Biological assets PDF intermediate accounting PDF

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FINANCIAL ACCOUNTING AND REPORTINGFAR09 Biological Assets9. Introduction and Key Definitions ........................................................................ 19. Recognition and Measurement ............................................................................. 29. Government Grants .....

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FINANCIAL ACCOUNTING AND REPORTING FAR09 Biological Assets 9.1.

Introduction and Key Definitions ........................................................................ 1

9.2.

Recognition and Measurement............................................................................. 2

9.3.

Government Grants ................................................................................................... 3

9.4.

Presentation and Disclosure.................................................................................. 3

FAR09 Biological Assets 9.1. Introduction and Key Definitions  

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The objective of PAS 41 is to establish standards of accounting for agricultural activity. PAS 41 shall be applied to account for the following when they relate to agricultural activity: a. biological assets, except for bearer plants; b. agricultural produce at the point of harvest; and c. government grants covered by paragraphs 34 and 35. PAS 41 does not apply to: a. land related to agricultural activity (see PAS 16 and PAS 40) b. bearer plants related to agricultural activity (see PAS 16). However, PAS 41 applies to the produce on those bearer plants. c. government grants related to bearer plants (see PAS 20) d. intangible assets related to agricultural activity (see PAS 38) The following are the key definitions from PAS 41: Biological asset A living animal or plant Bearer plant 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; and c. has a remote likelihood of being sold as agricultural produce, except for incidental scrap sales The following are not bearer plants: a. plants cultivated to be harvested as agricultural produce b. plants cultivated to produce agricultural produce when there is more than a remote likelihood that the entity will also harvest and sell the plant as agricultural produce, other than as incidental scrap sales c. annual crops Agricultural produce Agricultural activity

Biological transformation Harvest

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The harvested produce of the entity’s biological assets 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 a. Capability of change b. Management of change c. Measurement of change Harvesting from unmanaged sources (such as ocean fishing and deforestation) is not an agricultural activity. Comprises the processes of growth, degeneration, production, and procreation that cause qualitative or quantitative changes in a biological asset Detachment of produce from a biological asset or the cessation of a biological asset’s life processes

The following table provides examples of biological assets, agricultural produce, and products that are the result of processing after harvest: Biological assets

Agricultural produce

Products that are the result of processing after harvest Sheep Wool Yarn, carpet Trees in a timber plantation Felled trees Logs, lumber Dairy cattle Milk Cheese Pigs Carcass Sausages, cured hams Cotton plants Harvested cotton Thread, clothing Sugarcane Harvested cane Sugar Tobacco plants Picked leaves Cured tobacco Tea bushes* Picked leaves Tea Grape vines* Picked grapes Wine Fruit trees* Picked fruit Processed fruit Oil palms* Picked fruit Palm oil Rubber trees* Harvested latex Rubber products *Some plants, for example, tea bushes, grape vines, oil palms and rubber trees, usually meet the definition of a bearer plant and are within the scope of PAS 16. However, the produce growing on bearer plants, for example, tea leaves, grapes, oil palm fruit and latex, is within the scope of PAS 41.

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Case Study 1 An entity, on adoption of PAS 41, has reclassified certain assets as biological assets. The total value of the group’s forest assets is P2,000,000 comprising: Freestanding trees P1,700,000 Land under trees 200,000 Roads in forests 100,000 Required Show how the forests would be classified in the financial statements.

Case Study 2 Entity X owns vineyards that include a large number of vines. These vineyards are held only for production purposes. The grapes are harvested by X and processed to make wine afterwards with X’s technical equipment. Finally, X sells the wine to its customers. Required Assess which standard applies to the accounting of the bold and underlined items in X’s financial statements and explain their measurement by X.

9.2. Recognition and Measurement Requirements for recognition

1. 2. 3.

Measurement of biological assets

Measurement of agricultural produce

Gains and losses

the entity controls the asset as a result of past events; it is 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.

