CHAPTER 19 BIOLOGICAL ASSETS TECHNICAL KNOWLEDGE To understand the meaning of biological, assets, agricultural produce and agricultural activity. To know the recognition and measurement of biological asset. To know the recognition and measurement of agricultural : produce. 5 To know the treatment of agricultural land. To know the meaning of bearer plants. To understand the recognition of bearer plants as property, plant and equipment. To understand the recognition of bearer animals. To know the recognition of animal- related recreational activities. 600 Scanned with CamScanner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 Note that PAS 41 is applied to agricultural produce at the point of harvest. Thereafter, PAS 2 on inventories shall be applied. PAS 41 does not deal with the processing of agricultural produce after harvest. For example, the Processing of grapes into wine is s covered by PAS 2. Definition of terms Biological assets are “living animals and living plants". Agricultural produce is the harvested product of an entity's biological assets. Harvest is the detachment of produce from a biological asset or the cessation of a biological asset's life processes. Scanned with CamScannerExamples of biological assets The following table provides examples of biological assets, ig agricultural produce and products that are the result of processing after harvest. Biological asset Agricultural Product produce after harvest 1. Sheep Wool Yarn, carpet 2. Treesin plantation forest Felled trees Logs, lumber 8. Plant Harvestedcane Sugar 4. Dairy cattle Milk Cheese 5. Pigs t Carcass Sausage, : cured ham Again, the measurement of biological assets and agricultural produce is covered by PAS 41 and the measurement of products after harvest is covered by PAS 2 on inventories. Agricultural activity or simply "agriculture" This is 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. Examples of agricultural activity Agricultural activity covers a diverse range of activities such as the following: Raising livestock Annual or perennial cropping Cultivating orchards and plantations Floriculture Aquaculture, including fish farming oR OPP Scanned with CamScanner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 in quality or quantity brought about by biological transformation or harvest is measured and monitored as a routine management function. Biological transformation Biological transformation comprises the processes of growth, degeneration, production and procreation that cause qualitative or quantitative changes in a biological asset. Scanned with CamScanner_ Biological transformation results from the following types of outcome: 1. Asset changes through: a. Growth — an increase in quantity or improvement in quality of an animal or plant. b. Degeneration — a decrease in quantity or deterioration in quality of an animal or plant. c. Procreation — creation of additional living animal or plant. 7 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 the asset will flow. to the entity. c. The fair value or 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 or otherwise marking of the cattle on acquisition or birth. The future benefits are normally assessed by measuring the significant physical attributes. Measurement A biological asset shall be measured on initial recognition and at the end of each reporting period at fair value less cost of disposal. Agricultural produce shall be measured at fair value less cost of disposal at the point of harvest. - 604 Scanned with CamScannerCost of disposal Cost of disposal is the incremental cost directly attributable to the disposal of an asset. In other words, cost of disposal is necessary for a sale to occur put that would not otherwise arise, such as commission to broker and dealer, levy by regulatory agency and commodity exchange, and transfer tax and duty. Under the Basis for Conclusions on PAS 41, cost of disposal excludes transport cost, finance cost and income tax. Fair value of biological asset There is a presumption that fair value can be measured reliably for a biological asset. : However, this presumption can be rebutted only on initial recognition for a biological asset for which market determined prices are not available or estimates of fair value are determined to be clearly unreliable. Insuch a case, the biological asset shall be measured at cost less accumulated depreciation and any accumulated impairment loss. However, once the fair value of such a biological asset becomes clearly measurable, the entity shall measure the biological asset at fair value less costs of disposal. Fair value of agricultural produce In all cases, an entity shall measure agricultural produce at the point of harvest at fair value less cost of disposal. The fair value of agricultural produce at the point of harvest can always be measured reliably. The fair value measurement of agricultural produce stops at the point of harvest. After that date, PAS 2 shall apply. This means that the inventory shall be measured at the lower of cost and net realizable value after harvest. The harvested product is recorded by debiting inventory and crediting gain from change in fair value of agricultural produce. 