Accounting Essay: Recognitions, Measurements & Disclosures of IAS 41
Task: Write an accounting essay focusing on IAS 41 accounting standard, incorporating the following:
- Analyze the requirements of the accounting standards on recognitions, measurements, and disclosures;
- Discuss the impact of the accounting standard on fundamental qualitative characteristics (relevance and faithful representation) of information reporting;
- Identify and critically discuss any three practical challenges in complying with the selected accounting standard.
The primary objective of establishing IAS 41 accounting standard examined here in accounting essay is to manage the transformation of the biological assets into agricultural produce. The accounting standards apply to the biological assets with some exceptions like agricultural produce at the harvest point and bearer plants. It is generally inapplicable intangible assets and government grants related to agricultural activities or bearer plants. This particular essay analyses the requirements of the accounting standards based on their recognition, measurements, and disclosures, along with the impact of the standard on the fundamental qualitative characteristics of information reporting. There are also a few practical challenges associated with the compliance of this standard identified and critically discussed in the essay.
Recognition, measurements, and disclosures
Recognition: IAS 41 is a set of accounting standards that are developed to transform biological assets into agricultural production. The accounting standards are primarily meant for accounting the agricultural activities based on the cultivated products of a company’s biological assets. The accounting standards were issued in the year 2000. When an entity controls the vents related to past transactions, it recognizes the biological assets or agricultural products (Abdel?khalik, 2019). There is also a future probability that the entity or fair value can be measured consistently. These are the standards that are considered integral to the recognition of this particular accounting standard or procedure.
Measurement: The measurement of a fair value can be done consistently unless there is an estimation of the fair value at a lesser selling cost. As harvested produce is a commodity, the produced agriculture is calculated at fair value less estimated cost of for selling at the harvest point. Therefore there is no measurement reliability except for produce. All costs other than the purchase cost of biological assets are considered as expenses incurred, like the related cost to the biological assets’ fair value. The only measurement problem is related to the fact that the biological assets in terms of active market does not carry a price that is already quoted . The measurements related to fair value are not reliable, and in these cases, the measurement of assets is conducted at lesser costs involving impairment losses and reduced accumulated depreciation. However, costs that are free from fair value are needed if the circumstances change in a significant pattern.
Disclosure: The disclosure requirements of IAS41 are dependent on the average loss or gain from recognizing the assets and agriculture produce, along with the amendments in value of selling during the provided period. The requirements are also fairly dependent on the biological assets of the entity as described by the broad group (Baigrie and Coetsee, 2016). Restricted and pledged security titles related to information of biological assets are also included in the disclosure requirements. Commitments related to the acquisition and development of biological assets and strategies related to risk management associated with financing are also included in the disclosure requirements. If the reliable measurement of fair value cannot be achieved, additional disclosures are required regarding the asset depreciation, fair value range, and reasons regarding being unable to reliably measure the fair value. The depreciation methods and rates also need to be disclosed, and the gross depreciation that have been accumulated and the amount that is carried.
Impact of IAS41 on fundamental qualitative characteristics of information reporting
Faithful representation and relevance are considered as the fundamental qualitative characteristics of information reporting. It is considered a concept that projects the accurate representation and reflection of financial statements that determine the true economic condition of the business. The faithful representation should be extended to every part of the financial statement that includes operational results, financial positions, and various cash flows (Enyi, 2019). The statements that display a fair and relevant approach to information reporting primarily consists of three characteristics should be complete, unbiased, and free from any error. The identification of potential implications for the reporting entities is required to measure the proper impact of IAS41 on the financial reporting of companies. The income related to the unrealized gains or losses is used to determine the assets’ fair value that needs to be reported.
The recognition of unrealized gains and losses resulting from the assets from the fair value changes to agricultural harvest will significantly affect the income and other financial statements of the firms that will ultimately lead to increased volatility in the reported income. The impact is relatively greater on the governmental agencies as compared to the private agencies. Faithful and relevance representation are the two fundamental characteristics that are integral to financial reporting. Relevance is a property related to information that provides the decision-making capability in the decisions made by the users of the financial information. Information is relevant if used to identify the future outcome if it carries a predictive value, or it can confirm the past evaluations about economic events that carry a confirmative value (Filip et al., 2017). These events are reflected on the financial statements of firms even under the accounting standards of IAS 41 that refers to agricultural production and biological assets.
Disclosures made to the current year's revenue that is related to the agricultural production and biological assets are useful in predicting the revenue for the next year, and it also confirms the accuracy level of the predictions that were made in the last year. Impairment charges related to the agricultural produce or biological assets are useful in revising the valuation of the user's net assets. The potential liabilities of a firm that deals with biological assets are uncertain and legal claims can be exceptionally high, which may not make estimations very accurate. There is a certain amount of integrity required by a firm during the creation of a financial report that is based on agricultural production and biological assets. The amounts of produce each year are variable and not fixed in nature, and that is the most important deciding factor in determining the variables of financial accounting (Özerhan and Sultano?lu, 2017). The relevance and faithful representation of factual events and transactions are integral to developing proper financial reports of companies that are accounted under IAS 41.
