CHAPTER 26 PAS 41 AGRICULTURE TECHNICAL KNOWLEDGE To understand the meaning of biological asset, agricultural produce and agricultural activity. To know the recognition and measurement of biological asset and agricultural produce. : To understand the recognition of bearer plants as property, plant and equipment. To understand the récognition of bearer animals. 568Definition of terms Biola gical assets are living animals ang living plants. ants, icultural produce is the hary, piological assets. ‘ested product of an entity's "Harvest is the detachment of prod a te cessation of a biological asset's I jrom a biological asset or 3. Examples of biological assets The following table provides ex of biologi pericultural produce and prot amples of biological assets, processing after harvest, ‘ucts that are the result of Biological asset Agricultural Product 1 Produce after harvest 1, Sheep Wool 2, Treesin plantation forest Felled trees dara, pane 3, Sugarcane plant Harvestedcane §; el er 4, Dairy cattle Milk uge 5. Pigs Carcass reco 6. Tobacco plant Picked leaves cunacs cel em Agricultural activity or simply "agriculture" Agricultural activity 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 ote go po 569Biological transformation Biological transformation comprises the processes of degeneration, production and procreation that cause qualitag” or quantitative changes in a biological asset. ive 1. Asset changes through: Growth — an increase in quantity or improvement j quality of an animal or plant. in b. Degeneration — a decrease in quantity or deterioration in quality of an animal or plant. Procreation — creation of additional living animal o, 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: om . a. The entity controls the asset as a result of past event, 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. 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. icultural produce harvested shall be measured at fair value Jess cost of disposal at the point of harvest. Agricultural produce growing on bearer plant is measured at fair value less cost of disposal. 570Fair value of biological asset at the measurement date, There is a presumption that fai for a biological asset, ‘air value can be measured reliably However, this Presumption ca; recognition for a biological aceet ioe butted only on initial prices are not available or ¢, market determined determined to be clearly unrelible °° of fair value are In such a case, the biological asset shall sae be accumulated depreciation and any accumulnie y Ries i088. ted impairment However, once the fair value of such a biologi, becor dearly measurable, the entity shall rmearure the nc a at fair value less costs of disposal, Fair value of agricultural produce In all cases, an entity shall measure agricultural luce 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 on inventories 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. 671Gain and loss ae initic itic iological asset i on initial recognition of a biol e aoe betes ety! of disposal and any subsequent changes in fair value less cost of disposal shall be included in profit or loss. arise on initial recognition of a biological asset because cost of ay ‘osal is deducted in determining fair value less cost 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 pivauce 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 inital recognition of biological asset and agricultural produce and from the change in fair value less cost of disposal of biological asset. Agricultural land . Agricultural land is not deemed a biological asset. 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. 572Amendment for bearer plants The IASB decided that bearer plants should be accounted for in the same way a8 Property, plant and equipment because the operation of bearer plants is simi manufacturing. is similar to that of Bearer plants are used solely to grow agri over several periods, grow agricultural produce 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 crows is measured at the end of each reporting period prior to harvest at fair value less cost of disposal. IAS 41, paragraph 5c, provides that the agricultural produce growing on bearer plant is classified as biological asset. Once harvested, the agricultural produce is measured at fair value less cost of disposal at the point of harvest. The fair value less cost of disposal at the point of harvest is the deemed cost of inventory. 573Definition of bearer plant A bearer plant is a living plant that: Is used in the production or supply of agricultura produce. b. Is expected to bear produce for more than one period, Has a remote likelihood of being sold as agriculture) 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 usually scrapped. 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. Examples of bearer plants a. Trees that produce fruits are bearer plants while tle 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 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. 574Not considered bearer plants a, Trees grown to be harvested and not bearer plants. sold as log or lumber are b, Annual crops which do not bear i produce fo: one period and are held solely to be haryeated aa agricultural produce such as corn and ri plants. and rice are not bearer ‘Plant with dual use Aplant 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 bearer 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. - 575Measurement - immature bearer plants » imilar to an item of propert, bearer plants are similar p , aaa ond equipment being constructed before the intended use. The IASB decided that bearer plants before maturity are measured at accumulated cost in the same manner ag 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, Accumulating cost of an immature bearer plant is a new concept. Entities should be able to track and capture costs incurred for bearer plants during the prematurity stage. Measurement - mature bearer plants There is no specific guidance 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 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.Bearer animals Bearer animals, like beare the produce that they bear. plants, may be held solely for However, bearer animals have been explicitly excluded from the IASB amendment and will continue to be d for under IAS 41. accounte: The reason is that the measurement ‘ di more complex if applied to bearer aniacla Acs In other words, bearer animals continu ‘ > ie to biological assets. lisa 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. ; 577Illustration At the beginning of current year, an entity purchased 100 coy, 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 dispogay of the biological assets as follows: Newborn calf on July 1 4,000 Newborn calf on December 31 5,000 1/ 2year old calf on December 31 7000 3 years old cow on December 31 18,000 4 years 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 1,600,000 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 biological asset 80,000 3. To record the change in fair value of the cows and calves on December 31: Biological assets 960,000 Gain from biological asset 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 960,000 578Another illustration ‘An entity produced milk for sale to local and national ice orca Pr cere: he entity began operations at the in ni i Ee On. year by purchasing 500 milk cows for The entity had the followin ‘ informati ; year-end relating to the cower ration available at Carrying amount of milking cows, January 1 Change in fair value due to growth and price change prenyens 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 * 8,000,000 2, To record the net gain from the change in fair value of biological assets: Biological assets 700,000 Gain from biological asset 700,000 Change in fair value due to growth and pricechange 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 . “00,000 Gain from agricultural produce 0.000 579°