Story Of Patin

FACULTY OF ECONOMIC AND MANAGEMENT SEMESTER 2018/2019 EPPA4716 INTEGRATED STUDY CASE

MAGENTA THE STORY OF PATIN PREPARED FOR: DATIN DR ZAINI BINT EMBONG

PREPARED BY:

MATRIC NO.

AL- AZRI BIN ABU

A153043

NUR SYAZIERA BINTI ABD MAJID

A152922

MARYAM BINTI ABDUL SHUKOR

A153397

FILZATIL HAINA BINTI HUSSIN

A152944

SAFFA’ INSYIRAH BINTI FAKHRUL-ARIFIN

A152636

Contents 1

EXECUTIVE SUMMARY ................................................................................................ 3

2

ISSUE STATEMENTS ...................................................................................................... 4

3

DIFFERENT BETWEEN ACCOUNTING CYCLE AND OPERATING CYCLE.......... 5

4

MFRS 141- AGRICULTURE ............................................................................................ 7 4.1

Agriculture activities ................................................................................................... 7

4.2

Agriculture produce..................................................................................................... 7

4.3

Biological asset ........................................................................................................... 7

4.4

Biological transformation of ikan patin ...................................................................... 7

4.5

Components of cost of sell .......................................................................................... 8

5

MFRS 116- PROPERTY, PLANT, AND EQUIPMENT ................................................ 10

6

MFRS 15- REVENUE RECOGNITION ......................................................................... 11

7

FINANCIAL STATEMENT DISCLOSURE .................................................................. 13

8

RECOMMENDATION .................................................................................................... 14

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EXECUTIVE SUMMARY This report was made to have a better understanding and apply the relevant accounting

standards based on real situation. In this case, we are required to differentiate between accounting cycle and operating cycle, discuss in details the a) agricultural activity, b) agricultural procedure, c) biological asset, d) biological transformation of ikan patin, e) component of cost to sell, based on MFRS 141. Other than that, we are required to discuss in details the items that can be classified as assets based on MFRS 116, revenue recognition based on MFRS 15, and relevant disclosure related to biological asset in financial statements. Mr. Shah, 32 year old, is a Pahang patin fish farmer, was wondering why he hardly made profit even the demand of patin was increasing and there is a sufficient supply of the fish. Shah was really interested with the offer of financial assistance from the relevant authority to boost the Patin industry in Pahang. However, it must be supported with a proper accounting record. In order to establish the accounting records of his patin farm, Shah has asked for his nephew, Sabri, an accounting graduate to help him.

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ISSUE STATEMENTS The case is based on Shah’s difficulty in running his Patin farm which event there is a

highly demand, Shah still not making much profit. One of the factor could be improper record keeping.In order to make a proper accounting record for Shah’s patin farm, the relevant standard, Malaysia Financial Reporting Standard (MFRS) will be applicable. In this case, there are three standards from MFRS will be use. The first standards is MFRS 141, which deacribe the accounting for agriculture. the transformation of biological assets (living plants and animals) into agricultural produce (harvested product of the entity's biological assets). The standard generally requires biological assets to be measured at fair value less costs to sell Next, MFRS 116 – Property, Plant, and Equipment. According to this standard, PPE are tangible asset that are held for use in the production or supply of goods or services, for rental to others, for administritive purposes and are expected to be used during more than one period. This will be apply on the storage, cages, buoy/drum float, and the pickup truck. A part from that, MFRS 15 will be applicable in revenue recognition. According to this standards, revenue is recognised when the goods or services are transferred to the customer, at the transaction price. This part will required to develop the 5 steps in revenue recognition.

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3

DIFFERENT BETWEEN ACCOUNTING CYCLE AND OPERATING CYCLE

The term accounting cycle refers to the specific steps that are involved in completing the accounting process. The cycle is like a circle. It begins at one point and revolves through specific steps, before starting again at the same point and repeating the same steps. The length of the accounting cycle are varies among the company. It may be monthly, quarterly, semiannually, or annually depending on when the financial statements of the company are published. Regardless of the timing of the accounting cycle, the processes involved remain the same. The operating cycle revolves around the payment of cash and the receipt of cash. The steps of the operating cycle include purchasing merchandise, selling the merchandise, billing the customers, and receiving payment from the customers. The operating cycle begins when the company orders the merchandise and ends when the company receives payments from its customers. The operating cycle continues indefinitely without a defined beginning or end. With each new purchase, a new operating cycle begins. There are 3 differences that can be seen between these two cycle in this case, which are the length of time, number of steps, and valuation. For the length of time, for an operating cycle, it varies based on the inventory. The inventory is tracked from the time it is received until it is sold. This could be days, months or even years. In this case, there is no spesific time needed. Since Patin fish is the inventory for Shah business, they have to wait the transformation process from seeds untill it harvested and enter the market. Nevertheless, an accounting cycle typically lasts for either a month or a year depending on how the small business wants to track its financial information. In order to help Shah, Sbri need to prepare a financial reporting for 12 months, beginning 1st July 2016 and ending at 30th June 2017. Apart from that, there is also a different number of steps between this two cycle. There are more steps involved in the accounting cycle than in the operating cycle. The operating cycle only consists of four steps. These include analyzing the receivables, analyzing the inventory, reviewing the cost of goods sold and analyzing the payables. In contrast, the accounting cycle contains 10 steps. These include analyzing transactions, entering them into a journal, posting them, preparing unadjusted balances, adjust, review adjusted balances, prepare statements, close, prepare closing balance and reverse entries.

