Agricultural produce after harvest

What is the cost of harvested produce?

IAS 41 ends at the point of harvest. The produce is measured at fair value less costs to sell at that moment, and IAS 2 treats that amount as its cost. The costs actually incurred to grow the crop have already been expensed under IAS 41, and the difference between them and the harvest value has been recognised as a fair value gain, so the produce's later sale shows only the margin earned after harvest. See crops and the point of harvest.

Agricultural produce after harvest: wheat to sale

A farm harvests 600 tonnes of wheat when the price at the farm gate, less selling costs, is US$ 250 a tonne, so the deemed cost is 150 thousand. It stores the wheat on the farm for three months, at a cost of 4 thousand, and sells it for 265 a tonne, with selling costs of 2%.

The farm's total profit on the crop is this post-harvest margin plus the fair value gains recognised while the wheat was growing. Storage costs are expensed under IAS 2 unless storage is necessary in the production process before a further stage, as with maturing wine or cheese, where it is part of the cost of conversion.

What if prices fall after harvest?

Inventory is measured at the lower of cost and net realisable value. If, at the year end, the wheat price falls to US$ 230 a tonne, net realisable value is 600 × 230 less 2% selling costs, 135.2 thousand, below the deemed cost of 150 thousand, so the farm writes the wheat down by 14.8 thousand. If prices recover before sale, the write-down is reversed, up to the original deemed cost. Many farmers fix prices before harvest; see hedging crop prices. See net realisable value.

How is processed produce accounted for?

When harvested produce is processed, the deemed cost at harvest is the cost of the raw material, and processing costs are added as costs of conversion: crushing and fermenting grapes into wine, milling cane into sugar, turning milk into cheese, or sawing logs into timber. Fixed production overheads are allocated on normal capacity. The products of processing are ordinary inventory, outside IAS 41. See IAS 2 inventories.

How are sales through cooperatives treated?

Many farmers sell through cooperatives that pool produce and pay an initial price on delivery with later payments when the pool's sales are complete. If the farmer transfers control of the produce to the cooperative on delivery, it recognises revenue then, with the later pool payments as variable consideration, estimated and constrained under IFRS 15. If the cooperative acts as the farmer's agent and the farmer keeps control until the cooperative sells to customers, revenue waits until then. The terms of membership decide which. See variable consideration.

When can produce be measured at fair value instead?

IAS 2 excludes from its measurement rules producers of agricultural and forest products and agricultural produce after harvest that are measured at net realisable value in accordance with well-established practice in their industries, for example where there is an active market and a government guarantee or a negligible risk of failing to sell, with changes in profit or loss. Commodity broker-traders can also measure their inventories at fair value less costs to sell. Most farms do not qualify for the producer exception and use the lower of cost and net realisable value.

How does US GAAP differ?

Under ASC 905, harvested crops are inventory at the lower of cost and net realisable value, with cost based on the actual costs of growing them, so there is no deemed cost at harvest. US GAAP also allows some harvested agricultural products with readily determinable market prices and insignificant disposal costs to be carried at net realisable value. See agriculture accounting.

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