FACULTY OF MANAGEMENT AND ECONOMICS, SULTAN IDRIS EDUCATION UNIVERSITY, TANJONG MALIM PERAK FINANCIAL ACCOUNTING II (PAF3043)
BIOLOGICAL ASSETS "A LIVING ANIMAL AND PLANT" MFRS141
Biological asset are type of assets that have different characteristics compared to other asset like building,land, etc. It also defined and governed under the MFRS 141 Agriculture. MFRS 141 applies to account for biological assets except for bearer plants,agricultural produce at the point of harvest and government grants that relates to agricultural activity.Therefore,the accounting treatments for these kinds of asset are also different and requires special accounting standard to deal with the issue. What is Biological Asset ?
PURPOSE OF THE BOOK
EXAMPLE Paddy field ( Biological Asset ) Rice ( Agricultural Produce ) harvest Banana Trees ( Biological Asset ) Banana Fruits ( Agriculture Produce ) harvest Durian Orchard ( Biological Asset ) Durian Fruits ( Agriculture Produce) harvest Chick and Chicken ( Biological Asset ) Chicken and Egg ( Agriculture Produce ) process Cattle and Cow ( Biological Asset ) Beef and Milk ( Agricultural Produce ) process
RECOGNITION For a biological asset to be recognized, the entity should control the asset as a result of past events, it should be probable that future economic benefits associated with the asset will flow to the entity and the fair value or cost of the asset can be measured reliably. On initial recognition, the biological asset (including growing produce on a bearer plant) is required to be measured at its fair value less costs to sell, since it is presumed that the fair value can be measured reliably. It is pertinent to note that the cost - benefit exemption cannot be invoked and any claim that fair value measurement would be ‘clearly unreliable’ would need to be supported by strong evidence, such as, including the outcome of an actual valuation exercise. Further, such presumption can be rebutted only on initial recognition when quoted market prices are not available, and for which alternative fair value measurements are determined to be clearly unreliable. If such presumption is rebutted, the biological asset is measured at its cost less any accumulated depreciation and any accumulated impairment losses.
For example, in a tea plantation, the plucking cycle may range from 7 days to 15 days, depending on the location of the fields. The tea leaves on the tea bush, being the biological asset, would pertain to those leaves that are yet to be plucked as of a reporting date. On plucking (harvesting), the green leaves would be the agricultural produce that is further processed to produce black tea. Entities, apart from the use of their ‘own leaf’ , may also purchase green leaf from smaller growers, referred to as ‘bought leaf’ , for use in the production of black tea. Given that there is a ready market that is available for green leaf, we believe that entities may not be able to rebut the presumption that fair value can be measured reliably. In certain parts of India, depending on climatic conditions, there may even not be any biological asset as of a reporting date. A gain or loss arising on initial recognition of a biological asset at fair value less costs to sell is to be recognized in the profit or loss for the period in which it arises.
MEASUREMENT A biological asset is measured on initial recognition and at the end of each reporting period at its fair value less cost to sell when the fair value can be measured reliably. Agricultural produce harvested from an entity's biological asset is measured at its fair value less cost to sell at the point of harvest. The cost to sell is the cost that need to be incurred in order to sell a product for example advertisement cost and brokeage or dealer's commission.
MFRS 141 defines the fair value as the amount for which the asset could be exchanged between knowledgeable, willing parties in an arm's length transaction. The fair value of biological asset has to be based on its present location and condition. Para 26 describes that gain or loss is recognised when the biological asset are measuerd at fair value less cost to sell at initial recognition. This gain or loss is included in teh profit or loss for the reporting period. Any change in the fair value of biological asset generates gain or loss and included in the profit or loss for the reporting period.
EXAMPLE QUESTION PDF Bhd in mango business extracted 25,000 kilo of picked mango with the fair value of RM15 per kilo and cost to sell RM2 per kilo. Discuss the accounting treatment for the above transaction. The fair value less cost to sell per kilo for mango is RM13 (RM15 - RM2). Thus, the overall fair value for agriculture produce is RM325,000 (25,000 kilo x RM13 per kilo). Thus, the gain of RM325,000 is recognised in statement of profit or loss for the reporting period. The agricultural produce measurement will be the basis to measure the cost of inventory as accordance to MFRS 102 Inventories. EXAMPLE ANSWER
DISCLOSURE MFRS 141 requires entities to disclose a wide range of information about their biological assets. This information is intended to help users of the financial statements understand the nature and extent of the entity's biological assets, as well as the risks and uncertainties associated with these assets.
A description of the entity's biological assets, by broad group. A description of the nature of the entity'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. The carrying amount of each group of biological assets at the beginning and end of the period. The specific disclosure requirements include:
The changes in the carrying amount of each group of biological assets during the period, showing separately the following: Gains or losses arising from changes in fair value less costs to sell. Increases due to biological growth. Decreases due to harvest. Decreases due to culling. Other changes. 1. 2. 3. 4. 5. The specific disclosure requirements include: (Cont.)
The amount of any government grants received in relation to biological assets, showing separately the amount recognized as income and the amount deferred. The carrying amount of biological assets pledged as security for liabilities. The amount of any commitments for the development or acquisition of biological assets. The financial risk management strategies used in relation to biological assets. The specific disclosure requirements include: (Cont.)
Remember! The disclosure requirements for biological assets under MFRS 141 are extensive. This is because biological assets are often complex and unpredictable assets, and users of the financial statements need to be able to understand the risks and uncertainties associated with these assets. By disclosing the required information, entities can help users to make informed decisions about the financial performance and prospects of the entity.
CONCLUSION MFRS 141 applies to entities engaged in agricultural activity Biological assets are either living or plant. Agricultural produce is the harvested produce of the entity's biological assets. MFRS 141 explains how to measure the biological assets and agricultural produce at initial recognition and the change in the value of the biological assets. MFRS 141 requires extensive disclosure of biological assets and agricultural produce including government grants.
Entity controls Economic benefits Cost can be measured reliably Recognition (BA & AP) If FV is unavailable BA: Cost less any accumulated depreciation and impairment losses at initial recognition REVEIW OF BIOLOGICAL ASSETS MFR 141 Definition Biological Assets (BA) a living animal or plant Agricultural Produce (AP Harvested produce of the biological assets Measurement BA: Initial and subsequent FV less cost to sell AP: FV lesscost to sell at the point of harvest
Accounting Games