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#13 BIOLOGICAL ASSETS


FINANCIAL ACCOUNTING AND REPORTING                                                     


PAS 41 - AGRICULTURE

Objective of PAS 41

The objective of PAS 41 is to establish standards of accounting for agricultural activity -- the management of the biological transformation of biological assets (living plants and animals) into agricultural produce (harvested product of the enterprise's biological assets).

Key Definitions:

Ø  Agricultural activity is the management by an entity of the biological transformation of biological assets for sale, into agricultural produce, or into additional biological assets.
Ø  Agricultural produce is the harvested product of the entity’s biological assets.
Ø  A biological asset is a living animal or plant. 
Ø  Biological transformation comprises the processes of growth, degeneration, production, and procreation that cause qualitative or quantitative changes in a biological asset.
Ø  A group of biological assets is an aggregation of similar living animals or plants.
Ø  Harvest is the detachment of produce from a biological asset or the cessation of a biological asset’s life processes.
Ø  Bearer plant is a living plant that:
a.    Is used in the production process of agricultural produce,
b.    Is expected to bear produce for more than one period
c.    Has a remote likelihood of being sold (except as part of incidental scrap sales).

Initial Recognition

An enterprise should recognize a biological asset or agriculture produce only when the enterprise controls the asset as a result of past events, it is probable that future economic benefits will flow to the enterprise, and the fair value or cost of the asset can be measured reliably.

Measurement

Ø  Biological assets should be measured on initial recognition and at subsequent reporting dates at fair value less costs of disposal, unless fair value cannot be reliably measured.

Ø  Agricultural produce should be measured at fair value less costs of disposal at the point of harvest. Because harvested produce is a marketable commodity, there is no 'measurement reliability' exception for produce.

Ø  The gain on initial recognition of biological assets at fair value, and changes in fair value of biological assets during a period, are reported in net profit or loss.

Ø  A gain on initial recognition of agricultural produce at fair value should be included in net profit or loss for the period in which it arises.

Ø  All costs related to biological assets that are measured at fair value are recognized as expenses when incurred, other than costs to purchase biological assets.

Ø  Bearer plants are accounted for under PAS 16 using the cost model, or the revaluation model. Before bearer plants are able to bear agricultural produce (i.e. before maturity), they are accounted for as self-constructed items of property, plant and equipment. The agricultural produce of the bearer plant remains within the scope of PAS 41 and is therefore accounted for at fair value.

Ø  PAS 41 presumes that fair value can be reliably measured for most biological assets. However, that presumption can be rebutted for a biological asset that, at the time it is initially recognized in financial statements. In such a case,

Ø  The asset is measured at cost less accumulated depreciation and impairment losses if the asset does not have a quoted market price in an active market and for which other methods of reasonably estimating fair value are determined to be clearly inappropriate or unworkable.

Ø  But the enterprise must still measure all of its other biological assets at fair value. If circumstances change and fair value becomes reliably measurable, a switch to fair value less disposal costs is required.

Measurement of fair value

  • A quoted market price in an active market for a biological asset or agricultural produce is the most reliable basis for determining the fair value of that asset. If an active market does not exist, PAS 41 provides guidance for choosing another measurement basis. First choice would be a market-determined price such as the most recent market price for that type of asset, or market prices for similar or related assets; if reliable market-based prices are not available, the present value of expected net cash flows from the asset should be use, discounted at a current market-determined pre-tax rate.
  • In limited circumstances, cost is an indicator of fair value, where little biological transformation has taken place or the impact of biological transformation on price is not expected to be material.
  • The fair value of a biological asset is based on current quoted market prices and is not adjusted to reflect the actual price in a binding sale contract that provides for delivery at a future date.

Other Issues

a.   The change in fair value of biological assets is part physical change (growth, etc.) and part unit price change. Separate disclosure of the two components is encouraged, not required.

b.   Fair value measurement stops at harvest. PAS 2, Inventories, applies after harvest.

c.   Agricultural land is accounted for under PAS 16, Property, Plant and Equipment. However, biological assets that are physically attached to land are measured as biological assets separate from the land.

d.   Intangible assets relating to agricultural activity (for example, milk quotas) are accounted for under PAS 38, Intangible Assets.

e.   Unconditional government grants received in respect of biological assets measured at fair value are reported as income when the grant becomes receivable.

Disclosure requirements in PAS 41 include:

  • Carrying amount of biological assets
  • Description of an enterprise's biological assets, by broad group
  • Change in fair value during the period
  • Fair value of agricultural produce harvested during the period
  • Description of the nature of an enterprise's activities with each group of biological assets and non-financial measures or estimates of physical quantities of output during the period and assets on hand at the end of the period
  • Information about biological assets whose title is restricted or that are pledged as security
  • Commitments for development or acquisition of biological assets
  • Financial risk management strategies
  • Methods and assumptions for determining fair value
  • Reconciliation of changes in the carrying amount of biological assets, showing separately changes in value, purchases, sales, harvesting, business combinations, and foreign exchange differences

Disclosure of a quantified description of each group of biological assets, distinguishing between consumable and bearer assets or between mature and immature assets, is encouraged but not required.  If fair value cannot be measured reliably, additional required disclosures include:
  • Description of the assets
  • An explanation of the circumstances
  • If possible, a range within which fair value is highly likely to fall
  • Gain or loss recognized on disposal
  • Depreciation method
  • Useful lives or depreciation rates
  • Gross carrying amount and the accumulated depreciation, beginning and ending

If the fair value of biological assets previously measured at cost now becomes available, certain additional disclosures are required.

Disclosures relating to government grants include the nature and extent of grants, unfulfilled conditions, and significant decreases in the expected level of grants.

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