CHAPTER THREE

ACCOUNTING FOR AGRICULTURE

1. INTRODUCTION

Agriculture is the largest sector in the Ethiopian economy, accounting for over 50% of GDP and
employing over 85% of the labour force (MEDaC, 1999). Hence, Agriculture is the backbone of the
Ethiopian economy. This particular sector determines the growth of all other sectors and
consequently, the whole national economy. On average, crop production makes up 60 percent of the
sector’s outputs, whereas livestock accounts for 27 percent and other areas contribute 13 percent of
the total agricultural value added. The sector is dominated by small-scale farmers who practice rain-
fed mixed farming by employing traditional technology, adopting a low input and low output
production system. The land tilled by the Ethiopian small-scale farmer accounts for 95 percent of
the total area under agricultural use and these farmers are responsible for more than
90 percent of the total agricultural output. As result, the accounting information system application
is very crucial in measuring, recording, & reporting the agricultural activities of those sectors in the
development of modern economy of this country.

Agricultural accounting, as noted earlier, is among the specialty accounting types since enterprises
in agricultural activities tend to acquire specific branches and objectives of activity.
They all utilize the data provided by financial, cost and managerial accounting. Within this
framework, while recording of financial transactions in agricultural production process necessitates
the use of financial accounting; estimation of production costs incurred during the cultivation of
agricultural goods necessitates the use of cost accounting and provision of new data, either obtained
from financial or cost accounting, for decision-making practices of enterprise managers necessitates
the use of managerial accounting. Agricultural accounting can be explained as a specialty
accounting which primarily records financial and monetary transactions throughout agricultural
activities, classifies financial transaction in respect of types, estimates production costs incurred
during the cultivation of agricultural goods and then reports those financial according to their
purposes. In this chapter, you will be introduced with the basic concepts of agricultural activities,
biological assets and its accounting and reporting standards in the practice.

After completing this chapter student will be able to;

Identify Basic Terms and Agricultural activities

Identify Standards applied to Agricultural accounting

Define biological assets, bearer plants, and Agricultural produce

Describe the Accounting for Biological assets

Account for Recognition and Measurement of Biological Assets

Presentation and Disclosure Issues related with Biological Assets

 1.1. Overview of Agricultural activities & basic Terminologies

Agricultural activities encompass the various processes we use to grow crops and raise livestock for
food for human populations. Crops are also used for industrial processes, for example, palm oil is
used in many products from frying oil to cosmetics, sugar cane waste is used for biofuel, and cotton
is used for textiles. Livestock are used for meat, eggs, milk, as well as for leather and wool.
Livestock are also used for labor. Humans have altered Earth’s land for thousands of years through
agricultural activities. Industrialization of many agricultural activities over the last 300 years, and
especially over the last 70 years, has allowed us to greatly expand our land use. This has also
fragmented habitats and ecosystems, affecting species populations and ranges and
biodiversity.

Agricultural activities impact the Earth system in a variety of ways, including:

 Increasing greenhouse gases into the atmosphere, for example, from farm animals (for
example, methane from the digestion of plant material by cows), from the cultivation of
rice (for example, methane is produced by bacteria that thrive in rice fields), and from
the burning of fossil fuels to power farming equipment, and from the mining of minerals
and the burning of fossil fuels to make fertilizer.

 Deforestation and other forms of habitat loss to make land available for crops and grazing
livestock. Habitat loss often alters populations, species ranges, and the biodiversity in
ecosystems. Fire is often used in deforestation, which releases greenhouse gases into the
atmosphere. Deforestation can also decrease soil quality by increasing erosion,
necessitating the use of fertilizers that can also disrupt ecosystem biomass and
productivity.

 Diverting freshwater for crops and livestock, which in turn decreases the amount of water
available for other organisms and for other human needs and activities.

