat the subsequent expenditure.
I do not fully agree with this approach, for a very simple reason:
It is true that the effect on profit or loss will always be the same – I will show you in the short illustration later.
But, the presentation of the individual expenses in your profit or loss is totally affected by the way of how you treat the subsequent expenditure.
Also, your cash flow statement will look differently.
Select the accounting policy
In any case, it is YOU who need to set the accounting policy of treating the subsequent expenditure.
Basically, you have 2 options:
- Put all subsequent expenditure in profit or loss directly, or
- Capitalize the subsequent expenditure in the carrying amount of your biological assets.
Let’s explain.
Option #1: All expenses in profit or loss
This is very simple and very easy way of doing the things.
In my opinion, it is not ideal, because in this case, you would show big expenses in your profit or loss statement and on the other hand, you would show big increase in fair value of your biological assets.
What’s wrong with that?
Well, the fair value of your biological assets increases not only due to external market changes, but also due to your activities like feeding the animals, taking care of them etc.
If you present all expenses in profit or loss, you are effectively presenting the increase in fair value in one bunch regardless its source or reason.
Sure, fo some assets, you need to add additional disclosures about the fair value change due to price change and physical change – but this disclosure is just encouraged, not obligatory.
Option #2: Capitalize expenses in the carrying amount of an asset.
Under the first option, you would add the expenses to the carrying amount of the biological asset.
This way, you do not show big expenses for agricultural activity in your profit or loss, and also you show smaller increase in fair value of your biological assets.
In my opinion, this method reflects the fair value changes better than the first method, but it is more demanding and challenging.
Example: expense vs. capitalize
Let’s say the fair value of your herd of sheep was CU 1 000 at the end of year 1.
In the year 2, you spent CU 200 for the sheep food supplements, vet and other living and breeding expenses.
The fair value of your herd is CU 1 500 at the end of the year 2.
Accounting #1 – all expenses in profit or loss:
The journal entry for the subsequent expenses is:
- Debit Profit or loss – operating expenses: CU 200
- Credit Suppliers / Bank account: CU 200
The journal entry to remeasure the carrying amount of sheep herd to fair value less cost to sell at the end of year 2:
- Debit Biological assets: CU 500 (CU 1 500 – CU 1 000)
- Credit Fair value change in profit or loss: CU 500
Here, the net effect in profit or loss is CU 300 which a gain from remeasurement of 500 less the expenses of 200.
Accounting #2 – expenses are capitalized:
The journal entry for the subsequent expenses is:
- Debit Biological assets – sheep herd: CU 200
- Credit Suppliers / Bank account: CU 200
The journal entry to remeasure the carrying amount of sheep herd to fair value less cost to sell at the end of year 2:
- Debit Biological assets: CU 300 (CU 1 500 – CU 1 200)
- Credit Fair value change in profit or loss: CU 300
The net effect in profit or loss is CU 300 which is just gain from remeasurement.
So it’s the same, but the presentation is different.
This table summarizes the impact on profit or loss:
Expense | Capitalize | |
---|---|---|
FV change | 500 | 300 |
Operating expenses | -200 | 0 |
Net effect on P/L | 300 | 300 |
How to set your accounting policy?
Finally let me just outline the optimal process of setting the accounting policy for the subsequent expenditures.
If you want to take it easy regardless the presentation in profit or loss, then go for option 1 and put all the expenses in profit or loss as they arise.
If you care more about the presentation of your profit or loss and cash flows, then you can try looking at IAS 2 and IAS 16 for some guidance.
These standards do not apply to biological assets, but you can use them as help in developing your own policy.
You can just decide that all the expenses that maintain the assets, are expensed – for example, routine vaccinations of animals, pesticides with plants, etc.
And, all the expenses that help increase the yield or outcome of the biological assets would be capitalized – for example, food supplements or fertilizers.
This is quite challenging, because here you need to apply your judgement to determined which costs to capitalize and which to expense.
Any questions or comments?
Please add them below this article. Thank you!
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Dear,Silvia, How are you doing today?? Hopping things are goes with you awesomely. I would kindly like to thank you so over much for sheer humble description on subsequent expenditure in agriculture.
My name is Deme Gebreyesus. i am 29. i live Jimma, Ethiopia,East Africa. I am accountant at Horizon Plantation PLC unde MIDROC company. My company will have colse its accotnts as per IFRS starting from July7/2018 (Ethiopian Fiscal year starting July8 through July7),
Best regards with warm greetings!!
Deme
Hi Deme, you are very welcome, I’m glad it helped!
I think that this article can also help if you are dealing with agriculture: Top 3 Questions about IAS 41 Agriculture.
All the best
S.
dear, Silvia, for i am working as accountant at Horizon Plantation PLC, i am really facing some accounting challenges for sure.Please, Should I capitalize up-rooting cost of coffee tree and infilling or re-planting cost of coffee too. Impairment is too new for company.
Hi Silvia.
Thanks for the well detailed information. Just for emphasis, can the cost of planting seedlings be capitalized?
Awaiting ur prompt revert. Thanks
Thank you so over much for the mail.God bless you and wish you LONG LIVE!
Dear, How can i recognize the accumulated cost of Young coffee if young coffee died before bearing first fruit?? Example, Suppose,Total accumulated cost of young coffee incurred for 5000USD three years. If three years of half of young Coffee died,how could i recognize the cost of death coffee??
Hi Deme,
I think you should take the value of the threes and add to the depreciation of the biological asset, vrs the expense as impairment of losses. NIIF SMEs 34.10
Hello Sylivie. Thanks for the good work. My question is:
If a company ventures in agriculture with objective of breeding and maturing cattle for future sales, do we record any purchase of calves and mature cows as biological assets or inventories?
What journal entries do we pass if some of the cows are sold? Do we credit sales and credit inventories / biological assets? Thanks
Hi Kapala, yes, they are biological assets, because they are involved in agricultural activities (breeding/maturing). If you sell them, then you account for Debit Receivables (or cash received for sale)/Credit Revenues from sales; and Debit Cost of sales / Credit Biological assets. S.
Thank you soo much. And for the quick response too
Can you please tell me how we treat the expenses or cost we incur initially.
How do we treat them
Dear Siliva,
A Co (plywood industry) having a land and done forestry on it . co have done all relevant expenses on it for 2 years (life).After 2 year they cut plant and use their wood as a raw material.
please guide either IAs 41 apply on above activity on it or not.