Agricultural land

Which standard applies to agricultural land?

IAS 41 explicitly excludes land related to agricultural activity. Land a farmer uses to grow crops or raise animals is owner-occupied property, plant and equipment under IAS 16. Land held to earn rentals, such as farmland let to tenant farmers, or held for capital appreciation, is investment property under IAS 40. Where part of a property is used by the farm and part is let, the parts are accounted for separately if they could be sold or leased separately; otherwise the whole is investment property only if the owner-occupied part is insignificant. See investment property at fair value or cost.

Agricultural land: buying a farm

A company buys an arable farm for US$ 5,000 thousand, including the growing crop. Valuers attribute 400 thousand to the wheat in the ground, at fair value less costs to sell, 600 thousand to the farm buildings and 400 thousand to the irrigation system, leaving 3,600 thousand for the land.

The crop is a biological asset under IAS 41; the buildings and irrigation are property, plant and equipment depreciated over their useful lives; and the land is property, plant and equipment that is not depreciated, because land generally has an unlimited useful life. If the land were later valued at 4,200 thousand and the company used the revaluation model, it would record the 600 thousand increase in other comprehensive income, with deferred tax where the gain would be taxable on sale.

How is land separated from crops in valuations?

Farm valuations and market transactions often cover land and crops together. IAS 41 recognises this: an entity may use the combined value of the biological assets and the land to arrive at the fair value of the biological assets, by deducting the fair value of the land and improvements. Equally, a valuation model for a growing crop deducts a charge for the use of the land, so the land's return is not counted twice. See crops and the point of harvest.

How are land improvements treated?

Irrigation systems, drainage, fencing, terracing, roads and buildings have limited lives, so they are separate components depreciated over those lives. Costs of preparing land that are permanent, such as some clearing and levelling, may be part of the land's cost and not depreciated, while costs that need to be repeated are depreciated or expensed. Clearing and planting costs for orchards and plantations are part of the bearer plants, not the land. See bearer plants.

What about leased land and land use rights?

Farmers who lease land recognise a right-of-use asset and lease liability under IFRS 16 for leases longer than twelve months, unless payments are wholly variable, for example a share of the crop, which are expensed as incurred. In several countries, land cannot be owned outright and is held under long-term land use rights granted by the state; these are usually accounted for as right-of-use assets or prepaid leases, amortised over the term. See palm oil plantations.

What about water rights and acquisitions?

Where water rights can be traded separately from the land, as in parts of Australia and the US, they are intangible assets under IAS 38, often with indefinite lives and tested for impairment annually. When a company buys a farm, it first decides whether it has acquired a business or a group of assets: under IFRS 3, it can apply the optional concentration test, and if substantially all the fair value is in the land, the purchase is an asset acquisition, with no goodwill and the price allocated on relative fair values. See IFRS 3 explained.

How does US GAAP differ?

US GAAP carries land at cost, with no revaluation model, and does not separate investment property from other property in the same way; farmland held for rent is property, plant and equipment at cost. Land is still not depreciated, and improvements are. So an IFRS farm using revaluation can show far higher land values than a comparable US farm. See agriculture accounting.

This guide is general information. It is not tax or legal advice for your situation.