Reminder: New Accounting Standard for Agriculture under ASPE and ASNPO Released! How Will Your Financial Statements be Impacted?
The Canadian Accounting Standards Board (AcSB) has released a new accounting standard on agriculture. The new standard provides guidance on recognizing, measuring, and disclosure with respect to biological assets and harvested products of biological assets. This new standard could be a dramatic change for many agricultural producers preparing financial statements under Accounting Standards for Private Enterprises (ASPE) or Accounting Standards for Not-for-Profit Organizations (ASNPO)! Why do you ask? Previously there was no specific authoritative guidance for agricultural producers. Hence, this led to significant diversity in practice, which the AcSB is trying to rectify.
The new guidance comes into effect for fiscal years beginning on or after January 1, 2022. Therefore, you have time to prepare now. Understanding how this new standard impacts your entity’s financial statements will be key in preparing for this upcoming change.
Why Should I Start Preparing Now?
You may need to revise your existing accounting policies for recognizing and measuring biological assets and the harvested products of these assets. In addition, you may need to track information that was not previously retained in order to apply the new accounting requirements. Therefore, it is important to understand the requirements of the new standards. Here is a brief overview of the new standard, Section 3041 of the CPA Canada Accounting Handbook, to get you started.
It is important to understand these key definitions since it affects how the biological assets and harvested products are measured and accounted for.
Agricultural producers are defined as enterprises that undertake agricultural production, such as those that engage in agriculture, apiculture, aquaculture, floriculture, or horticulture.
Agricultural production is defined as the development and harvest of biological assets for sale or for use in a productive capacity. Agricultural production covers a diverse range of activities, such as annual or perennial cropping, raising livestock or aquatic organisms, and cultivating orchards and plantations.
The following activities are not considered agricultural production therefore, they are not within the scope of this Section:
- harvesting from sources that are not owned or controlled by an agricultural producer (e.g., ocean fishing, hunting and trapping); and
- raising or purchasing animals for competitive sport.•
Biological assets are defined as living animals or plants, and can be either agricultural inventories or productive biological assets. Examples of biological assets are sheep, beef cattle, wheat, and fruit trees/vines.
Productive biological assets are held for use in the production or supply of agricultural inventories or other productive biological assets, acquired or developed for use on a continuing basis with other than short productive lives, and not intended for sale in the ordinary course of business. Examples of productive biological assets are mature sheep, mature beef cattle, unharvested wheat, and producing fruit trees/vines.
Agricultural inventories are defined as biological assets, or the harvested products of biological assets, that meet one of the following criteria:
- held for use in the ordinary course of business;
- in the process of agricultural production to be held for sale or use in a productive capacity;
- in the form of raw materials or supplies to be consumed in the enterprise’s agricultural production process; or
- held for use in a productive capacity with short productive lives.
Example of agricultural inventories include wool, beef, harvested wheat, and harvested fruit.
Who Applies this New Standard?
An entity preparing financial statements in accordance with ASPE or ASNPO will account for its biological assets and harvested products of biological assets used in agricultural production under this new accounting standard as long as it meets the definition of an agricultural producer. Entities not subject to this new guidance will continue to account for biological assets and harvested product using other standards in ASPE and/or ASNPO, such as Inventories, S3031.
How are Agricultural Inventories Measured?
First, an agricultural producer makes an accounting policy choice to use either the cost model or the net realizable value model in measuring its agricultural inventories. If the cost model is used a further accounting policy choice is made to determine the cost of its agriculture inventories using either: (a) full cost; or (b) only input costs (cost of direct materials and direct labour).
The net realizable value model, however, can only be used when all of the following three conditions are met:
- the product has a readily determinable and realizable market price;
- the product has reliably measurable and predictable costs of disposal; and
- the product is available for immediate delivery.•
An example of a type of agricultural inventory that might meet all three conditions is harvested wheat that is available for immediate delivery.
The accounting policy choice to use either the cost model or the net realizable value model must be applied consistently to all agricultural inventories having a similar nature and use.
Input costs of agricultural inventories comprise direct costs which include the purchase price, import duties and other taxes (other than those subsequently recoverable by the enterprise from taxation authorities), transport, handling, and other costs directly attributable to the acquisition of materials and services used in the development and harvest of biological assets. Trade discounts, rebates, and similar items are deducted in determining input costs.
Example of direct materials input costs for plants would include seeds or seedlings, fertilizer, and pesticides. Input costs for animals would include feed, vaccinations, and other veterinary costs.
Input costs of agricultural inventories also comprise direct labour, to the extent the cost of labour is readily determinable and is directly related to the items of agricultural inventories produced.
Alternatively, the cost of agricultural inventories measured at full cost includes all input costs (direct materials and direct labour) and a systematic allocation of fixed and variable agricultural production overheads and all other costs incurred in the development and harvest of biological assets.
Impact of Accounting Policy Choice for Cost Method
For entities that choose to use only input costs it is expected to reduce the cost and effort associated with measuring agricultural inventories at cost. Entities that choose to measure their agricultural inventories at full cost will likely incur a one-time cost to establish a methodology to allocate overhead costs.
How are Productive Biological Assets Measured?
Productive biological assets are initially measured at cost and are amortized over their useful lives. The costs of productive biological assets include all costs directly attributable to the acquisition, development or betterment of the assets, including delivery and establishing them at the location and in the condition necessary for their intended use (very similar to accounting standards for property, plant, and equipment).
There is one exception to amortization of productive biological assets. Some productive biological assets are managed on a collective basis to maintain their collective productive capacity indefinitely. Productive biological assets of this type are considered to have an indefinite useful life and are not subject to amortization.
An example of productive biological assets managed on a collective basis would be a herd managed collectively to meet a production quota indefinitely. Such a herd is considered to have an indefinite useful life and is not subject to amortization. The costs incurred in the maintenance of the service potential of the herd is a maintenance expenditure, not an addition to the biological assets.
Effective Date and Transition
Section 3041 applies to annual financial statements relating to fiscal years beginning on or after January 1, 2022. Earlier application is permitted. An agricultural producer is required to apply this new Section retroactively which means that the entity will need to restate the comparative information in its financial statements. There are certain transitional provisions that are meant to facilitate the adoption of this Section in a cost-effective manner that we can advise you on. There will also be added note disclosures and additional information that will be required to be disclosed in the financial statements. A new disclosure requirement for example is information regarding quantities of agricultural inventories and productive biological assets if readily determinable. For example, an agricultural producer with a cattle herd may track the number of cattle in its herd and would disclose this.
As noted, there is time to plan and transition for this new standard, but we recommend considering now how the impending changes will impact your financial statements prepared under ASPE or ASNPO. Financial covenants, debt agreements and /or other key metrics should be considered and discussed with users of the financial statement since banking agreements may need to be revised or waivers obtained if this new guidance creates violations.
Our team of experienced DJB advisors can help you assess the impact on your financial statements, and determine what information you need to gather in advance of applying this new standard for the first time.