How to recognize and measure biological assets under IAS 41
- Graziano Stefanelli
- Sep 17
- 4 min read
Biological assets are living animals and plants held for agricultural activity. These assets are subject to a unique accounting treatment under IFRS, specifically IAS 41 – Agriculture, which requires entities to recognize and measure them at fair value less costs to sell. This differs from most other non-financial assets, which are typically carried at cost or depreciated cost. US GAAP, by contrast, does not have a standalone standard for biological assets, often defaulting to ASC 905 (Agriculture Industry) or treating them as inventory or fixed assets, depending on context.
Biological assets are defined by their role in agricultural activity.
IAS 41 defines biological assets as living plants or animals involved in agricultural activity, which includes processes of growth, degeneration, production, and procreation. These assets must be:
Controlled by the entity as a result of past events
Expected to provide future economic benefits
Typical examples include:
Livestock (e.g., dairy cattle, pigs, poultry)
Orchards, vineyards, and plantations (e.g., tea bushes, rubber trees)
Trees in a forestry operation
Breeding animals
Biological transformation refers to the natural changes in the asset’s quantity or quality—such as growth, weight gain, milk production, or fruiting.
Recognition requires control and probable future economic benefits.
Under IAS 41, an entity must recognize a biological asset when:
It controls the asset through ownership or similar rights;
The asset is likely to generate future economic benefits;
The fair value or cost to measure the asset reliably can be determined.
Recognition is not optional: once these conditions are met, the asset must be measured and recorded in the statement of financial position.
Measurement is based on fair value less costs to sell at initial recognition and each reporting date.
The core principle of IAS 41 is measurement at fair value less costs to sell:
Fair value is the market price in an active market for similar biological assets.
Costs to sell include incremental costs such as commissions, levies, and transfer taxes.
This approach leads to frequent revaluation and introduces volatility in profit or loss, as changes in fair value must be recognized immediately in the income statement.
Entities must maintain appropriate valuation techniques if market prices are not directly observable, including discounted cash flows or market multiples.
Agricultural produce is treated separately at the point of harvest.
Once the biological asset has yielded produce (e.g., harvested fruit, felled timber), the agricultural produce is:
Measured at fair value less costs to sell at the point of harvest, and then
Transferred to inventory, and subsequently measured per IAS 2 – Inventories.
This two-step approach ensures that the transformation (biological asset) and extraction (produce) are separately reported and valued.
US GAAP lacks a unified biological asset model, leading to inconsistencies.
In US GAAP, there is no equivalent to IAS 41. Treatment varies depending on context:
ASC 905 (Agriculture) applies to industry-specific activities but provides limited guidance.
Livestock is typically treated as inventory or fixed assets.
Crops and produce are accounted for at lower of cost or market (LCM), using historical cost and accrual-based farming costs.
This cost-based approach contrasts sharply with IFRS’s fair value model and leads to less volatility but also less reflection of current biological asset value.
Gains and losses from fair value changes must be disclosed transparently.
IAS 41 requires detailed disclosure of:
Reconciliation of biological asset balances
Gains or losses from fair value changes
Description of biological assets and related valuation methods
Quantities and classifications (e.g., bearer vs consumable)
This enhances users’ understanding of how biological processes contribute to earnings and balance sheet movements.
Journal entries reflect both fair value adjustments and harvest transfers.
Example 1: Fair value increase in biological asset
Dr. Biological assets 60,000
Cr. Gain on fair value change 60,000
Example 2: Harvesting produce and transferring to inventory
Dr. Inventory (agricultural produce) 30,000
Cr. Biological assets 30,000
These journal entries show how changes in natural growth and harvest are immediately reflected in the accounts under IAS 41.
IAS 41 represents a specialized and forward-looking model of asset valuation, designed to reflect the dynamic nature of agricultural activity. While US GAAP still relies on traditional cost-based approaches, IFRS forces entities to measure biological assets in real-time, using fair value logic that prioritizes economic substance and transparency.
____________
FOLLOW US FOR MORE.
DATA STUDIOS
