TABLE OF CONTENTS

I. INTRODUCTION........................................................
A. STATEMENT OF THE PROBLEM.............................................
B. THEORETICAL FRAMEWORK.................................................
C. SCOPE OF THE STUDY.........................................................
D. IMPORTANCE OF THE STUDY................................................
To Students......................................................................
To Teachers......................................................................
To Industry.......................................................................
E. DEFINITION OF TERMS.........................................................
II. REVIEW OF RELATED LITERATURE............................
III. RECOMMENDATION.................................................
IV. SUMMARY..............................................................
Objective.......................................................................
Scope.............................................................................
Other issues...................................................................
Government grant.........................................................
Disclosure......................................................................
V. CONCLUSION..........................................................
 INTRODUCTION

The Philippines has a vast number of businesses that revolves

around agriculture like; root crops, poultries, piggeries, handicrafts,

and anything that made something of natural process in terms of

plants and animals. The thing is, this business is quite unique in the

eyes of accounting perspective. That is why Philippine Accounting

Standard No. 41 (PAS 41) Agriculture is situated for this type of

industry, especially here in our country. PAS 41 tackles around the

biological assets of ones business. Starting from its first stage of

growing up through its adulthood, no matter if it is a plant or an

animal. PAS 41 also works together with PAS 2, which is the inventory.

The proponents chose this topic in financial accounting to the

fact abovementioned in the first sentence, and also to give importance

on how biological assets work theoretically and in practice. Some say

that biological assets in accounting is a hard topic in financial

accounting part one, some say it is irrelevant because there is no

actual farm lands that accounts their assets that organize. It seems

like it is the problem around this day, which this topic has been always

not giving importance the way that it should be. Remember,

Philippines is an agriculture dominated economy, and that means

1
accounting of agricultural products plays a vital role in every

businesses in this industry.

Accounting and financial reporting practices categorize many

assets such as property, machines, equipment, buildings, and other

assets. Biological assets is one of the categories of assets. Biological

assets include plants and animals. The common examples of biological

assets include animals such as goats, sheep, cows, buffaloes, calves,

and fish. Biological assets include plants such as vegetables, crops,

vineyards, trees, and fruit orchards.1

The biological assets keep on transforming. They grow,

degenerate, and produce. As a result quantitative or qualitative

changes occur in the nature of biological assets. Such changes are

known as biological transformation. The harvested product of changes

in the nature of biological assets is known as agricultural produce. The

examples of agricultural produce include milk, mutton, beef, fruits,

coffee beans etc.

2
 A. STATEMENT OF THE PROBLEM

To know the importance of Biological Assets not just theoretically

but in practice, especially here in the Philippines

How the process of Biological Assets works in practice of being a

certified public accountant.

By implementing Biological Assets accounting in a business, can

it affect the whole operations?

The abovementioned problems regarding this book are the

authors queries regarding the whole topic of Biological Assets.

The answers shall be fulfilled on the latter part of this book as

the research progresses.

3
 B. THEORETICAL FRAMEWORK

There are production periods for many crops that are so long that

impose the need to account the fair value changes in operating profit

every period, otherwise gross distortions would be made, because with

cost methods the entire earnings of a long production process would

be reported only at distant intervals, which would not faithfully

represent the underlying economic activities being carried out

(Epstein and Jermakowicz, 2010). This can be compared with long-term

construction undertakings, which are commonly accounted for as

percentage-of-completion, for the same reasons. Beyond these periodic

distortions that would be committed by cost methods, it is relevant to

stress that each stage of the biological transformation process (growth,

degeneration, procreation and production) has significance and

contributes to the expected economic benefits coming from biological

assets. If the cost model would be the norm, there would be a lack of

explicit recognition (in effect, no matching) of the benefits associated

with each of these discrete events (Epstein and Jermakowicz, 2010).

