Farming and Finances: Because Crops Won’t Count Themselves

13 Mar

Preview

Farming is an important industry, and keeping accurate financial records is essential for farmers and agricultural businesses. However, accounting for living assets—such as crops and livestock—is more complex than accounting for buildings or machinery.

To help small and medium-sized businesses (SMEs) report their farming activities correctly, Section 34 of the IFRS for SMEs Accounting Standard provides rules on recognising, measuring, and disclosing biological assets (such as animals and plants) and agricultural produce (such as harvested crops and milk).

This guide explains these rules in simple terms, using examples in South African Rand (ZAR) to make them easier to understand.

What Does Section 34 Cover?

Section 34 applies to biological assets, which are living plants and animals used in farming. It also applies to the agricultural produce that comes from these assets.

Examples of Biological Assets

Livestock – Cattle, sheep, goats, pigs, chickens, etc.
Crops – Maize, wheat, sunflowers, vegetables, etc.
Fruit trees and vineyards – Orange trees, apple trees, grapevines, etc.
Other agricultural plants – Sugarcane, coffee plants, macadamia trees, etc.

However, some plants are treated differently under IFRS for SMEs.

What Are Bearer Plants?

A bearer plant is a plant that:

Is used to grow produce for many years (e.g., an orange tree that produces fruit every season).
Is not sold as a plant itself (e.g., a grapevine grown for its grapes, not for its wood).
Will not be harvested at the end of its life (e.g., a tea bush that continues producing leaves for many years).

How Are Bearer Plants Treated?

Bearer plants are recorded under Section 17 (Property, Plant, and Equipment).
The fruit or crops that grow on them are recorded under Section 34.

Example:

A farmer in Mpumalanga owns mango trees. The trees themselves are recorded as Property, Plant, and Equipment, but the mangoes are recorded as biological assets under Section 34.

What Is Agricultural Produce?

Agricultural produce is anything harvested from a biological asset, such as:

Milk from cows
Wool from sheep
Eggs from chickens
Fruit from trees
Timber from trees grown for lumber

Section 34 explains how to recognise and measure these biological assets and agricultural produce correctly.

When Should a Farming Business Recognise a Biological Asset?

A biological asset (like a cow or a growing maize crop) should be recorded in the financial accounts when:

The business owns and controls the asset (e.g., a farmer purchases a herd of cattle).
The asset is expected to bring future income (e.g., the cattle will produce calves or milk that will be sold).
The cost or fair value of the asset can be measured reliably.

Example:

A farmer in Free State plants 100 hectares of maize. Once the maize starts growing, the farmer must recognise it as an asset because it will later be harvested and sold. If each hectare produces maize worth ZAR 12,000, then the total biological asset is recorded as ZAR 1.2 million.

How to Measure Biological Assets

Once a biological asset is recognised, a business must decide how to measure its value in financial reports. There are two options:

1. Fair Value Model

The fair value model is used if the market price of the asset can be found easily without too much cost or effort.

Biological assets are measured at "fair value minus selling costs" when they are first recorded and at the end of each financial year.
Any increase or decrease in fair value is recorded as a profit or loss.

Example:

A farmer in KwaZulu-Natal owns 200 sheep. If the market price per sheep is ZAR 2,500 at the start of the year and ZAR 3,000 at the end of the year, the farmer records the ZAR 500 increase per sheep as profit:

Start of the year: 200 sheep × ZAR 2,500 = ZAR 500,000
End of the year: 200 sheep × ZAR 3,000 = ZAR 600,000
Profit recorded: ZAR 600,000 - ZAR 500,000 = ZAR 100,000

Agricultural produce (such as harvested apples or wool) is also measured at "fair value minus selling costs" at the time of harvest.

Example:

A dairy farmer in Limpopo milks cows and sells the milk for ZAR 10 per litre. If it costs ZAR 1.50 per litre to transport the milk to market, the milk is recorded at ZAR 8.50 per litre (ZAR 10 - ZAR 1.50) at the time of harvest.

What Information Needs to Be Disclosed?

A business using the fair value model must include in its financial report:

A list of biological assets (e.g., cows, sheep, maize crops).
A summary of changes in the value of biological assets (e.g., births, sales, or changes in fair value).

2. Cost Model

If fair value cannot be determined easily, the business must use the cost model instead.

Biological assets are recorded at cost, minus depreciation and impairment losses.
Agricultural produce must still be recorded at fair value at the time of harvest.

Example:

A farmer in Northern Cape buys 500 macadamia trees for ZAR 250,000. The trees have a useful life of 20 years, so the farmer records a depreciation expense of ZAR 12,500 per year (ZAR 250,000 ÷ 20 years).

However, when the macadamia nuts are harvested, they must still be measured at fair value at that time.

What Information Needs to Be Disclosed?

Businesses using the cost model must include in their financial reports:

A list of biological assets.
Why fair value could not be used.
The depreciation method and useful life of assets.
The original cost of the assets and their accumulated depreciation.

Key Takeaways

Farming businesses must record biological assets (crops, animals) and their produce in financial statements.
They must use the fair value model if market prices are available. If not, they use the cost model.
Agricultural produce (harvested crops, milk, wool) must always be recorded at fair value at harvest.
Bearer plants (fruit trees, vines, coffee plants) are recorded as Property, Plant, and Equipment, but their produce is recorded under Section 34.
Businesses must disclose important information about how they measure and report biological assets.

By following these guidelines, farming businesses can accurately reflect the value of their assets and produce, ensuring their financial reports are clear, reliable, and useful for decision-making.

Join CIBA for our IFRS for SMEs Agriculture and Biological Assets CPD here.

🌱 Master IFRS for SMEs: Agriculture & Biological Assets🌱

Join us for a 2-hour live session on 31 March 2025, where we’ll break down Section 34 of IFRS for SMEs, covering biological assets and agricultural produce.

📅 Date: 31 March 2025
⏰ Time: 10:00
📍 Format: Live Event
🎓 CPD Units: 3
📊 Category: Accounting
🚀 Channel 2: Growth

This session is designed for accountants, financial professionals, and business owners in the agriculture sector who need to navigate IFRS for SMEs compliance with confidence.

💡 What You’ll Learn:
✔️ Definition & scope of biological assets & agricultural produce
✔️ How to recognize, measure, and disclose biological assets
✔️ Practical accounting applications and case studies

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