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Lastly, the valuation between accounting cycle and operating cycle. The operating cycle values the expenses and profits of the inventory. The beginning and ending numbers in an operating cycle simply show how much money was made from the sale of the inventory. In comparison, the accounting cycle shows all financial transactions in a business, including salaries, sales, expenses and profits. The accounting cycle gives an overall picture of the financial value of a small business in its entirety. In this case, Sabri need to values based on accounting cycle in order to get a comprehensive financial statement which it will consider all financial transactions, rather than only values the expenses and profits of the inventory.

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4.1

MFRS 141- AGRICULTURE

Agriculture activities MFRS 141 Agriculture paragraph 5 state that agricultural activity is defined by the

management by an entity of the biological transformation and harvest of biological assets for sale or for conversion into agricultural produce or into additional biological assets. In this case “Story of Patin”, Shah the owner of fish farmer breeding patin fish or silver catfish in along the riverbank of Sungai Pahang to conversion into agricultural produce and made profit from it.

4.2

Agriculture produce MFRS 141 Agricultural paragraph 5 states that agricultural produce is the harvested

produce of the entity’s biological assets. Story of Patin showed Patin fish as the agricultural produce or the harvested produce from the fish seed and will be recognized as inventory at the 6th months at fair value less costs to sell.

4.3

Biological asset A biological asset is a living animal or plant. In the “Story of Patin” the seed is

considered as biological assets until the day it harvested.

4.4

Biological transformation of ikan patin Biological transformation comprises the processes of growth, degeneration, production,

and procreation that cause qualitative or quantitative changes in a biological asset. In this case, biological transformation describes the growth from seeds to harvest process in order to get mature patin fish as production Biological transformation comprises the process of growth of patin fish’s seeds is an increase in quantity or improvement in quality of patin fish. To keep the seed grow and matured, Shah needs to maintain the better environment condition of the seed for it to harvest and survives. In the process to help the improvement and growth of the seeds, Shah had to feed the seeds with pallets. Pallets are considered as part of biological transformation.

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4.5

Components of cost of sell Cost of goods sold (COGS) is the direct costs attributable to the production of the goods

sold in a company. This amount includes the cost of the materials used in creating the good along with the direct labor costs used to produce the good. It excludes indirect expenses such as distribution costs and sales force costs. Based on this case, natural life cycle of patin fish takes 6 months to be harvested. From seeds with 3 inches in length, the fish could be harvested after 6 months with average weight of 700 grams per fish. The mortality rate was higher at the beginning of the fish lifecycle as they were more fragile and more vulnerable to predators and elements. The size of the cage determined the capacity of fish to be farmed. Each small cage could accommodate around 1,500 fish seeds and the larger one could accommodate around 2,000 seeds. The patin fish were fed with pellets which for each cage, 120 bags of pellet were needed until the fish are harvested that cost of pellets is RM65 per bag. The same pellets were used throughout the life cycle of the patin fish. The patin fish need to be fed at regular interval to ensure healthy growth. Table 1 : The timeline of seeds harvested into patin fish. (Cycle 1)

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In Table 1, the first batch of seeds (highlighted in green color) was release in the cage. It is released in January and harvested in July. The other batch of seeds was released in other month and follow by the sequences. Unfortunately, no seeds were release in the month of November and December because of the rainy season and flood were expected. The fair value measurement of a biological asset may be facilitated by grouping biological assets according to significant attributes. Only 55% of the seed will be recognized as biological assets after 5 months due to its sur