605 Scanned with CamScannerDefinition of fair value Under PFRS 13, fair value is defined as the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date. PFRS 13, paragraph 72, enumerates the fair value hierarchy or best evidence of fair value as follows: 1. Level 1 inputs are the quoted prices in an active market for identical assets. ‘An active market is a market in which transactions for the asset or liability take place with sufficient regularity and volume to provide pricing information on an ongoing basis. A principal market is the market with the greatest volume and level of activity for the asset or liability. 2. Level 2 inputs are inputs that are observable either directly or indirectly. Level 2 inputs include quoted prices for similar assets in an active market and quoted prices for identical or similar assets in a market that is not active. 3. Level 3 inputs are unobservable inputs for the asset. Unobservable inputs are usually developed by the entity using the best available information from the entity's own data. Gain and loss A gain or loss arising on initial recognition of a biological asset at fair value less costs of disposal and any subsequent changes in fe value less costs of disposal shall be included in profit or loss. A loss may arise on initial recognition of a biological asset because costs of disposal are deducted in determining fair value less costs of disposal of a biological asset. A gain may arise on initial recognition of a biological asset, for example, when a calf is born. A gain or loss may arise on initial recognition of agricultural produce as a result of harvesting which shall also be included in profit or loss. 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 of disposal of biological assets, 606 Scanned with CamScannerAgricultural land Agricultural land is not deemed a biological asset. The principles espoused in PAS 41 for biological assets and agricultural produce do not apply to agricultural land. 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 Biological assets are often physically attached to land, for example, trees in a plantation forest. 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. An entity may use information regarding the combined assets to determine the fair value of the biological assets. For example, the fair value of the land may be deducted from the fair value of the combined assets to arrive at the fair value of the trees in the plantation forest. Government grant An unconditional government grant related to a biological asset that has been measured at fair value less cost of disposal shall be recognized as income when the grant becomes receivable. Ifa government grant related to a biological asset measured at fair value less cost of disposal is conditional, the grant shall be recognized as income only when the conditions attaching to the grant are met. If a government grant relates to a biological asset measured at cost less any accumulated depreciation and any accumulated impairment losses, PAS 20 on "government grant" is applied. 607 Scanned with CamScannerAmendment for bearer plants Prior to the IASB amendment, bearer plants are considered biological assets included within the scope of IAS 41 and measured at fair value less cost of disposal. The IASB decided that bearer plants should now be accounted for in the same way as property, plant and * equipment in IAS 16 because the operation of bearer plants is similar to that of manufacturing. Bearer plants are used, solely to grow agricultural produce over several periods. At the end of their productive life, the bearer plants are usually scrapped: Once a bearer plant is mature, apart from bearing produce, the biological transformation is no longer significant in generating future economic benefit. The only significant future economic benefit it generates comes from the agricultural produce it creates. Agricultural produce growing on bearer plants The agricultural produce growing on bearer plants remains within the scope of IAS 41. In other words, the agricultural produce as it grows is measured at the end of each reporting period prior to harvest at fair value less cost of disposal. : Once harvested, the agricultural produce is measured at fair value less cost of disposal at the point of harvest.» Scanned with CamScanner‘Definition of bearer plant A bearer plant is a living plant that: a. Is used in the production or supply of agricultural produce. b. Is expected to bear produce for more than one period. c. Has a remote likelihood of being sold as agricultural produce, except for incidental scrap sales. In other. words, a bearer plant is a living plant that is used solely to grow agricultural produce over the productive life. At the end of productive life, the bearer plant is usuall; scrapped. é ‘A bearer plant that no longer bears produce is commonly cut down and sold as scrap at the end of the productive life. The incidental scrap sales would not prevent the plant from being a bearer plant. t Examples of bearer plants a. Trees that produce fruits are bearer plants while the fruits growing on the trees are agricultural produce until harvested. ! In an oil palm plantation, a coconut tree is the bearer plant and the fruit is the agricultural produce. When immature, the coconut fruit can be harvested for 7 drinking, known as "buko" juice in the vernacular. When mature, the coconut fruit can be processed to give oil, charcoal from the hard shell and copra from the dried coconut flesh. b. Ina vineyard, the grape vines are the bearer plants and the grapes are the agricultural produce. 