BIOLOGICAL

ASSETS
Definitions

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.

Agricultural produce is the harvested product of an entity's

biological assets.

A biological asset is a living animal or plant.

Biological transformation comprises the processes of growth,

degeneration, production and procreation that cause qualitative
and quantitative changes in a biological asset.
Definitions

A group of biological assets is an aggregation of similar living

animals or plants.

Harvest is the detachment of produce from a biological asset or

the cessation of a biological asset's life processes

Fair value is the price that would be received to sell an asset or

paid to transfer a liability in an orderly transaction between market
participants at the measurement date. (MFRS 13)

Carrying amount is the amount at which an asset is recognised

in the statement of financial position.
Biological Assets

Biological assets are the core income-producing assets of

agricultural activities, held for their transformative capabilities.
Biological transformation leads to various different outcomes.

• Asset changes:

• Growth: increase in quantity and or quality

• Degeneration: decrease in quantity and/or quality

• Creation of new assets:

• Production: producing separable non-living products

• Procreation: producing separable living animals
Biological Assets

Can distinguish between the importance of these by saying that

asset changes are critical to the flow of future economic
benefits both in and beyond the current period, but the relative
importance of new asset creation will depend on the purpose of
the agricultural activity.

The MFRS distinguishes therefore between two broad categories

of agricultural production system.
a) Consumable: animals/plants themselves are harvested
b) Bearer: animals/plants bear produce for harvest

A few further points are made.

a) Biological assets are usually managed in groups of animal or
plant classes, with characteristics (eg male/female ratio) which
allow sustainability in perpetuity.
b) Land often forms an integral part of the activity itself in
pastoral and other land-based agricultural activities.
Biological Assets

The table below provides examples of biological assets, agricultural

produce and products that are the result of processing after harvest:
Bearer Biological Assets

An amendment has been issued to MFRS 141 regarding plant-

based bearer biological assets, which would include trees grown
in plantations, such as grape vines, rubber trees and oil palms.

These plants are used solely to grow produce crops over several
periods and are not in themselves consumed. When no longer
productive they are usually scrapped.

It was decided that fair value was not an appropriate

measurement for these assets as, once they reach maturity, the
only economic benefit they produce comes from the agricultural
produce they create. In this respect, they are similar to assets in a
manufacturing activity.
Bearer Biological Assets

Consequently, these assets have been removed from the scope of

MFRS 141 and should be accounted for under MFRS 116
Property, Plant and Equipment.

They are measured at accumulated costs until maturity and are

then subject to depreciation and impairment charges. The MFRS
116 revaluation model could also be applied. Agricultural produce
from these plants continues to be recognised under MFRS 141.
Recognition of Biological Assets

The recognition criteria are very similar to those for other

assets, in that animals or plants should be recognised as assets
in the following circumstances.

a) The entity controls the asset as a result of past events

b) It is probable that the future economic benefits associated
with the asset will flow to the entity
c) The fair value or cost of the asset to the entity can be
measured reliably
Recognition of Biological Assets

The significant physical attributes of biological assets can be

measured using various methods (which are used by markets to
measure value) and generally indicate the source of future
economic benefits.

The certainty of the flow of rewards can be determined by formal

ownership records, e.g. land title, branding.

The availability of both cost and value for biological assets

indicates the reliability aspect of the measurement criteria is
fulfilled.
Measurement of Biological Assets

The MFRS requires that at each year end all biological assets
should be measured at fair value less estimated point-of-sale
costs.

The MFRS allows an alternative method of valuation, if a fair value

cannot be determined because market- determined prices or
values are not available. Then the biological asset can be
measured at cost less accumulated depreciation and impairment
losses.

This alternative basis is only allowed on initial recognition.

Measurement of Biological Assets

The measurement basis used to depict the fair value of a

biological asset will differ depending on the existence of an active
market, market efficiency and the use made of the asset.

In summary, it is felt that fair value, when compared to historical

cost, has greater relevance, reliability, comparability and
understandability as a measure of future economic benefits.
Measuring Fair Value

The standard states that the primary indicator of fair value should
be net market value. This is reasonable as efficient markets exist
for most biological assets in most locations and net market value
is usually considered as providing the best evidence of fair value
where an active market exists. Markets will generally differentiate
between differing qualities and quantities. Market value is not
generally predicted on management's intended use, however, but
recognises alternative uses.

MFRS 13 requires the fair value of a biological asset to be

determined by reference to the principal market for the asset.
This may or may not be the most favourable market.
Measuring Fair Value

An active and efficient market may not be available for a class of

biological assets in a specific location, or there may be
imperfections in the market.

The standard goes into some detail about how fair value should
be measured in such circumstances, but in summary the
valuation techniques should be consistent with the objectives of
measuring fair value and should attain an appropriate balance
between relevance and reliability.
Recognition

This is an important principle, whereby the change in the carrying

amount for a group of biological assets should be allocated
between:

a) The change attributable to differences in fair value, and

b) The physical change in biological assets held

The total change in carrying value between the beginning and end
of the period thus consists of two components. Although the
separation of these two components might appear impractical, the
Standard states that separate disclosure of each is fundamental
to appraising current period performance and future
prospects. This is because they will not be reported in the same
way in the financial statements.
Recognition

a) The change in carrying amount attributable to the physical

change in biological assets must be recognised as income
or expense and described as the change in biological assets.
b) The change in carrying amount attributable to differences in
fair value should be recognised in the statement of non-
owner movements in equity and presented in equity under the
heading of surplus/(deficit) on fair valuation of biological
assets.

In the statement of financial position the biological assets must

be shown at fair value, incorporating the consequences of all
biological transformations. These assets, with their differing risk
and return characteristics, should be identified clearly.
Presentation and Disclosure

In the statement of financial position biological assets should be

classified as a separate class of assets falling under neither
current nor non-current classifications. This reflects the view of
such assets as having an unlimited life on a collective basis; it is
the total exposure of the entity to this type of asset that is
important.

Biological assets should also be sub-classified (either in the

statement of financial position or as a note to the accounts).

a) Class of animal or plant

b) Nature of activities (consumable or bearer)
c) Maturity or immaturity for intended purpose
Presentation and Disclosure

Where activities are consumable, the maturity criterion will be

attainment of harvestable specifications, whereas in bearer
activities, it will be attainment of sufficient maturity to sustain
economic harvests.

In the statement of profit or loss and other comprehensive

income, entities with significant agricultural activity are
encouraged to provide an analysis of the income and expenses
used in determining profit from operating activities based on the
nature of income and expenses (ie rather than the cost of sales
method).

The MFRS also lists some detailed disclosure requirements

including the measurement base used for fair value, the details of
the reconciliation of the change in carrying value for the year and
so on.
END OF LECTURE 1