These biological transformations, reflected in financial statements,

represent two kinds of changes in the fair value of biological assets,

physical changes and price changes. When market prices are not

available, and biological assets are valued with a discounted cash flow

approach, the discount rate chosen should reflect the risks inherent to

4
the future cash-flows. However, these risks are not only those

concerned with the entity, but also with the biological transformation

itself, which the company doesnt fully control, and even more

important with the high risk of the agricultural activity, such as climate

changes, price volatility and the possibility of adverse meteorological

conditions (frosts, hail, persistent rain, natural disasters). 25 Another

factor contributing to the difficulty to measure biological assets at fair

value is the lack of active markets, especially during the growth period,

for biological assets with a long growth cycle (like pine trees with 30

years of growth until harvest). Besides, there can be also a lack of

match between fair market prices and selling prices, because the

selling price can be regulated by contracts, like exclusive contract

deals bargained with cooperatives (Costa, 2011). But even if these

active markets do exist, their access conditions can imply high and

discouraging costs to agricultural companies, especially to small-sized

ones, where the information cost may not offset the generated benefits

(Mendes, 2010). Still, some authors advocate that it is difficult to

reliably ascertain the production cost of biological assets. One of the

biggest barriers to use the cost method binds with the presence of joint

costs in agriculture, and the frequent lack of analytical accounting

systems in agricultural companies able to deal and analyze these data

to elaborate correct estimations (Mendes, 2010). Concerning the fact

that a change in the fair value of biological assets is reported in the

5
income statement in the period when it occurs, even if the objective is

to improve the relevance of accounting information available to

investors, it is nevertheless a solution that can mislead shareholders

expectations about the future value to be distributed as dividends

(Mendes, 2010). Consequently, financial statements users can

develop unrealistic expectations of distributable profits, creating

pressure for entities to declare and pay dividends for which no funds

are available (Elad and Herbohn, 2011). To deal with this situation,

some authors propose that financial statements should separately

present the obtained and distributable income and the earnings that

have not been transacted yet (Gonzlez and Lauro, 2007).

6
 C. SCOPE OF THE STUDY

IAS 41 applies to biological assets with the exception of bearer

plants, agricultural produce at the point of harvest, and government

grants related to these biological assets. It does not apply to land

related to agricultural activity, intangible assets related to agricultural

activity, government grants related to bearer plants, and bearer plants.

However, it does apply to produce growing on bearer plants.

Note: Bearer plants were excluded from the scope of IAS 41 by

Agriculture: Bearer Plants (Amendments to IAS 16 and IAS 41),

which applies to annual periods beginning on or after 1 January

2016.

7
D.IMPORTANCE OF THE STUDY

To Students

The importance of this study to students is situated on the

practice of biological assets in accounting to the industry of

agriculture. It nurtures the horizon of knowledge of students

taking up accountancy or related courses with the same subject

matter in the field of agriculture. Knowing that agricultural-

business here in the Philippines are very fundamental in our

economy.

To Teachers

It will help professor to formulate new situations and

examples that they can present to students that will help them to

realize the importance of biological assets in accounting and not

must be looked down for its content.

To Industry

Proposing to be a reference for more comprehensive

information regarding the biological assets in the Philippine

Accounting Standards No. 41 Agriculture and will pose as

beacon of sharing the experience of biological assets in practice

of being an certified public accountant or as a professional.

8
E.DEFINITION OF TERMS

Biological asset - is a living plant or animal. Agricultural activity

- Is the management of the biological transformation and harvest

of the biological assets for sale or for conversion into agricultural

produce or into additional biological assets.

Biological transformation - it relates to the processes of

growth, degeneration, and production that can cause changes of

a quantitative or qualitative nature in a biological asset.

Harvest - Is the detachment of produce from a biological asset

or the cessation of a biological asset's life process.

Agricultural produce - Is the harvested product of the entity's

biological assets, for example, milk and coffee beans.

Bearer plant - is a living plant that:

is used in the production or supply of agricultural produce

is expected to bear produce for more than one period, and
has a remote likelihood of being sold as agricultural produce,

except for incidental scrap sales.

Active market - one where these conditions exist: The items

traded in the market are homogenous; willing buyers and sellers

9
normally can be found at any time; and prices are available to

the public.

Fair value - Is the amount for which an asset can be exchanged

or a liability settled in an arm'slength transaction between

knowledgeable and willing parties. The fair value of an asset is

based on its present location and condition.

Costs to sell - are the incremental costs directly attributable to

the disposal of an asset, excluding finance costs and income

taxes.

Price change refers to the change in fair value of the

biological asset due to fluctuating price in an active market.

Physical change refers to the change in fair value as

biological asset grow.

10
 REVIEW OF RELATED LITERATURE

Foreign Literature

IAS 41 Agriculture sets out the accounting for agricultural activity

the transformation of biological assets (living plants and animals) into

agricultural produce (harvested product of the entity's biological

assets). The standard generally requires biological assets to be

measured at fair value less costs to sell.