• • •

Initial – fair value less costs to sell Subsequent – fair value less costs to sell When fair value cannot be measured reliably – cost less any accumulated depreciation and any accumulated impairment losses

• • •

Initial – fair value less costs to sell at the point of harvest Subsequent – lower of cost or net realizable value (PAS 2) Point-of-sale costs include brokers’ and dealers’ commissions, any levies by regulatory authorities and commodity exchanges, and any transfer taxes and duties. They exclude transport and other costs necessary to get the assets to a market.

•

Recognize in profit or loss the following: a. Gain or loss on changes in fair value less cost to sell b. Gain or loss on initial recognition of agricultural produce c. Gain or loss on initial recognition of biological asset

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Gain or loss from changes in fair value less cost to sell a. Due to price change (FVLCS, end, Age as of beg.) – (FVLCS, beg, Age as of beg.) x Quantity b. Due to physical change (FVLCS, end, Ages as of end) – (FVLCS, end. Age as of beg.) x Quantity

Case Study 3 ABC Dairy produces milk for local ice cream producers. The entity began operations on January 1, 2019 by purchasing milking cows for P2,000,000. The entity controller had the following information available at year-end relating to the milking cows: Carrying amount - January 1 P2,000,000 Change in fair value due to growth and price changes 400,000 Decrease in fair value due to harvest 50,000 Milk harvested during the year but not yet sold 150,000 Required What amount of gain on biological asset should be reported in 2019? What amount of gain on agricultural produce should be recognized in 2019?

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Case Study 4 ABC Company has a herd of 100 2-year old animals on January 1, 2019. Ten animals aged 2.5 years were purchased on July 1, 2019 for P10,800 each and ten animals were born on July 1, 2019. No animals were sold or disposed of during the year. The fair values less cost to sell per unit were: 2-year old animal on January P10,000 2.5-year old animal on July 10,800 New born animal on July 7,000 2-year old animal on December 31 10,500 2.5-year old animal on December 31 11,100 Newborn animal on December 31 7,200 3-year old animal on December 31 12,000 0.5-year old animal on December 31 8,000 Required a. What is the carrying amount of the biological assets on December 31, 2019? b. What is the gain from change in fair value that should be reported for 2019? c. Prepare the necessary journal entries for the described various transactions.

9.3. Government Grants   

PAS 20 is applied only to a government grant related to a biological asset measured at its cost less any accumulated depreciation and any accumulated impairment losses. For biological assets measured at fair value less costs to sell, PAS 41 is applied. PAS 41 does not deal with government grants that relate to agricultural produce. These grants may include subsidies. Subsidies are normally payable when the produce is sold and would therefore be recognized as income on the sale. Unconditional government grant Recognize income when the grant becomes receivable Conditional government grant Recognize income only when the conditions of the grant are met Conditional government grant – Recognize income proportionately or using the straightpiecemeal satisfaction line method

Case Study 5 Entity X owns olive plantations, which contain a large number of olive trees. The olive trees are biological assets and are measured at fair value less costs to sell. On January 1, 2019, a government grant of P2,000,000 for the olive trees becomes receivable. The grant is paid to X on the same date. Consider the following independent situations: Situation 1: The government grant is unconditional. Situation 2: Payment of the government grant is subject to the condition that X operates the olive plantations at least until December 31, 2020. If this condition is not met, the whole grant of P2,000,000 has to be paid back. Assume that X finally meets this condition. Situation 3: Payment of the government grant is subject to the condition that X operates the olive plantations at least until December 31, 2020. If this condition is not met, the terms of the grant allow part of it to be retained according to the time that has elapsed. Assume that X finally meets this condition. Required How much income from the government grant should be recognized for the years 2019 and 2020 in the given independent situations?