 Increasing food availability. Industrial and technological innovations increased the

reliability of food supplies, especially the last 70 years, which in turn has played a role in
global human population

 Increasing the amount of nutrients in soil or water, especially nitrogen and phosphorous.
These nutrients increase plant and algae growth, but also have negative impacts on other
 species. For, example, in aquatic environments, nutrient-rich runoff can cause large
amounts of algae grow – when the algae die, they are consumed by bacteria which can
reduce oxygen levels in the water, killing fish and other species. This process is known as
eutrophication.

 Releasing pollutants and waste from fertilizers and pesticides into ecosystems that can
harm the health of native species populations. Pollutants and waste also decrease
the quality of freshwater

 Removing trees and plants, plowing fields, and overgrazing by livestock disrupt roots that
stabilize sediment and decrease soil quality. These human activities can
increase erosion rates 10 to 100 times. In turn, increasing erosion decreases water
quality by increasing sediment and pollutants in rivers and streams.

Q. Can you think of additional cause and effect relationships between agricultural activities and
other parts of the Earth system?

The following are relevant terminologies related to agricultural activities;

Agricultural activity is the management by an enterprise of the biological transformation of

biological assets for sale, into agricultural produce or into additional biological assets. Agricultural
activity is the management of biological transformation (such as biological growth) of a biological
asset for the purpose of sales of that asset.

Agricultural activity is the management of biological transformation (reproduction) of a

biological asset for the purpose of creating additional biological asset.

Agricultural activity is the management of biological transformation of a biological asset for

the purpose of harvesting agricultural produce from that asset.

Examples of agricultural activity include: Raising livestock, fish or poultry, Cultivating

Mango yards, Stud farms (for example, breeding horses or cattle) , Forestry, Floriculture

Biological assets: are Living plants and animals.

Agricultural produce: The product of the entity’s biological assets, for example, milk and
coffee beans. Agricultural produce is the harvested produce from biological asset. Harvest is the
detachment of produce from a biological asset or the cessations of a biological assets life.
 Biological transformation: Relates to the processes of growth, degeneration, and
production that can cause changes of quantitative or qualitative nature in a biological asset.

Biological transformation leads to either;

 Asset changes can be:

Growth: increase in quantity and/or quality

Degeneration: decrease in quantity and/or quality

 Creation of new assets:

Production: producing separable non-living products

Procreation: producing separable living animals

1.1.1. Nature of Biological Assets

Biological assets are living plant or animal owned by a business entity for the purpose
agricultural activity. But, not all living plant or animals are biological asset.
For example, livestock such as goats, cows, sheep, pigs, and fish are all considered biological
assets. Biological assets also include crops grown by farmers – e.g., corn, tomatoes – as well as
grapevines, cannabis, trees, and any produce coming from trees, such as apples. The following are
excluded from biological assets for reporting purposes;
Land related to agricultural activity
Biological assets held for provision or supply of services ( E.g. Public sector can have lots of
examples of biological asset held for the provision of services. Examples include: Police / customs
dogs, Police horses, Trees / flowers in public parks.)
Bearer plant related to agricultural activity ( E.g. A living plant that is used in the production or
supply of agricultural produce. Mango trees held for the provision of mango fruit)
Figure 3.2: Examples of biological assets & agricultural produces