Date Development Comments

December 1999 Exposure Draft E65 Comment deadline 31
Agriculture January 2000

December 2000 IAS 41 Agriculture issued Operative for annual

financial
statementscovering periods
beginning on or after 1
January 2003
22 May 2008 Amended by Improvements Effective for annual periods
to IFRSs (discount rates) beginning on or after 1
January 2009
30 June 2014 Amended by Agriculture: Effective for annual periods
Bearer Plants (Amendments beginning on or after 1
to IAS 16 and IAS 41) January 2016

IAS 41 was originally issued in December 2000 and first applied to

annual periods beginning on or after 1 January 2003. (Deloitte, "IAS 41

Agriculture")

History of IAS 41

11
Foreign Study

Accounting for Biological Assets

Despite the fact that nowadays agriculture has been given its

due importance in the accounting world, it has not always been like

this, although agriculture has always been a cornerstone of many

economies in several countries. Traditionally, agricultural companies

were of small size, family held businesses, not obliged to produce

financial statements, and only performed some kind of accounting

activity to comply with tax and subsidy requirements (Argils and Slof,

2001). Also, grantors of farm credit have historically looked to the

character of the borrower, usually a long time resident with deep roots

in the community, rather than to financial statements (Epstein and

Jermakowicz, 2010).

Another factor possibly contributing to the scant attention given

to agriculture by standard setters around the world is based on the fact

that the main regulatory bodies have been based in the US or UK, and

in these economies agriculture is not given such importance as in less

developed countries. Besides, singular characteristics of this industry,

such as biological transformation like growth, production, degeneration

and procreation, which cannot be accounted with traditional

accounting classification schemes, postponed its concern by financial

reporting rules (Epstein and Jermakowicz, 2010).

12
IAS 41:

In this section I will provide a summary of IAS 41 implications

based on the standard provided by the European Commission website

(www.ec.europa.eu). IAS 41 effective date was 1 January 2003,

although the IASB encouraged earlier application.

According to IAS 41, biological assets are living animals or plants. This

standard deals not only with biological assets but also with agricultural

produce at the point of harvest, where agricultural produce is the

harvested product of the entitys biological assets.

After the point of harvest, agricultural produce is no longer ruled

by IAS 41, but instead by IAS 2 (Inventories) or another applicable

standard. For example, sheeps and dairy cattle are biological assets;

wool and milk are their agricultural produce, respectively. But the

process of converting wool into yarn and carpet or of converting milk

into cheese, are no longer relevant for IAS 41, because these are

products that are the result of processing after harvest. Similarly, and

with greater relevance for this study, trees in a plantation forest are

biological assets, felled trees are agricultural produce, and

logs/lumbers are products that are the result of processing after

harvest.

Harvest is the detachment of produce from a biological asset or

the cessation of a biological assets life processes. The cessation of a

13
biological assets life is concerned with consumable biological assets,

which are those that are to be harvested as agricultural produce or

sold as biological assets. Examples of consumable biological assets are

livestock intended for the production of meat, livestock held for sale,

fish in farms, crops such as maize and wheat, and trees being grown

for lumber. The detachment of produce from a biological asset is

concerned with bearer biological assets, which are for example

livestock from which milk is produced, grape vines, fruit trees, and

trees from which firewood is harvested while the tree remains.

According to IAS 41, biological assets can be grouped into

mature and immature. This distinction enables stakeholders to analyze

future impacts of these biological assets in P&L and balance sheet, in

terms of the future economic benefits that will be generated in the

short-term (mature biological assets) or in the long-term period

(immature biological assets) (Costa, 2011). Mature ones can still be

divided between those that have attained harvestable specifications

(for consumable biological assets) and those that are able to sustain

regular harvests (for bearer biological assets) (www.ec.europa.eu).

Concerning the recognition and measurement of biological

assets, according to IAS 41, these are to be measured at its fair value

less costs to sell, on initial recognition and at the end of each reporting

14
period, except for the cases where fair value cannot be measured

reliably. Costs to sell are the incremental costs directly attributable to

the disposal of an asset, excluding finance costs and income taxes

(www.ec.europa.eu).

The quoted price in an active market or in the most relevant

market if the entity has access to different active markets, which exists

for a biological asset or agricultural produce, is the suitable basis for

ascertaining the fair value of that asset. If these active markets dont

exist, the company bases its evaluation on the following 3 alternatives:

the most recent market transaction price, if there have not been

considerable changes in the economic environment since the date of

the transaction until the end of the reporting period; market prices for

similar assets with adjustment to reflect differences

(www.ec.europa.eu); and sector benchmarks. Sector benchmarks are

for example the value of an orchard expressed per export tray,

bushel, or hectare, and the value of cattle expressed per kilogram of

meat (www.ec.europa.eu).