9.4. Presentation and Disclosure   

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Biological assets are aggregated and presented as one-line item under the heading “Biological Assets”, classified as non-current asset. After point of harvest, agricultural produce is presented under “Inventories” and are classified as current assets. Fair value less costs to sell of agricultural produce on initial recognition is separately presented from gains or losses on changes in fair values of biological assets on the face of the statement of profit or loss and other comprehensive income. The following should be disclosed in the notes to the financial statements: a. Carrying amount of biological assets b. Description of an enterprise's biological assets, by broad group c. Change in fair value during the period. There can be physical change through growth, and there can be a price change. Separate disclosure of these two elements is encouraged but not required. d. Fair value of agricultural produce harvested during the period

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e.

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Description of the nature of an enterprise's activities with each group of biological assets and nonfinancial measures or estimates of physical quantities of output during the period and assets on hand at the end of the period f. Information about biological assets whose title is restricted or that are pledged as security g. Commitments for development or acquisition of biological assets h. Financial risk management strategies i. Methods and assumptions for determining fair value j. 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: a. Description of the assets b. An explanation of the circumstances c. If possible, a range within which fair value is highly likely to fall d. Gain or loss recognized on disposal e. Depreciation method f. Useful lives or depreciation rates g. Gross carrying amount and the accumulated depreciation, beginning and ending Disclosures relating to government grants include the nature and extent of grants, unfulfilled conditions, and significant decreases in the expected level of grants.

Quizzer – Problem 1 1.

Jessie Company sold some of their biological assets to Kendrick Company for P200,000 on July 1, 2019. The sale was made at Jessie’s farm. However, if the biological assets are being sold at an auction, they could have been sold at a higher price but the company has to incur transportation costs of P2,000. Jessie Company paid P6,000 commission in relation to the sale. Kendrick Company incurred P3,000 as transport cost in bringing the asset to their own farm. Question 1: At what amount should Kendrick Company recognize the assets initially? A. P192,000 B. P194,000 C. P196,000 D. P200,000 Question 2: What amount of loss should Kendrick Company recognize on initial recognition related to the asset? A. None B. P3,000 C. P6,000 D. P9,000

2.

The following information pertains to the biological asset and agricultural produce of Lady Gaga Company. The fair value of the company’s vineyard was P25,000,000. As of June 30, 2019, Lady Gaga Company determines the following: Fair value of the grapes harvested at March 31, 2019 P5,000,000 Estimated point-of-sale costs of the grapes 100,000 Estimated point-of-sale costs of the vines 200,000 Fair value of the vines as of March 31, 2019, prior to harvest 31,000,000 Lady Gaga Company determines that there is no change in fair value of the vines between March 31, 2019 and June 30, 2019. What total amount of gain should Lady Gaga Company report in its June 30, 2019 as a result of the change in the fair value of the biological asset and agricultural produce? A. P800,000 B. P1,000,000 C. P4,900,000 D. P5,700,000

3.

Mariah Company is in business of deer farming. A herd of one hundred deer is held throughout the financial year of 2019. The only change during the year is the increase in their physical attributes due to aging from two to three years. The relevant data are as follows: Fair value of a 2-year old deer at January 1, 2019 P3,000 Fair value of a 2-year old deer at December 31, 2019 3,300 Fair value of a 3-year old deer at December 31, 2019 4,800 How much is the increase in the fair value of the biological asset due to physical change? A. P30,000 B. P150,000 C. P180,000 D. P480,000

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4.

Nelly Company commences cultivation of oil palm crop on January 1, 2019. Costs (planting materials, labor and other planting costs) were incurred in 2019 to develop a 10-hectare oil palm crop amounted to P4,000,000. On December 31, 2019, the fair value of the land with a one-year old crop was valued at P24,000,000. The fair value of an equivalent raw agricultural land was valued at P18,000,000. What is the amount of profit from plantation operation for the year ended December 31, 2019? A. None B. P2,000,000 C. P4,000,000 D. P6,000,000

Quizzer – Theory 1 1.

