Bio Assets.docx

BIOLOGICAL ASSETS PAS 41- AGRICULTURE PAS 41 shall be applied to account for the following when they relate to agricultural activity: a. Biological assets b. Agricultural produce c. Government grant related to a biological asset PAS 41 is applied to agricultural produce at the point of harvest. Thereafter, PAS 2 on inventories shall be applied. Also, PAS 41 does not deal with processing of agricultural procedure after harvest. For an instance, the processing of grapes into wine is covered by PAS 2. BIOLOGICAL ASSETS are “living animals and living plants”. AGRICULTURAL PROCEDURE is the harvested product of an entity’s biological assets. Harvest is the detachment of procedure from a biological asset or the cessation of a biological asset’s life processes. EXAMPLES OF BIOLOGICAL ASSETS These will be the result of processing after harvest. Biological Asset 1. Sheep 2. Trees in plantation

Agricultural Procedure

Product after harvest

Wool

Yarn, carpet

Felled trees

Logs, lumber

Harvested cane

Sugar

Milk

Cheese

Carcass

Sausage, cured ham

Leaf

Tea, cured tobacco

Grapes

Wine

Picked fruits

Processed fruit

forest 3. Plant 4. Dairy cattle 5. Pigs 6. Bushes 7. Vines 8. Fruit trees

Agricultural activity or simply "agriculture" This is the management by an entity of the biological transformation and harvestof biological assets for sale or for conversion into agricultural produce or into additional biological assets. Examples of agricultural activity: Agricultural activity covers a diverse range of activities such as the following: 1. Raising livestock 2. Annual or perennial cropping 3. Cultivating orchards and plantations 4. Floriculture 5. Aquaculture, including fish farming Features of agricultural activity Certain common features of agricultural activity are as follows: A. Capability to change Living animals and plants are capable of biological transformation. B. Management of change The agricultural activity must be "managed" to facilitate the biological transformation by enhancing or at least stabilizing conditions necessary for the process to take place for example, nutrient levels, moisture, temperature fertility and light. Such management distinguishes agricultural activity from other activities. For example, harvesting from "unmanaged" sources, such as ocean fishing and deforestation, is not agricultural activity. C. Measurement of change The change is quality or quantity brought about by biological transformation or harvest is measured and manufactured as a routine management function.

Biological transformation Biological transformation comprises the processes of growth, degeneration, production and procreation that cause qualitative and quantitative changes in a biological asset. Biological transformation results from the following types of outcomes: 1. Asset changes through: A. Growth - increase in the quantity of improvement in quality of animal or plant. B. Degeneration - decrease in quantity or deterioration in quality of animal or plant. C. Procreation - creation of additional living animal or plant. 2. Production of agricultural Produce such as latex, tea leaf, wool and milk. Recognition An entity shall recognize a biological Asset or agricultural Produce when: a. The entity controls the asset as a result of past events. b. It is probable that future economic benefits associated with asset will flow to the entity. c. The fair value of cost of the asset can be measured reliably. In agricultural activity, control may be evidenced by, for example, legal ownership of cattle and the branding otherwise marking the cattle on acquisition or birth. Measurement 

A biological asset should be measured at each balance sheet date at its fair value less estimated point of sale costs. The price in an active market is the best basis of the asset’s fair value.

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Agricultural produce shall be measured at fair value less costs to sell at the point of harvest.

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Cost to sell -the incremental costs directly attributable to the disposal of an asset. -costs necessary for a sale to occur -exclude transport cost, finance costs and income taxes (PAS 41Conclusions)

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When market determined prices or values are not available in its present condition, the present value of expected net cash flows from the asset discounted at current determined pretax rate may be used.

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Point-of-sale costs include broker’s commissions, levies by regulatory authorities, and transfer taxes and duties. They don’t include, however, costs of getting the asset to a market.

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Any change in the fair value less point of sale costs during a reporting period is taken to profit or loss. PAS/IAS 41 encourages separate disclosures of change in fair value less estimated point of sale costs due to physical change.

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When fair value is not reliably determinable for a biological asset, and when alternative estimates of fair value are determined to be clearly unreliable, the biological asset is measured on the balance sheet at cost less accumulated depreciation and accumulated impairment losses.

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If in subsequent period, the fair for the biological asset becomes reliably measurable, the entity must switch to fair value less point-of-sale costs measurement basis.

Fair Value of Biological Asset 

There is a presumption that fair value can be measured reliably for a biological asset, but it can only be rebutted on initial recognition for a biological asset.

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The biological asset shall be measured at cost less accumulated depreciation and any accumulated impairment loss.