If market based prices are not available, the entity bases its

analysis on discounted cash-flow methods. The calculation of cash-

flows is based on what market participants would expect the asset to

reproduce in the most relevant market. Cash- flows for financing the

asset, taxation and for re-establishing biological assets after harvest,

15
for example, the cost of replanting trees in a plantation forest after

harvest (www.ec.europa.eu), are not included.

According to IAS 41, gains and losses arising on initial recognition of a

biological asset or of agricultural produce at fair value less costs to sell,

and from changes in fair value less costs to sell of biological assets,

should be reported in the income statement in the respective period.

Biological assets shall be measured at cost less accumulated

depreciations and impairment losses, only on initial recognition, and

only when neither market based prices are available or when

alternative ways of accounting at fair value are clearly unreliable. Once

the fair value calculation becomes an accurate estimate of the value of

the asset, the entity shall value the asset at fair value less costs to sell

until disposal (www.ec.europa.eu).

According to some authors, the fact that biological assets

strengthen, mature or fatten over time, therefore changing its physical

condition constantly, makes it inherently less reliable to value these

assets at cost (Argils and Slof, 2001).

However, the cost method may be a reasonable way to value

biological assets, and it might be a good approach to estimate fair

value, in two specific situations: if tree seedlings are planted just

before the end of the reporting period, or other situations where no

16
relevant biological transformations have taken place, or in the case of

a biological asset with a long life, like a pine

plantation with a production cycle of 30 years, where in the initial

growth phase the impact of the biological transformation on price is

not considered to be relevant (www.ec.europa.eu).

Historical Cost versus Fair Value in Biological Assets:

There are production periods for many crops that are so long that

impose the need to account the fair value changes in operating profit

every period, otherwise gross distortions would be made, because with

cost methods the entire earnings of a long production process would

be reported only at distant intervals, which would not faithfully

represent the underlying economic activities being carried out

(Epstein and Jermakowicz, 2010). This can be compared with long-term

construction undertakings, which are commonly accounted for as

percentage-of-completion, for the same reasons. Beyond these periodic

distortions that would be committed by cost methods, it is relevant to

stress that each stage of the biological transformation process (growth,

degeneration, procreation and production) has significance and

contributes to the expected economic benefits coming from biological

assets. If the cost model would be the norm, there would be a lack of

explicit recognition (in effect, no matching) of the benefits associated

with each of these discrete events (Epstein and Jermakowicz, 2010).

17
These biological transformations, reflected in financial statements,

represent two kinds of

changes in the fair value of biological assets, physical changes and

price changes.When market prices are not available, and biological

assets are valued with a discounted cash flow approach, the discount

rate chosen should reflect the risks inherent to the future cash-flows.

However, these risks are not only those concerned with the entity, but

also with the biological transformation itself, which the company

doesnt fully control, and even more important with the high risk of the

agricultural activity, such as climate changes, price volatility and the

possibility of adverse meteorological conditions (frosts, hail, persistent

rain, natural disasters).

Another factor contributing to the difficulty to measure biological

assets at fair value is the lack of active markets, especially during the

growth period, for biological assets with a long growth cycle (like pine

trees with 30 years of growth until harvest). Besides, there can be also

a lack of match between fair market prices and selling prices, because

the selling price can be regulated by contracts, like exclusive contract

deals bargained with cooperatives (Costa, 2011). But even if these

active markets do exist, their access conditions can imply high and

discouraging costs to agricultural companies, especially to small-sized

18
ones, where the information cost may not offset the generated benefits

(Mendes, 2010).

Still, some authors advocate that it is difficult to reliably ascertain the

production cost of biological assets. One of the biggest barriers to use

the cost method binds with the presence of joint costs in agriculture,

and the frequent lack of analytical accounting systems in agricultural

companies able to deal and analyze these data to elaborate correct

estimations (Mendes, 2010).

Concerning the fact that a change in the fair value of biological

assets is reported in the income statement in the period when it

occurs, even if the objective is to improve the relevance of accounting

information available to investors, it is nevertheless a solution that can

mislead shareholders expectations about the future value to be

distributed as dividends (Mendes, 2010). Consequently, financial

statements users can develop unrealistic expectations of distributable

profits, creating pressure for entities to declare and pay dividends for

which no funds are available (Elad and Herbohn, 2011). To deal with

this situation, some authors propose that financial statements should

separately present the obtained and distributable income and the

earnings that have not been transacted yet (Gonzlez and Lauro,

2007).

