Crops and the point of harvest

How is a growing crop valued?

IFRS 13 measures fair value as the price a market participant would pay for the asset in its current state. For a crop in the field, a buyer would pay roughly the value of the expected harvest less the costs it would still have to incur and a return for the risk and for using the land. So the valuation starts from the expected yield and price at harvest, deducts the remaining costs of growing, harvesting and transporting the crop, a contributory asset charge for the land, machinery and other assets that produce it, and an allowance for risks such as weather, and discounts the result if harvest is far off. Inputs such as yields are unobservable, so these are Level 3 measurements. See biological assets at fair value.

Crops at the point of harvest: wheat across a year end

A farm's wheat is three months from harvest at the year end. It expects to harvest 600 tonnes, with a forward price for harvest delivery of US$ 250 a tonne at the farm gate. Costs still to come for spraying, harvesting and haulage are 30 thousand, a market participant would charge 6 thousand for the use of the land and machinery over the remaining period, and the farm allows 8 thousand for weather and yield risk. Selling costs are 2% of the harvest value. The farm has spent 80 thousand on the crop so far.

The crop is carried at 103.0 thousand, and because the farm's costs of 80 thousand were expensed as incurred, it recognises a fair value gain of 103.0 thousand in the year, showing the value created by growth so far. At harvest, if the yield and price are as expected, the wheat is measured at 147.0 thousand, and the further gain is recognised then.

When does cost approximate fair value?

IAS 41 accepts that cost may approximate fair value when little biological transformation has taken place since the costs were incurred, for example seeds planted just before the year end, or when the impact of transformation on price is not expected to be material, such as the early growth of a long-term plantation. A crop sown in autumn and dormant over a winter year end is a common example. The farm still needs to consider whether events such as frost have reduced the value below cost.

What happens at the point of harvest?

Harvest is the detachment of produce from a biological asset or the end of its life processes: cutting the wheat, picking the fruit or felling the tree. At that moment, the produce is measured at its fair value less costs to sell, and the gain or loss is recognised in profit or loss. From then on, the produce is inventory, or another asset if it is used differently, and IAS 41 no longer applies. The measurement at harvest becomes the cost for IAS 2. See agricultural produce after harvest.

What about crops harvested over several years?

Sugar cane can be harvested from the same roots for several seasons, and some crops grow over more than a year before harvest. The roots or stools may meet the definition of bearer plants, accounted for under IAS 16, while the cane growing on them is a biological asset measured at fair value until each harvest. Long-term crops such as timber are valued with models that run to the expected felling date. See bearer plants.

How does US GAAP differ?

Under ASC 905, growing crops are inventory carried at the lower of cost and net realisable value, with costs accumulated until harvest and no gain recognised before sale. So an IFRS farm reports profit as crops grow, while a US GAAP farm reports it when the harvest is sold. See agriculture accounting.

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