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However, once the fair value becomes measurable, the entity shall measure the biological asset at fair value less costs to sell.

Fair Value of Agricultural Asset 

In all cases, an entity shall measure agricultural produce at the point of harvest at fair value less costs to sell.

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Fair value of agricultural produce at the point of harvest can always be measured reliably. (PAS 41)

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After the point of harvest, PAS 2 shall be applied. It means that the inventory shall be measured at the lower cost and nest realizable value.

Determination of Fair Value 

PAS 41 sets out several ways of measuring fair value which include the following: 1. Quoted price in an active market. 2. Most recent market transaction price. 3. Market price for similar asset with adjustment to reflect any differences. 4. Sector benchmark, such as value of an orchard per hectare, or value of cattle per kilogram. 5. Present value of expected net cash flows from the asset.

Active Market 

An active market is a market where all of the following conditions exist: 1. The items traded within the market are homogeneous, meaning similar identical in nature or form. 2. Willing buyers and sellers can normally be found at any time. 3. Prices are available to the public.

Gain and Loss 

A gain or loss arising on initial recognition of a biological asset at fair value less costs to sell. Any subsequent changes shall be included in profit or loss.

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A gain or loss arising from initial recognition of agricultural produce at fair value less costs to sell shall also be included in profit or loss. A gain or loss may arise on initial recognition of agricultural produce as a result of harvesting.

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An entity shall disclose the aggregate gain or loss arising on the initial recognition of biological assets and agricultural produce and from the change in fair value less costs to sell of biological assets.

Agricultural Land 

It is not deemed a biological asset. It doesn’t apply to agricultural land based on the principle in PAS 41.

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The requirements of PAS 16 which are applicable to property, plant and equipment apply equally to agricultural land for purposes of measurement.

Biological Assets Attached To Land 

These are often physically attached to land, for example, trees in a plantation forest.

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There may be no separate market for biological assets that are attached to the land but an active market may exist for the combined assets, that is, for the biological assets and land as a package.

Government Grant 

An unconditional government grant related to a biological asset that has been measured at fair value less cost to sell shall be recognized as income when the grant becomes receivable.

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The grant shall be recognized as income only when the conditions attaching to the grant are met, if it is conditional.

If a government grant relates to a biological asset measured at cost less any accumulated depreciation and any accumlated impairment losses, PAS 20 on “government grant” is applied. Accounting Entries for Biological Assets For a complete illustration of transactions relating to biological assets, assume the following information for Monteclaire Farms, Inc. FV less point of sale cost of biological assets at December 31,2006 Biological assets during the period Purchase price FV less point of sale cost upon purchase Gain arising from change in fair value less point of sale costs due to price changes due to physical changes Sale of biological assets

P3,500,000 4,000,000 3,900,000 1,200,000 2,500,000 4,200,000

Upon purchase of the biological assets Biological assets Loss on Initial Recognition of Biological Assets Cash

3,900,000 100,000 4,000,000

Increase in fair value less POS (point of sale) costs during the period (inclusive of birth of biological assets and change in fair value immediately prior to sale) Biological Assets Gains arising from change in FV less POS costs due to price change

3,700,000 1,200,000

Gains arising from change in FV less POS costs due to physical change

2,500,000

Sale of biological assets (any change in fair value is assumed to have been taken up in the above entry) Cash

4,200,000 Biological Assets

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In the notes to the financial statements, the disclosure of the reconciliation of the changes in the carrying amounts of the biological assets during the period is presented as follows:

Carrying amount, January 01,2007 Increase due to purchases Gains arising from change in FV less POS costs due to price change Gains arising from change in FV less POS costs due to physical change Decreases due to sales Carrying amount, December 31,2007  

4,200,000

P3,500,000 3,900,000 1,200,000 2,500,000 (4,200,000) P6,900,000

If the biological assets are not expected to be disposed of within twelve months after the balance sheet date, they are presented as part of non-current assets on the balance sheet. The account gain arising from change in fair value less point of sale costs biological assets is presented as revenue in the income statement.