The International Accounting Standard 41 (IAS 41) states that a biological asset is any living plant
or animal owned by the business, and they are typically measured at fair value minus selling costs.
Biological assets can be held and accounted for by any business owner. However, because of their
nature, they are, typically, of the utmost importance to farmers or any individuals whose primary
source of profit comes from growing, selling, and shipping such goods.
Biological assets, because they are living or have an active component that makes them difficult to
maintain, are constantly under the threat of change, both qualitatively and quantitatively. It simply
means that plants, animals, and the living things they produce (such as hens producing eggs or cows
producing milk) have a period of time where they must grow or be produced, a useful period during
which they can be harvested, and a limited amount of time during which they can be moved and
sold before they rot, decay, or otherwise become useless to consumers.
Biological assets generate substantial revenue or income for businesses in industries such as
silviculture, cannabis, vineyards, and livestock, so this asset type is typically seen in the balance
sheet of companies in these industries. They are the same as the goods produced by other
companies that manufacture items made of plastic, paper, or other materials in terms of generating
revenue for the seller and accounting for loss if the goods are damaged or stolen. The only
qualitative difference is that the asset is living. Biological assets change and depreciate naturally
and more rapidly than other types of goods. Different types of biological assets, much like other
goods, can be in high or low demand, depending on the season. Recently there has been a surge
in the demand for cannabis. They can also be lost or damaged, with the loss or damage usually due
to things like unexpected periods of rain or drought, cold weather, or the spread of a disease that
wipes out crops and/or livestock.

It’s important to note that the term “biological asset” is unique to the field of accounting for the
purpose of clearly categorizing and identifying assets owned by businesses, such as farms and
vineyards, or produce that is a primary source of the company’s income. Businesses in various
industries and sectors can raise plants and animals for a variety of reasons; classifying them as
biological assets denote their nature and their value to the business owner.
Cannabis Stocks have gained increased awareness due to the listing of cannabis companies in public
stock exchanges. With shares in the public market, they are required by regulation to periodically
release their financial statements. This has given the general public access to their Income
Statements, Statements of Financial Position, and Cash Flow Statements. A significant portion of
the current assets owned by these companies is biological assets (cannabis), which is typically
their primary resource for profit-generating operations. Below is an example of Canopy Growth
Corporation’s balance sheet, and highlighted is their Biological Asset holdings.
Figure 3.3: Statement of Financial Position of Canopy growth Corporation

Other Industries that are known for large amounts of biological assets are:

 Paper and Forest Products (Trees)

 Dairy (Cows)

 Agriculture (Crops)

 Meat (Grazing)

 BioFuel (Energy Crops – such as Soybean)

3.1.1.1. Types of Biological Assets

The biological assets are categorized based on nature of their natural existence, durability and
purposes. International Accounting Standards ( IAS 41) Grouped biological assets as follows;

Biological assets

Bearer biological Consumable

assets/Bearer biological

IAS 16, except

IAS 41
produce Produce
growing thereon

1. Bearer Plant

Bearer plant is a living plant that is used in the production or supply of agricultural produce. It
has the following main features;

The plant is expected to bear produce for more than one year, and
 It is unlikely that the entity will harvest the plant as agricultural produce

Produce growing on bearer plant is a biological asset.

o Example Mangos on a mango tree.

o The following are not bearer plants;

Plants cultivated to be harvested as agricultural produce (eg trees grown for use as a lumber)

Plants cultivated for agricultural produce but there is a likelihood that the entity will also harvest
and sell the plant as agricultural produce. Other than as incidental sales (eg trees are cultivated both
for their fruit and also their lumber)

Annual crops ( for example, wheat)

2. Consumable Biological assets

o Consumable biological assets are those biological assets that are to be harvested
as agricultural produce or sold as biological asset.
o Biological assets which do not meet all of the above requirements (For bearer plant)
o E.g. All animals

3.1.1.2. Identifying Biological assets, Agricultural produce and inventories

Practical Examples

Example 1: Assume Entity A raises cattle, slaughters them at its abattoirs and sells the carcasses to
the local meat market.

Required: Identify these activities as Biological asset (Bearer/Consumable, Agricultural

produce, or Inventories?

Answer

The cattle are biological assets while they are living. When they are slaughtered, biological
transformation ceases and the carcasses meet the definition of agricultural produce. Hence, Entity A
should account for the live cattle in accordance with IAS 41 and the carcasses as inventory in
accordance with IAS 2 Inventories.

Example 2. Assume ABC grows vines, harvests the grapes and produces wine.
Required: Which of these activities are in the scope of IAS 41?

