Are you ready for the new accounting standard for biological assets and harvested products?
In the agricultural industry, there has been great diversity in how biological assets were accounted for, leading to inconsistency in reporting among producers. After years of consultations and analysis, the Canadian Accounting Standards Board released new guidance to account for the biological assets and harvested products of agricultural producers in November 2019.
This standard, 3041 Agriculture, applies to agricultural producers, which are defined as enterprises that undertake agricultural production, such as crops, raising livestock or cultivating orchards. An enterprise that does not meet the definition of an agricultural producer would not apply the requirements of this standard, even if that enterprise has biological assets.
For producers, the standard describes the approach to be taken in measuring agricultural inventories using either the cost or net realizable value model. It also requires that the measurement of productive biological assets, such as breeding stock, must be under the cost model. One new requirement is that productive biological assets with a limited life will be amortized over the life the biological asset. All productive biological assets will be tested for impairment whenever circumstances indicate that the carrying amount may not be recoverable.
These changes in the standard are significant, and it is likely that additional information will need to be tracked and recorded in your financial records to accumulate the appropriate cost or net realizable values. It may be prudent to review your current processes to ensure the needed information is collected and available when the standard comes into effect.
Given the above changes, and the changes in disclosure requirements, your annual financial statements may look very different than in previous years. If your financial statements are provided to third parties, it is recommended that you connect with those parties to explain the expected effect on your financial information. Some financial measures, such as those used for borrowing covenants, may be significantly impacted by the changes. This standard is effective for years beginning on or after January 1, 2022, but it must be applied retrospectively, and thus, the changes should be tracked and measured starting on your year beginning on or after January 1, 2021.
We encourage you to reach out to your preferred Virtus Group service provider to obtain specific advice about how this new standard impacts your operation and assist you in preparing for the change.