Advice to Directors

IAS 41 Agriculture prescribes the accounting treatment, presentation and disclosures related to agricultural activity. A biological asset such as a dairy herd should be measured at each balance sheet date at its fair value less estimated point of sale costs, except where the fair value cannot be measured reliably. The fair value of cattle is the price in the relevant market less the transport and other costs of getting the cattle to that market. Any gains or losses arising from a change in fair value should be included in net profit or loss for the period in which it arises. IAS 41 encourages companies to separate the change in fair value less estimated point of sale costs between that due to physical changes and the portion attributable to price changes. The calculations are in the Appendix. The company is encouraged by IAS 41 to provide a quantified description of each group of biological assets. Thus the cows and heifers should be shown and quantified separately in the balance sheet.

Milk should be valued under IAS 41 at its fair value at the time of milking less estimated point of sale costs. However, due to the bad publicity the inventory of milk has risen tenfold from 50,000 kilograms to 500,000 kilograms. There is a need to ascertain whether the milk is fit for consumption and whether there will be a need to dispose of some of it. The quantity of milk which...