Answer
The vines are biological assets that continually generate crops of grapes. When the entity
harvests the grapes, their biological transformation ceases and they become agricultural produce.
The vines continue to be living plants and should be recognised as biological assets.
Assets such as wine that are subject to a lengthy maturation period are not biological assets.
These processes are analogous to the conversion of raw materials to a finished product rather
than biological transformation. Therefore, the entity should account for the grapevines in
accordance with IAS 41 and the harvested grapes and the production of wine, as inventory in
accordance with IAS 2.
Example 3: An entity on adoption of IAS 41 has reclassified forest as biological assets. The total
value of the group’s forest assets is $2 million comprising
Freestanding trees.....................$1,700
Land under trees…............................200
Roads in forests...................................100
Required
Show how the forests would be classified in the financial statements.
Answer

The forests would be classified on the statement of financial position as follows;

 Biological assets...................................................$1,700

 Noncurrent asset-land...............................................200

 Noncurrent assets—other tangible assets….............100

1.2. Accounting for Agriculture

International Accounting Standard (IAS 41) sets out accounting for agricultural activity – the
transformation of biological assets (living plants and animals) into agricultural produce (harvested
product of the entity's biological assets).

The objective of IAS 41 is to establish standards of accounting for agricultural activity .This
Standard shall be applied to account for the following when they relate to agricultural activity:
 Biological assets, except for bearer plants;
Agricultural produce at the point of harvest; and
Government grants

1.2.1. Measurement & Recognition of Biological assets and Agricultural Produces

A) Recognition Criteria

IAS 41 suggests the recognition of biological asset or agricultural produce when the following
criteria met;

Entity controls asset as result of past event

Probable future economic benefits/service potential will flow to entity

Fair value or cost can be measured reliably

B) Measurement of biological assets & Agricultural Produce

Any biological asset should be measured initially and at each balance sheet date, 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 harvest.
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.
If an active market does not exist, then fair value is determined as per fair value hierarchy. The
hierarchy may be summarized as follows:
Price for the asset in an active market.
Recent transaction price for the asset if there is no active market.
Market prices for similar assets, adjusted for the points of difference.
Sector benchmarks.
Present value of the future cash flows expected to be generated from the asset.
EXAMPLE: Assume Agaro Livestock Farm purchased a cow for $1,000. It paid $20 carriage in
cost. It estimated that if they wish to sell the cow then they will have to pay another $20 carriage
out cost and $30 sales commission per cow.
Required
How the cow is measured initially?
Is carriage in is capitalized or expensed?
Is there any gain or loss on initial recognition?
How to journalize the transaction?
Answer
How the cow is measured initially?
Cost = FV – cost to sale $1,000-$30-$20 =$950
Is carriage in is capitalized or expensed?
It is Expensed, b/s carriage in is considered period cost not cost of biological asset. Thus, it
should be expensed in that period.
Is there any gain or loss on initial recognition?
There is a loss b/s FV of the asset is $1000, but, recorded initially as $950. Thus a loss of $50
recognized initially.
How to journalize the transaction?
Cow $950
Freight in $20
Loss on initial recognition---$50
Cash $10200
C) Measurement of Bearer Plant
A bearer plants should be treated as property, plant and equipment (IPSAS 16). A bearer plant is
measured at cost for the initial recognition. The cost based measurement is continued till the plant
grows to maturity.
Subsequently it is measured using:
Cost less depreciation and impairment model Or
Revaluation Model
Summary of Measurement of Biological assets, Agricultural Produces & Bearer Plant