609 Scanned with CamScannerNot considered bearer plants a. Trees grown to be harvested and sold as log or lumber are not bearer plants. b. Annual crops which do not bear produce for more than one period and are held solely to be harvested as agricultural produce such as corn and rice are not bearer plants. Plant with dual use A plant with dual use is reported as biological asset and not as bearer plant. A plant may have a dual use, namely: a. The plant is cultivated for bearing agricultural produce b. The plant itself is being sold either as a living plant or an agricultural produce. For example, rubber trees may be cultivated to grow rubber milk as agricultural produce and at the same time, may be sold as living plant or cut down at the end of the productive life to be sold as lumber or wood. In this case, the rubber trees are recognized as biological asset because of the dual use. However, the rubber trees are recognized as bearer plants when simply cut down and sold for scrap upon maturity. Judgment required Determining whether a plant is a beater plant is critical as it drives the subsequent measurement of the plant. Judgment is required in determining if the definition of bearer plant is met especially in deciding whether the sales of the plant itself are incidental scrap sales. 610 Scanned with CamScannerSeparating bearer plant from agricultural produce Before amendment, the bearer plant and the agricultural produce are considered to be one single biological asset account presented as either current or noncurrent based on the asset's useful life, After amendment, the bearer plant and the agricultural produce are now reported as two separate assets with different measurement model. Bearer plants are presented as noncurrent assets. Agricultural produce is usually presented as a current asset unless it takes more than one year to mature. Measurement — immature bearer plants Immature bearer plants are similar to an item of property, plant and equipment being constructed before the intended use. The IASB decided that bearer plants before maturity are measured at accumulated cost in the same manner as self-constructed item of property, plant and equipment. Accumulation of cost ceases when the bearer plants are in the location and condition necessary for the intended use, meaning, the bearer plants already reach maturity. Bearer plants are a qualifying asset under IAS 23 Borrowing costs. Specific and general borrowing’ costs are capitalized in accordance with this standard. Accumulating cost of an immature bearer plant is a new concept. Entities should be able to track and capture costs incurred for bearer plants du~ing the prematurity stage. 611 Scanned with CamScannerMeasurement - mature bearer plants There is no specific guidance on when a bearer plant reaches maturity. For example, a grape vine may take many years to produce the right quantity and quality of fruit for a good wine. Judgment is required and entities need an accounting policy to determine when bearer plants reach maturity. Mature bearer plants are measured using either the cost model or revaluation model. The policy adopted must be applied consistently. The carrying amount of bearer plants is depreciated on a systematic basis over the useful life. The useful life of bearer plants is the number of years bearing agricultural produce. The depreciation method shall reflect the pattern in which future economic benefits from the plant are expected to be consumed by the entity. An example is the production method but. the use of other appropriate depreciation method such as straight line is not prohibited. The useful life of bearer plant should be reviewed at least at each financial year-end. At the end of each reporting period, an entity should assess if there is any indication that the bearer plant may be impaired by applying the requirements of IAS 36 Impairment of assets. Impairment indiéators requiring impairment test include: Drop in the market price of agricultural produce Natural phenomena, such as drought and flood ‘Disease in plants causing decreased productivity Labor constraints peop 612 Scanned with CamScannerMeasurement of agricultural produce a. Agricultural produce as it grows Agricultural produce growing on bearer plant is measured at fair value less cost of disposal with changes recognized in profit or less as the produce grows. In other words, agricultural produce is measured at the end of each reporting period prior to harvest at fair value less cost of disposal. b. Harvested produce Harvested: produce is measured at fair value less cost of disposal at the point of harvest. IAS 41 provides that the fair value of agricultural