Kurumsal Finans ve Strateji Rehberi | Finance & Strategy Insights

Agricultural activities have unique accounting challenges, particularly when it comes to valuing biological assets such as livestock or crops. The Turkish Accounting and Financial Reporting Standards (TMS/TFRS) provide guidance on how these assets should be measured and reported. In this article, we will examine how TMS 41 Agriculture, TMS 2 Inventories, TMS 20 Government Grants, and TFRS 5 Non-current Assets Held for Sale apply to a sheep farming business.

1. TMS 41 – Measurement of Biological Assets

Assume a company owns 200,000 sheep and 50,000 lambs. According to TMS 41, biological assets must be measured at fair value less costs to sell.

• Sheep (200,000 head):
  • Opening balance (2 years old): 200,000 × 120 TL = 24,000,000 TL
  • Closing balance (3 years old): 200,000 × 128 TL = 25,600,000 TL
  • Change in value: +1,600,000 TL
• Lambs (50,000 head):
  • Opening balance (1 year old): 50,000 × 90 TL = 4,500,000 TL
  • Closing balance (2 years old): 50,000 × 95 TL = 4,750,000 TL
  • Change in value: +250,000 TL

Total increase in biological assets: 1,850,000 TL.

Part of this change stems from biological transformation (aging of the animals), and part from price fluctuations in the market.

2. Fair Value Challenges in the Delta Region

The company also operates in the Delta Region, where demand for sheep products has dropped due to a livestock disease, leading the government to impose production restrictions. Management claims that fair value cannot be reliably measured.

However, TMS 41 allows cost measurement only in rare cases. Market signals suggest fair value is still measurable:

• Competitor’s offer: 2.5 million TL
• Discounted cash flow estimate: 3 million TL

These indicators provide sufficient evidence of fair value. Therefore, the company must continue to apply fair value measurement and disclose related uncertainties in the notes to the financial statements.

3. TMS 2 – Measurement of Inventories

Products derived from biological assets, such as wool or milk, fall under TMS 2 after harvest.

Example: The company holds 150,000 kg of wool at year-end.

• Cost: 20 TL/kg → 3,000,000 TL
• Net realizable value: 22 TL/kg → 3,300,000 TL

Since inventories are measured at the lower of cost or net realizable value, the wool stock is reported at 3,000,000 TL in the balance sheet.

4. TMS 20 – Government Grants

The government announces a 4 million TL compensation program to offset producers’ income losses.

• Public announcement (e.g., October 1, 20X4) → does not create a receivable.
• Official grant approval (e.g., January 5, 20X5) → creates a receivable.

Accordingly, the grant cannot be recognized as income in the 20X4 financial statements, but must be disclosed as a subsequent event. It is recognized as income in 20X5.

5. TFRS 5 – Non-current Assets Held for Sale

A competitor offers to purchase the company’s Delta Region farms for 8 million TL. However, management has no intention to sell.

Under TFRS 5, an asset is classified as held for sale only if:

• It is available for immediate sale,
• A sale is highly probable, and
• Management has committed to the sale.

Since these conditions are not met, the farms remain classified under TMS 41 for livestock and TMS 16 for land and buildings, rather than as assets held for sale.

Conclusion

This sheep farming case illustrates the practical application of accounting standards in agriculture:

• TMS 41 ensures fair value measurement of livestock,
• TMS 2 governs post-harvest product inventories,
• TMS 20 addresses recognition of government grants, and
• TFRS 5 applies only when there is a clear intent to sell assets.

For financial managers and farm owners, accurate application of these standards is critical to ensure transparent reporting, regulatory compliance, and investor confidence.