Disclosing separately the change in Fair Value due to Price Change and the Change in Fair Value due to Physical Change     

Fair value of bilogical assets- can change due to both physical changes and price changes in the market PAS/ IAS 41 encourages but not require separate disclosures of these two elements accounting for change in fair value. Separate disclosure- useful in appraising current period performance and future prospects particularly when production cycle is more than one year (PAS 41, par 51) If the company opts to disclose the two factors separately, the recognition of income is split into two components. The change in fair value due to price change – increase or decrease in the price of the biological asset having the same characteristics at two different dates

Example: If a two year old cattle had a fair value less point of sale cost of P25,000 on January 1, 2007 and a two year old cattle having the same size and characteristics had a fair value less point of sale cost of P28, 000 on December 31, 2007, then the gain arising from change in fair value due to price change during the year for that cattle is P3,000. The two year old cattle on January 1,2007 is already three years old at December 31,2007. If the fair value of a three year old cattle on December 31 is P35,000, the change in fair value less point of sale costs due to physical

change is P7,000, which is P35,000 – P28,000. The birth of an animal gives rise to change in fair value due to physical change. For a complete illustration, consider the following: A herd of 20, 2-year old animals was held on January 1,2007. Five animals, aged 2.5 years old, were purchased on July 1,2007. On the same date, 4 animals were born. Ten animals were sold at December 31,2007, aged 3 years old, at fair value. Per unit fair value less estimated point of sale costs were as follows:

January 1,2007 2 year old animal July 1,2007 New born animal 2.5 year old animal December 31,2007 New born animal 0.5 year old animal 2 year old animal 2.5 year old animal 3 year old animal

P15,000 8,000 20,000 8,500 9,500 16,500 23,000 28,000

The following are the entries to record the foregoing transactions: July 1 Biological Assets Cash Purchased five 2.5 year old animals 1 Biological Assets Gain Arising from FV less POS cost Due to Physical Change Birth of 4 animals (8,000 x 4) Dec. 31 Biological Assets Gain Arising from FV less POS cost Due to Price Change Gain Arising from FV less POS cost Due to Physical Change Price Change New born 4 x (8,500 – 8,000) 2 year old animals 20 x (16,500 – 15,000) 2.5 year old animals 5 x (23,000 – 20,000) Total Physical Change 0.5 year old animals

100,000 100,000

32,000 32,000

306,000 47,000 259,000

P2,000 30,000 15,000 P47,000

4 x (9,500 – 8,500) P4,000 3 year old animals 20 x (28,000 – 16,500) 230,000 5 x (28,000 – 23,000) 25,000 Total P259,000 Cash (10 x 28,000) Biological Assets Sale of ten animals

280,000 280,000

Reconciliation Balance, January 1,2007 P300,000 Purchase on July 1 100,000 Change in FV less POS Cost due to Price Change 47,000 Change in FV less POS Cost due to Physical Change (259,000 + 32,000) 291,000 Sale (280,000) Balance, December 31,2007 P458,000 On hand on December 31,2007 0.5 year old animals ( 4 x P9,500) P38,000 3 year old animals (15 x 28,000) 420,000 Balance, December 31,2007 P458,000 Disclosing Separately The Change in Fair Value Less Point of Sale Costs Due to Price Change and Due to Physical Change 2 year old cattle at January 1,2007

P25,000

2 year old cattle at December 31,2007

28,000

Increase in FV less POS cost due to Price Change= P3,000

3 year old cattle at December 31,2007

P35,000

Increase in FV less POS cost due to Physical Change= P7,000

Agricultural Produce 

Agricultural produce is the harvested product of the entity’s biological assets.

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If so, it shall be measured at its fair value less estimated point-of-sale costs at the point of harvest. Such measurement is the cost at that date when applying PAS 2. Inventories of another applicable accounting standard. (PAS 41, paragraph 13)

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A gain or loss arising from an initial recognition of agricultural produce at fair value less estimated point-of-sale costs shall be included in profit or loss for the period in which it arises. A gain or loss may arise on initial recognition of agricultural produce as a result of harvesting. (PAS 41, paragraphs 25 and 29)

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PAS 41 reflects the view that the fair value of agricultural produce at the point of harvest can always be measured reliably.

Required Disclosures An entity shall disclose the following relating to biological assets and agricultural procedure. (a) The aggregate gain or loss on initial recognition of biological assets and agricultural procedure and from the change in fair value less point of sale costs of the biological assets; (b) a description of each group of biological assets; (c) the methods and assumptions applied in determining fair values; (d) the fair value less estimated point of sale costs of agricultural procedure harvested during the period; (e) any restrictions on title and carrying amounts of biological assets pledged as security for liabilities; (f) the amounts of commitments for the development or acquisition of biological assets; (g) a reconciliation of changes in carrying amount, showing separately changes in value, purchases, sales, harvest, business combination and exchange differences; (h) gain or loss on disposal; (i) where fair value cannot be measured reliably, the depreciation method used, useful lives or depreciation rates; (j) where fair value cannot be measurable and the effect of the change for biological assets previously measure at cost less accumulated depreciation and impairment loss; (k) The nature and extent of government grants of biological assets, conditions relating to the grants that have not been fulfilled, and significant changes in the expected levels of the grants.