19
Biological Assets: An International Analysis

Some authors developed a study concerning fair value in the

agricultural sector based on a survey and an analysis of annual reports

in France, Australia and UK (Elad and Herbohn, 2011).

The main objective of the study is to investigate in an empirical way

the application of IAS 41 in these countries, and ascertain about

harmonization practices in farm accounting. It is relevant to state that

in Australia IAS 41 is not applicable. Instead, Australian companies

apply the AASB 141, which resembles IAS 41 as regards fair value

measurements.

In France (that possesses the largest agricultural share in Europe,

with more than 20% of the European Union agricultural output), more

than 50% of the companies analyzed used historical cost method

under IAS 41. Therefore, the weak impact of the standard is explained

by the fact that the Plan Comptable Gnral Agricole remains the

regulatory guidance in most agricultural entities in France.

Furthermore, as far as small and medium-sized agricultural entities are

concerned, IAS 41 is not expected to have a significant impact on

these companies, both in France and in Australia and UK, because not

only there is an option to use historical cost when fair value cannot be

determined reliably, but also because the IASB itself recommends that

20
these companies dont use fair value unless it implies minimized cost

or effort.

In their annual report analysis, that relates to the financial year

2006-2007, these authors found on the one hand that the option to use

historical cost under IAS 41 is more common in France than in Australia

or UK. On the other hand, the present value method is the more

commonly used in Australia and UK (when using the Fair Value

approach), where the valuations were usually undertaken by

independent external appraisers, mainly in the plantation and forestry

area.

These same authors found in their study that discount rates estimated

in net present value methods, besides being subject to judgement and

assumptions, are difficult to determine in less developed capital

markets, particularly the risk free rate. In the 3 countries analyzed, it is

difficult to establish risk premium for forestry assets, thats why some

companies present sensitivity analysis in their financial reports. These

difficulties in reaching an accurate value for the discount rate can lead

into problems with auditors and regulatory bodies. It happened with

Touchwood Ltd (Sri Lankan company), its auditor (KPMG) and the local

stock exchange regulator. At the date of the book (Elad and Herbohn,

2011), it was subject of a pending court case between Touchwood, the

Sri Lankan Accounting and Auditing Standards Monitoring Board, and

21
the local stock exchange regulators. The company advocated a

discount rate of 12%, whereas the auditors advocated that the

appropriate discount rate was of 17%, which would decrease the value

of the forest.

Another case, where a company was embroiled in a major

dispute with their auditors, occurred in a French biological company,

whose accounts were subject to a qualification by their auditors. The

company mentioned is DUC SA, specialized in poultry farming. In the

aftermath of an avian influenza epidemic, concerning the financial year

ending 2006, the auditors, Synergie Audit and Mazars & Guerard,

advocated that the company didnt use effective strategies to assess

future cash-flows, taking into account the uncertainties of these cash-

flows generated by lack of consumer confidence in the safety of

poultry goods.

Lastly, this study denotes that IAS 41 may promote social conflict

in some countries (mainly tropical ones), where stakeholder advocacy

organisations have argued that fair values established by market

forces do not reflect the real value of tropical agricultural commodities

such as coffee, tea, banana, or cocoa (Elad and Herbohn,2011).

Some stakeholder advocacy groups and human rights activists

dont accept the fair value, stating that the minimum fair trade price is

higher than the fair market value. Therefore, by reporting these kinds

22
of biological assets in financial statements at fair value, IAS 41 is

promoting alienation of reality. This issue is behind global campaigns

fostered by ethical investors, environmental non-governmental

organizations and religious groups around the world, all united by the

Fair-trade Foundation. This movement seeks to give a voice to

disadvantaged agriculture workers in tropical countries, so that

altruistic consumers in industrialised countries can demonstrate

empathy and solidarity by their willingness to pay a price premium

(above the conventional market price) to alleviate the inequities of free

trade (Elad and Herbohn, 2011).

Likewise, in Europe, biological assets according to IAS 41 are subject to

subsidised and politically mediated market prices, because of the vast

impact of the European Unions Common Agricultural Policy (CAP). To

give an example, in 2009, 41 billion Euros were distributed to European

farmers as subsidies, amounting to over 40% of the European Unions

budget.

Therefore, selling prices of farm goods that are transacted with

developing countries are below production costs. Such protectionist

policies undermine

the fair value model in IAS 41 which forges a tight link between heavily

subsidised market prices and the value of biological assets (Elad and

Herbohn, 2011).

