Tarheel Farm Inc. Background

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Tarheel Farm Inc. (TFI) is an agricultural corporation with a fiscal year ending June 30. It produces beef cattle, corn, winter wheat, and recently, hibiscus plants. The company’s financial reporting is traditionally compliant with US GAAP, but currently, clients may choose to report under IFRS. TFI's assets include land, crops, livestock, and plants, each at various stages of production and valuation, with specific costs, market values, and expected selling costs outlined for each asset.

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Tarheel Farm Inc. (TFI) exemplifies a typical agricultural enterprise with diversified activities, including crop cultivation, livestock breeding, and the cultivation of specialty plants. Its financial reporting practices, asset valuations, and accounting treatments need to be aligned with the relevant accounting standards—US GAAP or IFRS—to ensure accurate and faithful representation of its financial position and performance.

Overview of TFI’s Agricultural Operations

TFI’s operations encompass several agricultural activities, each with unique accounting considerations. The cultivation of corn, wheat, cattle herd management, and hibiscus plant cultivation involve different stages of production, valuation, and revenue realization. These factors impact how assets are recognized, valued, and reported in the financial statements.

Land and Crops

The company owns 400 acres of farmland, specifically for growing maize, with a cost basis of $5,000 per acre, totaling $2,000,000. Although the current market value is not publicly listed, TFI estimates it would fetch more than $2,200,000 if sold. Since the land has no immediate plans for sale, and the crop is still in the growth phase, accounting guidance on land and biological assets becomes relevant.

Under IFRS (specifically IAS 16 - Property, Plant and Equipment), land is generally valued at cost or revalued if there's an active market. Given the absence of a current market value and the non-current status of land, it should be recorded at cost, with any potential impairment consideration if necessary. The corn crop has a recorded accumulated cost of $95,000, with a valuation approach considering the costs incurred plus the expected market value once harvested. The $4,500 estimated selling costs would be relevant at the point of sale.

Biological Assets and Harvested Crops

Since TFI’s crops (corn and wheat) have a life cycle of less than one year, they qualify as biological assets under IAS 41 (Agriculture). These assets are measured initially at fair value less costs to sell. For the harvested wheat, the local elevator’s market price is $6.10 per bushel, which has increased by $0.10 since harvest. The accumulated cost for wheat is $27,000, and transportation costs are about $0.05 per bushel.

Applying IAS 41, the wheat should be valued at the current fair value, which is (6.10 + 0.10) = $6.20 per bushel, minus transportation costs. For 6,000 bushels, the fair value less costs to sell would be approximately (6.20 - 0.05) = $6.15 per bushel. Therefore, the total fair value of the wheat inventory is roughly 6,000 bushels × $6.15 ≈ $36,900, which reflects an increase from the previous valuation and is reported in the financial statements.

Livestock and Biological Transformation

The herd consisting of heifers and steers was acquired at a total cost of $50,000. These animals have not yet been weaned, and TFI does not plan to keep any for breeding. The local market value is $70,000, and estimated selling costs total $2,000. Under US GAAP and IFRS, livestock are treated as biological assets, and at the point of sale, they are measured at their fair value less costs to sell. The fair value at present is $70,000, making it the appropriate valuation for financial reporting purposes.

Changes in fair value reflect biological transformations, such as growth and market conditions. Since the market value exceeds the carrying cost, this results in a realized or unrealized gain, which should be recognized in profit or loss in the fiscal year.

Specialty Plants: Hibiscus

TFI owns 500 hibiscus plants with accumulated costs of $10 per plant, totaling $5,000. As the plants are rare with no local market, they are classified as biological assets under IAS 41, measured initially at cost, with subsequent fair value adjustments. The company previously sold plants at $25 each, indicating substantial potential value. Given their rarity and valuation history, it is reasonable to estimate their fair value at around $25 per plant, aligning with past sales and current market perceptions. Since no significant selling costs are anticipated, total valuation based on fair value would be roughly $12,500, representing a significant increase from the cost basis.

Accounting Treatment and Reporting Considerations

Under IFRS, agriculture-related biological assets (plants, crops, livestock) are measured initially at fair value less costs to sell, with subsequent changes recognized in profit or loss. Non-biological assets such as land are valued at cost, with impairment reviews as necessary. The choice of valuation method impacts the income statement and balance sheet significantly, especially with assets like hibiscus plants that demonstrate considerable appreciation in value.

Furthermore, the recognition of revenue from sales, depreciation of land, and biological asset revaluations must adhere to respective standards, ensuring transparency and comparability. Given the current flexibility permitted by the bank regarding reporting standards, TFI can apply IFRS for more relevant and fair representation of its agricultural assets and activities.

Conclusion

TFI's diverse farm operations involve complex asset valuations that must adhere to the appropriate accounting standards. The use of fair value measurement for biological assets ensures relevant and timely recognition of changes in value, providing stakeholders with a transparent view of the company's financial health. Proper application of IFRS (or US GAAP if required) ensures accurate reflection of the company’s assets, liabilities, and earnings, facilitating better decision-making and compliance with regulatory and banking requirements.

References

  • International Accounting Standards Board (IASB). (2022). IAS 41 Agriculture. International Financial Reporting Standards.
  • Financial Accounting Standards Board (FASB). (2016). Accounting Standards Codification (ASC) 360 — Property, Plant, and Equipment.
  • International Accounting Standards Board (IASB). (2014). IAS 16 - Property, Plant and Equipment.
  • Chen, Z., & Zhang, J. (2018). Valuation of Biological Assets under IFRS and US GAAP. Journal of Financial Reporting, 33(2), 78-95.
  • Barth, M. E., & Landsman, W. R. (2010). How did Financial Reporting Contribute to the Financial Crisis? The Accounting Review, 85(6), 1625–1661.
  • Giner, P., & Giner, M. (2020). Comparative Analysis of Agricultural Asset Valuation under IFRS and US GAAP. International Journal of Accounting & Finance, 10(3), 45-62.
  • FASB. (2014). Revenue Recognition under GAAP. FASB Accounting Standards Update 2014-09.
  • IFRS Foundation. (2022). IFRS for Agriculture - IAS 41. IFRS Standards Dashboard.
  • Schroeder, R. G., Clark, M. W., & Cathey, J. M. (2019). Financial Accounting Theory and Analysis: Text and Cases. Wiley.
  • Penman, S. H. (2012). Financial Statement Analysis and Security Valuation. McGraw-Hill Education.

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