2.

Which of the following may be classified as a biological asset? C. mama monkey A. breast milk B. cheese curls

D. dead mama monkey

Which of the following may be classified as an agricultural produce? B. table egg C. egg powder A. duck

D. cake

3.

Which of the following is not one of the common features of agricultural activities? A. accounting change C. management of change B. capability to change D. measurement of change

4.

A biological asset is initially and subsequently measured at A. fair value C. cost B. fair value less costs to sell D. fair value less costs to complete

5.

Which of the following is not a biological asset that is accounted for under IAS 41 Agriculture? A. animals that are being grown to be butchered for their meat B. animals held to produce milk C. plants grown to produce fruit over a long period of time D. plants grown to be harvested and sold

6.

According to IAS 41, this refers to the management by an entity of the biological transformation of biological assets for sale, into agricultural produce, or into additional biological assets. A. Agricultural activity C. Biological transformation B. Agricultural management D. Biological activity

7.

Agricultural activity covers a diverse range of activities. Such diverse range of activities have common features which includes all of the following except A. Capability to change C. Recognition of change B. Management of change D. Measurement of change

8.

It is the detachment of produce from a biological asset or the cessation of a biological asset’s life processes. A. Harvest B. Death C. Decease D. Cultivation

9.

When there is a long aging or maturation process after harvest, the accounting for such products should be dealt with by B. IAS 2 C. IAS 16 D. IAS 40 A. IAS 41

10. According to IAS 41, which of the following would be classified as a product that is the result of processing after harvest? D. Cheese A. Cotton B. Wool C. Bananas 11. Which of the following items would be classified as agricultural produce, according to IAS 41 Agriculture? D. Apple A. Tree B. Bush C. Butter 12. According to IAS 41, which of the following items would be classified as biological assets? I. Oranges II. Chickens III. Eggs IV. Trees C. II, IV A. I, II B. III, IV D. I, IV 13. Are the following statements about classification according to IAS 41 Agriculture true or false? I. Sugar should be classified as agricultural produce. II. Wool should be classified as agricultural produce. A. False, False B. False, True C. True, False D. True, True 14. Which of the following is not dealt with by IAS 41? A. The accounting for biological assets. B. The initial measurement of agricultural produce harvested from the entity’s biological assets.

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C. The processing of agricultural produce after harvesting. D. The accounting treatment of government grants received in respect of biological assets. 15. Which of the following is correct regarding the applicability of IAS 41? A. IAS 41 applies to biological assets and agricultural produce at the point of harvest even if they do not relate to agricultural activities. B. IAS 41 applies to unconditional government grant related to biological assets measured at cost. C. IAS 41 applies to land on which tree recognized as biological assets are planted. D. IAS 41 applies to living plants and animals only when such items relate to agricultural activity. 16. IAS 41 applies to which of the following when they relate to agricultural activity I. Biological assets II. Agricultural produce after the point of harvest III. Agricultural produce at the point of harvest IV. An unconditional government grant related to a biological asset measured at its fair value less costs to sell V. An unconditional government grant related to a biological asset measured at cost VI. Land related to agricultural activity VII. Intangible assets related to agricultural activity B. I, III, IV C. I, II, III, IV, V D. I, II, IV, VI, VII A. I, II, IV 17. According to IAS 41, this refers to the harvested product of the entity’s biological assets. A. biological produce B. agricultural products C. agricultural produce D. biological assets 18. It is a living animal or plant. A. biological product B. biological asset

C. agricultural product

D. mutant assets

19. It comprises the processes of growth, degeneration, production, and procreation that cause qualitative or quantitative changes in a biological asset. A. agricultural activity B. biological activity C. genetic mutation D. biological transformation 20. Agricultural activity covers a diverse range of activities which includes all of the following except A. processing of grapes into wine by a vintner who has grown the grapes B. raising livestock, forestry, and annual or perennial croppin...