23
24
LATEST DEVELOPMENT

IAS 41 Bearer Plant

This is a limited scope project to consider an amendment to IAS 41

Agriculture in relation to bearer biological assets (BBAs, e.g. fruit trees,

grape vines), as to whether these assets would be better accounted for

under IAS 16 Property, Plant and Equipment rather than using the fair

value measurement approach prescribed by IAS 41.

There is support (especially those in the plantation industry) for a

limited-scope project for BBAs and such a project is also supported in

the Issues Paper produced by the Asian-Oceanian Standard Setters

Group (AOSSG) and the IASB's Emerging Economies Group (EEG).

Users of financial statements that responded to the IASB's agenda

consultation considered a project on bearer biological assets to be

important/urgent.

The AOSSG noted that concerns had been raised by investors (as well

as preparers) about the relevance and usefulness of information

provided to users for certain biological assets accounted for at fair

value. Specifically the paper included a survey performed by the

Malaysian Accounting Standards Board (MASB) in 2010 that found that

a group of analysts specialising in plantation did not find fair value

information for BBAs useful, particularly the presentation of changes in

25
fair value within the profit or loss which in some instances can be

large and distort profits.

The key issues to be addressed by the IASB as part of this limited-

scope project are as follows:

1. What definition of bearer biological assets should be used in the

scope of the amendment, e.g. asset has no alternative use, the

predominant use of asset (i.e. the treatment of a biological asset

would depend on what it is predominantly used for), or plants only

(i.e. excluding livestock)?

2. Should guidance for BBAs be incorporated into IAS 16 or remain in

IAS 41?

3. What should be the measurement attribute of BBAs before being

placed into production (e.g. fair value or cost accumulation)?

4. Is there a need for additional measurement guidance in IAS 16 for

BBAs, such as: determining the unit of account accounting for CBAs

growing on the BBAs unique costs of growing BBA (capitalist versus

expense) additional disclosures transitional provisions?

The IASB added this project to its agenda in September 2012. The

IASB decided a Discussion Paper is not required due to the existing

research that had already been undertaken in the topic area.

26
27
Current status of the project

This project has been completed. The IASB issued Agriculture: Bearer
Plants (Amendments to IAS 16 and IAS 41) on 30 June 2014.(Deloitte,
"IAS 41 Bearer plants")

Project Milestones
Date Development Comments

September Limited scope project added

2012 to the IASB agenda

26 June 20 ED/2013/8 Agriculture: Bear Comment deadline 28

13 er Plants published October 2013

30 June 20 Agriculture: Bearer Plants Effective for annual periods

14 (Amendments to IAS 16 and beginning on or after 1
IAS 41) issued January 2016

28
 RECOMMENDATION

For users who might be interested to know about the fair value of

the BBA to assist them in predicting the potential changes in the

economic resources that the entity is likely to control in the future,

information on fair value of the combined asset, for example the BBA

and the land related to the agricultural activity, could be provided in

the financial statements via voluntary disclosures in the notes.

A possible definition for agricultural activity, bearer biological assets

and consumable biological assets could be: Agricultural activity is the

management by an entity of: Issues Paper on IAS 41 submitted by

AOSSG WG on Agriculture Page 14 of 18 (a) the biological

transformation and harvest of biological assets for sale, or for

conversion into agricultural produce, or into additional biological

assets; and/or (b) biological assets for their agricultural produce.

Bearer biological assets are biological assets that: (a) are cultivated for

use in the production or supply of agricultural produce to others; and

(b) are expected to be used over more than one period.

We urge the IASB to reconsider the accounting treatment for

BBA, which are akin to property, plant and equipment of a

manufacturing facility as noted in the preceding paragraphs, based on

the following approach: (a) bearer biological assets the accounting for

BBA would apply accounting principles that are consistent with

29
property, plant and equipment prescribed in IAS 16. 7 The proposed

definition of BBA is drafted to closely align to the definition of property,

plant and equipment. IAS 16 defines property, plant and equipment as

tangible items that are (a) held for use in the production or supply of

goods or services, for rental to others, or for administration purposes;