Three practical challenges of IAS 41 compliance
There are three practical challenges associated with the compliance of IAS 41 following the accounting standards.
The active market’s absence is a primary challenge that is associated with the compliance methods of biological assets. The company management entirely needs to depend on the estimates and judgments of biological assets. The available markets and market information needs to be assessed in order to review the current economic trends and conditions that were reported on previous dates. If the economy is steady throughout the economic term, the current prices would be useful to decide the biological assets’ fair value. As per Scott, Wingard and van Biljon (2016) the company administration needs to evaluate proper data in cases where assets are low or scarce so that a market may not have been created.
A lack of available valuation technique is considered as the second challenge related to the compliance of IAS 41. The application of various accounting principles that are based on similar entities can arise due to a lack of guidance from the national treasury. The treasuries of various nations provide the strategies and suggest needs related to the economic sector. The lack of supervision can be attributed to the cause of unavailability of valuation techniques. However, the event does not exempt the organization from the application of the requirements. If the requirements are ignored then it might result in opinions from the quality of audit departments.
High costs related to biological assets’ fair value accounting is also a practical challenge related to costs determining the fair value. According to Baigrie and Coetsee (2016) the excessive costs associated with the evaluation method are the challenge that is considered most significant in the case of biological assets. Specific requirements should be met when experts are contracted to do the valuation process. The administration is required to assess the credentials and knowledge of the value before the establishment of contact with the individual. The company's management remains accountable for the presentation of the compiled information despite the experts taking care of them. They should assess the performed work and evaluate the expert's work on the audit and other financial reporting. The underlying valuations will be audited audit by the auditor general's department, and the administration will supply auditors with the required information regarding the evidence.
The three challenges of adhering or complying to the IAS 41 are integral to the final preparation of financial reports of the company as the management of the companies are ultimately responsible for the proper assessment and evaluation of the financial statements. There is a significant amount of impact created on the relevance and the faithful representation of the biological assets that are evaluated by the fair value of assets and agricultural produce. The initial recognition, measurements, and disclosure are the three variables that are integral to the understanding of the accounting standards that are meant for appreciation, well as the depreciation of biological assets that are associated with agricultural produce. Therefore, it can be assessed that the cost and valuation related to the market of biological assets are the key factors determining the integrity of the financial; reports of the companies. There is significant impact of this accounting standard on the fundamental characteristics of information reporting that has been seen in the financial reports of the companies dealing in agricultural and biological products.
Abdel khalik, A.R. (2019). Failing Faithful Representations of Financial Statements: Issues in Reporting Financial Instruments. Abacus, [online] 55(4), pp.676–708. Available at: https://onlinelibrary.wiley.com/doi/full/10.1111/abac.12176 [Accessed 4 Jun. 2021].
Baigrie, I. and Coetsee, D. (2016). An analysis of the financial reporting compliance of South African public agricultural companies. Journal of Economic and Financial Sciences, [online] 9(3), pp.833–853. Available at: https://core.ac.uk/download/pdf/160732061.pdf [Accessed 4 Jun. 2021].
Enyi, P. (2019). ETHICAL PRINCIPLES AND FAITHFUL REPRESENTATION OF FINANCIAL REPORTS OF QUOTED COMPANIES IN NIGERIA. International Journal of Business and Management Review, [online] 7(3), pp.1–10. Available at: https://www.eajournals.org/wp-content/uploads/Odesanya-O.-S.pdf [Accessed 4 Jun. 2021].
Filip, A., Hammami, A., Molson, J., Hammami@concordia, A., Ca, Z., Huang, Jeny, A., Magnan, M. and Moldovan, R. (2017). Literature Review on the Effect of Implementation of IFRS 13 Fair Value Measurement. [online] . Available at: https://www.ifrs.org/content/dam/ifrs/meetings/2018/january/iasb/ap7c-ifrs-13-literature-review.pdf [Accessed 4 Jun. 2021].
Özerhan, Y. and Sultano?lu, B. (2017). M2M-Fair Value Accounting. [online] www.intechopen.com. IntechOpen. Available at: https://www.intechopen.com/books/accounting-and-corporate-reporting-today-and-tomorrow/m2m-fair-value-accounting/ [Accessed 4 Jun. 2021].
Scott, D., Wingard, C. and van Biljon, M. (2016). Challenges with the financial reporting of biological assets by public entities in South Africa. South African Journal of Economic and Management Sciences, [online] 19(1), pp.139–149. Available at: http://www.scielo.org.za/scielo.php?script=sci_arttext&pid=S2222-34362016000100009 [Accessed 4 Jun. 2021].