produce at the point of harvest can always be measured reliably. The fair value less cost of disposal at the point of harvest is the deemed cost of inventories on the date IAS 2 Inventories is applied. Bearer animals Bearer animals, like bearer plants, may be held solely for the produce that they bear. . However, bearer animals have been explicitly excluded from the IASB amendment and will continue to be accounted for under IAS 41. The reason is that the measurement model would become more complex if applied’ to bearer animals: In other words, bearer animals continue to be reported as biological assets. Scanned with CamScannerAnimal-related recreational activities Managing recreational activities, for example, game parks and zoos, is not agricultural activity. The reason is that there is no management of the transformation of the biological asset but simply control of the number of animals. The natural breeding that takes place is not a managed activity and is incidental only to the main activity of providing a recreational facility. Accordingly, animals related to recreational activities shall be accounted for in accordance with PAS 16, Property, plant and equipment. 614 Scanned with CamScannerIllustration At the beginning of current year, an entity purchased 100 cows which are 3 years old for P15,000 each for the purpose of producing milk for the local community. On July 1, the cows gave birth to 20 calves. The active market provided the fair value less cost of disposal of the biological assets as follows: { Newborn calf on July 1 4,000 j Newborn calf on December 31 \ 5,000 1/2year old calfon December 31 . 7,000 3years old cow on December 31 18,000 4years old cow on December 31 24,000 Journal entries 1. To record acquisition of 100 cows at P15,000 each or a total of P1,500,000. Biological assets 1,500,000 Cash ° 1,500,000 2. To record the birth of 20 calves with a fair value of P4,000 each or a total of P80,000. Biological assets 80,000 Gain from change in fair value 80,000 3. , To record the change in fair value of the cows and calves on December 31: . Biological assets . 960,000 Gain from change in fair value : 960,000 Cows which are now 4 yearsold (100 x P24,000) 2,400,000 Calves which are now 1/2 year old( 20 x P 7,000) 140,000 Total fair value — December 31 2,540,000 Carrying amount of biological assets (1,500,000+80,000) _1,580,000 Change in fair value 960,000 615 Scanned with CamScannerFinancial statement presentation In the year-end’ statement of financial position, the biological assets shall be presented as a "separate ling item" at the fair value of P2,540,000 and classified ag noncurrent asset. The income statement for the current year would show gain from change in fair value of P1,040,000 (P80,000 on July 1 and P960,000 on December 31). Price change and physical change Separating the change in fair value between the portion attributable to price change and the portion attributable to physical change is encouraged but not required by PAS 41. ¢ The change in fair value of P1,040,000 can be separated into price change and physical change as follows: Fair value of 3 years old cow on December31 18,000 ‘Acquisition cost of 3 years old cow 15,000 Price change 3,000 Fair value of 4years old cow on December 31, 24,000 Fair value of 3 years old cow December 31 18,000 Physical change 6,000 Fair value of newborn calf on December 31 : 5,000 Fair value of newborn calf on Jily 1 4,000 Price change 1,000 4 — Fair value of 1/2 year old calf on December 31 7,000 Fair value of newborn calf on December 31 5,000 Physical change 2,000 == 616 Scanned with CamScanner4 years old cows Price change (100 x 3,000) Physical change (100 x 6,000) 1/2year old calves Pricechange * (20x 1,000) Physical change (20 x 2,000) Physical change at birth (20x 4,000) Total change in fair value Summary Price change: Ayears old cows 1/2year old calves Physical change: 4years old cows 1/2 year old calves Atbirth Total change in fair value 617 300,000 600,000 20,000 40,000 80,000 1,040,000 300,000 - 20,000 320,000 600,000 40,000 80,000 720,000 1,040,000 Scanned with CamScannerAnother illustration An entity produced milk for sale to local and national ice cream producers. The entity began operations at the beginning of current year by purchasing 500 milk cows for P8,000,000. The entity had the following information available at year-end relating to the cows: Carrying amount of milking cows, January 1 8,000,000 Change in fair value due to growth and price change 900,000 Decrease in fair value due to harvest 200,000 Milk harvested during the year but not sold 400,000 Journal entries 1. To record the acquisition of milking cows: Biological assets 8,000,000 Cash 8,000,000 2. To record the net gain from the change in fair value of biological assets: Biological assets 700,000 Gain from change in fair value 700,000 Change in fair value due to growth and price change 900,000 Decrease in fair value due to harvest (200,000) Net gain — biological assets: 700,000 3. To record the gain from change in fair value of agricultural produce: Milk inventory 400,000 Gain from change in fair value 400,000 618 Scanned with CamScanner