and (b) are expected to be used during more than one period. Issues

Paper on IAS 41 submitted by AOSSG WG on Agriculture Page 15 of

18 This approach would be consistent with the principles of IAS 16 and

would be suitable for a bearer biological asset that are cultivated for

use in the production or supply of agricultural produce to others and

are expected to be used during more than one period, such as oil palm

plantations. Some AOSSG WG members believe entities engaged in the

cultivation of BBA should be accorded the choice of either the cost or

revaluation model in accounting for the BBA given that IAS 16 provides

the choice in accounting for property, plant and equipment. With

regard to immature BBA, typically significant costs are incurred in

cultivating the immature BBA to maturity. In accordance with the

provisions under IAS 16, such costs would be capitalized until

commercial production comprising of direct costs (eg seedlings, cost of

labour and fertilizers) and other indirect development costs (eg land

clearing). For example, in the case of orchards or vineyards, substantial

expenditure for labor and material to shape and train the tree or vine

into an efficient form may be incurred during the period of

30
development before they reach a maturity stage. Capitalization of such

costs is inappropriate if future recovery is in doubt as in cases when

there is uncertainty as to survival of the immature BBA because they

may be more susceptible to pests, disease or weather effects. Whilst

significant biological transformation occurs during the period of growth

towards maturity, unlike CBA, this should not be a relevant factor for

immature BBA as they are not agricultural produce but are being

cultivated towards maturity to be held for use in the production of

agricultural produce. The stage of maturity should therefore not be a

factor in the choice between the adoptions of a cost or revaluation

model for BBA, even when the choice is permitted. (b) Consumable

biological assets For CBA or agriculture produce borne from BBA, the

accounting treatment would follow the requirements as prescribed in

IAS 41, i.e. the agriculture produce borne from BBA (for example,

fruits growing on a tree) would be separately recognized and valued at

fair value at the point of harvest whereby a gain or loss arising on

initial recognition of agricultural produce at fair value less costs to sell

shall be included in profit or loss. The AOSSG WG is conscious that an

active market may not exist for certain agriculture produce, for

example plucked tea leaves which are to be immediately consumed for

conversion into black tea. In such cases, the AOSSG WG believes the

entity shall use the guidance prescribed in IFRS 13 Fair Value

Measurement to measure the agricultural produce at the point of

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harvest. In addition the AOSSG WG members support the AASBs

recommendation to IASB to improve paragraph 51 of IAS 41 and

recommends the IASB to consider AASBs proposal. The AOSSG WG

believes it would be impracticable to require separate disclosures of

the components of the change in fair value less costs to Issues Paper

on IAS 41 submitted by AOSSG WG on Agriculture Page 16 of 18 sell

of biological assets due to physical changes and due to price changes

when the fair value estimates are derived based on the present value

of future cash flows instead of observable market prices. A copy of the

AASBs letter is attached in Appendix H. 42. Appendix I shows a

marked-up version of the proposed amendments to IAS 41, prepared

by the Malaysian Accounting Standards Board (MASB) to incorporate

the above recommendations, based on the presumption that the IASB

takes the approach that accounting requirements regarding the BBA be

incorporated into IAS16.

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 SUMMARY

Objective

The objective of IAS 41 is to establish standards of accounting for

agricultural activity the management of the biological transformation

of biological assets (living plants and animals) into agricultural produce

(harvested product of the entity's biological assets).

Scope

IAS 41 applies to biological assets with the exception of bearer plants,

agricultural produce at the point of harvest, and government grants

related to these biological assets. It does not apply to land related to

agricultural activity, intangible assets related to agricultural activity,

government grants related to bearer plants, and bearer plants.

However, it does apply to produce growing on bearer plants.

Note: Bearer plants were excluded from the scope of IAS 41

by Agriculture: Bearer Plants (Amendments to IAS 16 and IAS 41),

which applies to annual periods beginning on or after 1 January 2016.

Initial recognition

An entity recognises a biological asset or agriculture produce only

when the entity controls the asset as a result of past events, it is

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probable that future economic benefits will flow to the entity, and the

fair value or cost of the asset can be measured reliably. [IAS 41.10]

Measurement

Biological assets within the scope of IAS 41 are measured on initial

recognition and at subsequent reporting dates at fair value less

estimated costs to sell, unless fair value cannot be reliably measured.

[IAS 41.12]

Agricultural produce is measured at fair value less estimated costs to

sell at the point of harvest. [IAS 41.13] Because harvested produce is a

marketable commodity, there is no 'measurement reliability' exception

for produce.