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5

MFRS 116- PROPERTY, PLANT, AND EQUIPMENT As stated in MFRS 116 para 6, Property, Plant and Equipment (PPE) are tangible items

that are held for use in the production or supply of goods or services, for rental to others, or for administrative purposes and are expected to be used for more than one (1) period. Paragraph 10 of MFRS 116 also mentioned an entity evaluates under this recognition principle all its property, plant and equipment costs at the time they are incurred. These costs include costs incurred initially to acquire or construct an item of property, plant and equipment and costs incurred subsequently to add to, replace part of, or service it. The cost of an item of property, plant and equipment may include costs incurred relating to leases of assets that are used to construct add to, replace part of or service an item of property, plant and equipment such as depreciation of right-of-use assets. Paragraph 43 MFRS 116 states that each part of an item of the property, plant and equipment with a cost that is significant in relation to the total cost of the item shall be depreciated separately. According to the case of Patin Farm, Shah has tangible items for production uses. A main storage facility and 2 unit of smaller storage which both storages have estimated life for 10 years. Shah also 680 buoy/drum float which estimated life for 4years. Besides, Shah also have small and large cages which contains steel frame and net with 7years and 4years of life span respectively. Every type of assets can calculate depreciation using straight line depreciation method. Based on paragraph 43, steel frame and net should be depreciated separately.

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MFRS 15- REVENUE RECOGNITION The core principle of MFRS 15 is that revenue is recognised when the goods or services

are transferred to the customer, at the transaction price. Revenue is recognised in accordance with that core principle by applying a 5-step model as shown below. Firstly, Step 1 is identifying the contract with a customer. A contract creates enforceable rights and obligations. It may be written, oral or implied by customary business practice. Combine contracts when they are entered into at or near the same time and are negotiated as a package, payment of one depends on the other, or goods/services promised are a single performance obligation. A contract modification is accounted for as a separate contract or continuation of the original contract prospectively or with cumulative catch-up, depending on facts and circumstances. According to the case of Patin Farm, Shah had made contract with his customer whom owned restaurant that consider as wholesaler which Shah sold Patin fish at RM10 per kilogram and nearby hotel at RM14 per kilogram. Next step is identifying separate performance obligations in the contract. Performance obligations are promises in a contract to transfer goods or services, including those a customer can resell or provide to its customer. Use the model's indicators to separate the performance obligations if they are capable of being distinct and if they are distinct based on the context of the contract (separately identifiable from other promises in the contract). According to the case of Patin Farm, Shah did not charge any additional cost to his nearby hotel customers when he delivers the patin fish to the hotel as he already charges extra RM4 per kilogram to the customer. Step 3 is determining the transaction price. Transaction price is the amount of the consideration a company is entitled to receive in exchange for transferring goods or services to customers. Determining the transaction price is straightforward when the contract price is fixed: it becomes more complex when it is not fixed. Discounts, rebates, refunds, credits, incentives, performance bonuses, and price concessions could cause the amount of consideration to be variable. In situations where there are variable considerations, transaction price is estimated based on the expected value or the most likely amount but is constrained up to the amount that is highly probable of no significant reversal in the future. The minimum amount that meet these criteria is included in the transaction price. According to the case of Patin Farm, Shah agree to sell the fish for RM10 to the wholesaler and RM14 to the hotel nearby. 11

Step 4 is allocating the transaction price. Transaction price should be allocated to distinct performance obligations based on relative standalone selling price. This may be the standalone selling price of a good or service when sold separately to a customer in similar circumstances and to similar customers. If a standalone selling price is not directly observable, estimate it by considering all information that is reasonably available, such as market conditions, specific factors, and class of customers. Assess your experience with similar types of performance obligations in making this determination. According to the case of Patin Farm, Shah sold the fish to the wholesaler for RM10 because competitor was stiff due to too many farmers located at Sungai Pahang Lastly, Recognise revenue when the performance obligation is satisfied. Recognise revenue when the promised goods or services are transferred to the customer and the customer obtains control. This may be over time or at a point in time. The new standard provides indicators when control is transferred. Additionally, the new standard introduces a new concept and revenue is required to be recognised over time when, the asset being created has no alternative use to the company and the company has an enforceable right to payment for performance completed to date. The revenue of patin fish will be recognized when the fish is sold directly to customers. Figure 1 shows total sale of Patin Fish in a year and figure 2 shows total sale of return in a year based on past experience.

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FINANCIAL STATEMENT DISCLOSURE

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RECOMMENDATION For the purpose of improvising Shah’s business, we would like to suggest Shah to have

a better record keeping. It is important for Shah’s business to maintain a proper accounting records since they provide a transaction that the business has carried out. Shah will need a good record to prepare an accurate financial statements. If accurate records are not kept, then the business may pay the incorrect amount, which could impact on their profits. On top of that, Shah need to adhere with the entity concept, which treats a business separately with its owner. This is because if transactions of a business are mixed up with that of its owners or other businesses, the accounting information would lose its usability. Doing so requires the use of separate accounting records for the business that completely exclude the assets and liabilities of any other entity or the owner. Without this concept, the records of multiple entities would be intermingled, making it quite difficult to discern the financial or taxable results of a single business.

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