International Accounting Standard (IAS) 41 was a controversial standard when it was initially issued in 2000, mainly for the reason that its requirement to measure all assets related to biological activity at fair value, with movements in fair value to be recognized in the statement of comprehensive income as gains or losses.
The requirement to measure biological assets create troubles in that it can be difficult to determine reliable fair values for some biological assets such as immature trees. There can also be valuation problems in distinguishing between processing subsequent to harvest of biological assets, and biological transformation. The most important points can be summarized as follows:
• Requirement to measure assets in biological nature at fair value through Income Statement
• Difficulty in determining reliable fair values for some biological assets like immature trees
• Difficulty distinguishing between processing subsequent to harvest and biological transformation
The Reason Why The Concept Of Control Is Problematic When Applying The Recognition Criteria Of IAS 41:
The concept of control can be problematical in the agricultural industry wherever leases or management agreements are involved. This happens because the definition of ‘agricultural activity’ in International Accounting Standard (IAS) 41 deals with the ‘management’ by an entity of the biological transformation of biological assets. Therefore it is possible to be confused management term with control. The definitions provided in IAS 41 describe ‘management’ as the facilitation of biological transformation by enhancing the conditions necessary for the process to take place. Some major points to note down in the understanding of control include that:
• Control is a key condition in the definition of an asset
• Control is not defined consistently in IFRS
• Control may or may not be linked to risks and rewards of ownership
The scope of IAS 41 refers to “agricultural activity” which refers to the management of biological assets, not the control of such assets.