The gain on initial recognition of biological assets at fair value less

costs to sell, and changes in fair value less costs to sell of biological

assets during a period, are included in profit or loss. [IAS 41.26]

A gain on initial recognition (e.g. as a result of harvesting) of

agricultural produce at fair value less costs to sell are included in profit

or loss for the period in which it arises. [IAS 41.28]

All costs related to biological assets that are measured at fair value are

recognised as expenses when incurred, other than costs to purchase

biological assets.

IAS 41 presumes that fair value can be reliably measured for most

biological assets. However, that presumption can be rebutted for a

biological asset that, at the time it is initially recognised, does not have

34
a quoted market price in an active market and for which alternative fair

value measurements are determined to be clearly unreliable. In such a

case, the asset is measured at cost less accumulated depreciation and

impairment losses. But the entity must still measure all of its other

biological assets at fair value less costs to sell. If circumstances change

and fair value becomes reliably measurable, a switch to fair value less

costs to sell is required. [IAS 41.30]

Guidance on the determination of fair value is available in IFRS 13 Fair

Value Measurement. IFRS 13 also requires disclosures about fair value

measurements.

Other issues

The change in fair value of biological assets is part physical change

(growth, etc) and part unit price change. Separate disclosure of the two

components is encouraged, not required. [IAS 41.51]

Agricultural produce is measured at fair value less costs to sell at

harvest, and this measurement is considered the cost of the produce at

that time (for the purposes of IAS 2 Inventories or any other applicable

standard). [IAS 41.13]

Agricultural land is accounted for under IAS 16 Property, Plant and

Equipment. However, biological assets (other than bearer plants) that

are physically attached to land are measured as biological assets

separate from the land. In some cases, the determination of the fair

value less costs to sell of the biological asset can be based on the fair

35
 value of the combined asset (land, improvements and biological

assets). [IAS 41.25]

Intangible assets relating to agricultural activity (for example, milk

quotas) are accounted for under IAS 38 Intangible Assets.

Government grant

Unconditional government grants received in respect of biological

assets measured at fair value less costs to sell are recognised in profit

or loss when the grant becomes receivable. [IAS 41.34]

If such a grant is conditional (including where the grant requires an

entity not to engage in certain agricultural activity), the entity

recognises the grant in profit or loss only when the conditions have

been met. [IAS 41.35]

Disclosure

Disclosure requirements in IAS 41 include:

Aggregate gain or loss from the initial recognition of biological

assets and agricultural produce and the change in fair value less costs

to sell during the period* [IAS 41.40]

Description of an entity's biological assets, by broad group [IAS

41.41]

Description of the nature of an entity's activities with each group

of biological assets and non-financial measures or estimates of

36
 physical quantities of output during the period and assets on hand at

the end of the period [IAS 41.46]

Information about biological assets whose title is restricted or

that are pledged as security [IAS 41.49]

Commitments for development or acquisition of biological assets

[IAS 41.49]

Financial risk management strategies [IAS 41.49

Reconciliation of changes in the carrying amount of biological

assets, showing separately changes in value, purchases, sales,

harvesting, business combinations, and foreign exchange differences*

[IAS 41.50]

* Separate and/or additional disclosures are required where biological

assets are measured at cost less accumulated depreciation [IAS 41.55]

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.

[IAS 41.43]

If fair value cannot be measured reliably, additional required

disclosures include: [IAS 41.54]

Description of the assets

An explanation of why fair value cannot be reliably measured

37
 If possible, a range within which fair value is highly likely to lie

Depreciation method

Useful lives or depreciation rates

Gross carrying amount and the accumulated depreciation,

beginning and ending. If the fair value of biological assets previously

measured at cost subsequently becomes available, certain additional

disclosures are required. [IAS 41.56]

Disclosures relating to government grants include the nature and

extent of grants, unfulfilled conditions, and significant decreases

expected in the level of grants. [IAS 41.57]

38
 CONCLUSION

Biological Assets are of great importance for the firm. It is a good

source of income as gains are constantly flowing towards the business.

The firm must establish a method where it can constantly apply the

accepted principles in determining the gain every year end. IAS 41 is a

benchmark that will guide the company in this procedure.

IAS 41 provides us especially the accounting major guide on how to

recognize and measures the biological assets. It help us recognized the

difference with agricultural produce and biological assets. It guides us

regarding the proper recognition and measurement of the biological

assets and agricultural produce. This topic is important though it only

comprises small portion in accounting subject particularly in Financial

Accounting Part One thats why it should be understand. It helps to

fully understand the accounting process that should be applied to

every biological asset and how gain/losses are recognized. Also, this

update us regarding the latest development about the topic the best

example here is the new policies implemented to bearer plants.

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