The following table summarizes the measurement recognition criteria of biological assets,
agricultural produces & bearer Plant at different stages of production;
Subsequent expenses relating to agricultural Activity
Various expenditures may be incurred after the initial acquisition or production of biological
assets. The following are some of activities and related costs with measurement criteria;
Such costs may include feeding, veterinary services, planting, weeding, irrigation,
fertilizer, and harvesting and slaughtering costs.
IAS 41 does not prescribe the treatment of such costs.
Prior to adoption of IAS 41, many agricultural businesses had policy of capitalizing some of
these costs.
Many entities now adopt a policy of treating all such expenditure as a cost of production.
Measurement & Recognition of Gain or Loss on Biological assets
The change in the fair value of biological assets is twofold. There can be physical change through
growth, and there can be a price change. 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.
Common Accounting entries related to Biological assets
A) Bearer Biological assets related entries
1) Before maturity
Equivalent to Construction - in – progress
Measured at Accumulated costs (IAS 16)
Entry to record costs incurred:
Dr. Bearer Immature Biological assets… xxx
Cr. Cash/Materials etc.. xxx
2) On maturity
Accumulated cost transferred to depreciable PPE (IAS 16) Entry
to record the transfer:
Dr. Bearer Matured BA… xxx
Cr. Bearer Immature BA.. xxx
3) After maturity
a) Depreciation on matured BA (IAS 16)
Use acceptable depreciation method as per IAS 16 Entry
to record depreciation:
Dr. Work in Progress Biological assets (WIP-BA)… xxx
Cr. Accumulated Depreciation - BA.. xxx
a) Current costs on matured Biological Assets (IAS 16)
Standard silent on these costs
Options: Capitalize or charge to Cost of Production Entry
to record current costs:

Treatment Entry

Current cost capitalized Dr. Bearer Matured BA …. xxx

Cr. Cash/Materials etc …. xxx

Current cost charged to production Dr. WIP – BA…….xxx

Cr. Cr. Cash/Materials etc …. xxx
 a) Agricultural produces (IAS 41)
Measured at fair value less costs to sell, with changes recognised in profit or loss as the
produce grows.
B) Consumable Biological Assets related Entries

1) Before maturity
Measured at fair value less costs to sell, with changes recognised in profit or loss as the
produce grows.
Entry to record costs incurred:
Dr. Consumable Biological Assets xxx
Cr. Cash/Materials etc xxx
2) On Maturity
Measured at fair value less cost to sell (IAS 41)
Entry to record change in fair value:
Dr. Consumable Biological Assets xxx
Cr. Gain on R-measurement xxx
3) After maturity - Harvesting
 Measured at (IAS
2) Entry to record costs incurred:
Dr. Inventory (e.g. Corn) xxx
Cr. Consumable BA xxx
Cr. Gain on Re-measurement xxx

1.3. Presentation & Disclosures of Biological assets on Financial statements

1.3.1. Presentation & Classifications

It’s important to note that the term “biological asset” is unique to the field of accounting for the
purpose of clearly categorizing and identifying assets owned by businesses, such as farms and
vineyards, or produce that is a primary source of the company’s income. Businesses in various
industries and sectors can raise plants and animals for a variety of reasons; classifying them as
biological assets denotes their nature and their value to the business owner. In the statement of
financial position biological assets should be classified as a separate class of assets
falling under neither current nor non-current classifications. Biological assets
should also be sub-classified (either on the face of the statement of financial
position or as a note to the accounts).

Class of animal or plant

Nature of activities (consumable
or bearer) Maturity or immaturity
for intended purpose

1.3.2. Disclosures required

An entity shall disclose the aggregate gain or loss that arises on the initial
recognition of biological assets and agricultural produce and from the change in
value less estimated point-of sale costs of the biological assets.
A description of each group of biological assets is also required.
The methods and assumptions applied in determining fair value should also be disclosed.
The fair value less estimated point-of-sale costs of agricultural produce
harvested during the period shall be disclosed at the point of harvest
The existence and carrying amounts of biological assets whose title is
restricted and any biological assets placed as security should be disclosed.
The amount of any commitments for the development or acquisition of
biological assets and management’s financial risk strategies should also be
disclosed.
A reconciliation of the changes in the carrying amount of biological assets
showing separately changes in value, purchases, sales, harvesting, business
combinations, and exchange differences should be disclosed.