ACCOUNTING FOR BIOLOGICAL ASSETS

Objectives

Understand what types of assets can be classified biological assets and know the unique attributes of
such assets
Be able to explain why net market value has been suggested by some researchers as the appropriate
basis for valuation of biological assets pertaining to agricultural activity
Understand the various issues associated with changes in the market value of biological assets, and
explain when such changes in value should be recognised in profit and loss
Be aware of some ongoing accounting debates in relation to biological assets and be able to evaluate
the logic of the various arguments supporting or opposing particular valuation and disclosure
approaches

Contents

INTRODUCTION
Importance
Why the neglect!
THE NATURE OF BIOLOGICAL ASSETS
Definition
Classification
Characteristics
ACCOUNTING FOR BIOLOGICAL ASSETS – AASB 141
Separate Standard
Classification in Financial Statements
Measurement
Animals
Plants
Recognition and measurement of changes in the carrying amount of biological assets
CONCLUSION

Introduction

Importance of SGARAs

The ABS statistics relating to the Agricultural, forestry, fishing and hunting sector show that:
Agriculture made a direct contribution of about 3% of Gross Domestic Product over the past decade
agriculture and forestry and fisheries accounted for approximately 20% of exports in 2000/01
455.5 (59%) of available 768 million hectares of land in Australia, is connected with agriculture,
excluding forestry.
Australia's major exports over the last decade have been primary products (and minerals) such as
wool, wheat, meat, sugar, timber (and by-products), horticultural products.

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Why the neglect!

One of the major contributing factors has been the different social environment in which primary
production operates.
Technically, this should not concern the accountant because it should not effect the accounting process.
In practice - created a situation where Acc. for primary production/self-generating and regenerating
assets generally did not progress far beyond the "corner store" type accounting, as farm businesses
are frequently a family business and the farmer has, in the past at least, tended to have little contact
with businessmen other than those also engaged in farming.
Consequently, the major accounting reports are prepared for tax purposes and are generally irrelevant
for farm management purposes.
In addition, primary producers operate in an environment in which they cannot control and seldom
influence produce prices.
The primary producer has had no opportunity (or desire?) to undersell a competitor or struggle for
a share of the market (e.g. farmer does not feel the need to know how much the growing of wool
or wheat is costing, so that s/he can undersell or at least match the farmer down the road).
The only avenue of control open to them is through costs of production and it is by no means evident
to most primary producers how accounting can assist in this control.

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The nature of biological assets

Relevant standard is AASB 141 ‘Agriculture’ (released July 2004), replacing AASB 1037 ‘Self-
generation and Regenerating Assets’ (SGARAs)

The two standards are substantially the same

Definitions

“SGARA is Non-human living assets” - AASB 1037

‘Biological asset is a living animal or plant’ - AASB 141 Para 5

Included:
trees held as part of a forestry operation
animals held as part of a livestock operation
orchards and vineyards
aquaculture and fishery holdings

Definition of biological assets used in AASB 141 more restrictive than definition of SGARAs used in
AASB 1037.

Unlike AASB 1037, AASB 141 does not apply to:

an investment in a forest as a carbon sink, which gives rise to carbon credits that can either be sold
or used to offset pollution caused by the entity
greyhounds, horses, pigeons, and whippets used for racing
performing animals held by theme parks
non-human living assets other than animals and plants, such as viruses and blood cells

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 The nature of biological assets

SGARA / Biological Assets

Plant Animal

Consumable Bearer Consumable Bearer

S/term L/term L/term S/term L/term L/term

Wheat Forests Orchards Slaughter Fatten Breeders
animals Dairy cattle
Sheep for wool

AASB 141 adopts directly the definition of assets provided by AASB Framework (AASB 141, par.
10):

An entity shall recognise a biological asset or agricultural produce when, and only when:
(a) the entity controls the asset as a result of past events
(b) it is probable that future economic benefits associated with the asset will flow to the entity;
and
(c) the fair value or cost of the asset can be measured reliably.

‘Agricultural activity’ is defined as ‘management by an entity of the biological transformation of

biological assets for sale, into agricultural produce, or into additional biological assets’ (Para 5)

Agricultural produce’ is defined as ‘the harvested product of the entity’s biological assets’ (Para 5)

‘Harvest’ is the detachment of produce from a biological asset or the cessation of a biological assets
life processes” (Para 5)

See Table in Para 4, p.1041 of Handbook for distinction between Biological assets and Agricultural
Produce

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Accounting for biological assets

Key issues associated with SGARAs/biological assets

Since they are unique, do they need a dedicated accounting standard?

How should SGARAs/biological assets be classified and presented in financial reports?

How should SGARAs/biological assets be measured?

When and how should revenue associated with SGARAs/biological assets be recognised?

Unique nature of SGARAs/biological assets

Natural capacity to grow and/or procreate directly impacts on value

Great deal of increase in value owing to input of free goods

Great deal of cost incurred early in the asset’s life but economic benefits derived much later

Production cycle might be very long

Not necessarily any relationship between expenditure on asset and ultimate return

Classification and reporting in financial reports

Prior to standard, various classification systems used

Forestry was classified as:

property, plant and equipment, separate class of ‘regenerative’ assets

Livestock was classified as:

inventory, current (intended for meat) and non-current inventory (intended for breeding)

Comparability an important attribute of general-purpose financial reports

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AASB 141—Classification requirements

SGARAs required to be presented separately in the balance sheet

Does not prohibit classification into current and non-current elements

Classification as current and non-current will depend on management’s intentions

How should SGARAs be measured?

Prior to AASB 1037 ‘Self-generating and Regenerating Assets’, there was great variation in valuation
methods

For example, valuation of forests in Australia was done on a historical cost basis, replacement-cost
basis and/or a market value basis

Refer to Exhibit 9.2 on page 345 - Some valuation policies adopted in relation to forestry assets

Classification and reporting in financial reports

As indicated by Whittred et al. (2004) the study by (Herbohn et al. 1998)[1] indicates that:

Survey 1990-1995 accounts of all 8 ASX listed Co.s involved in forestry to determine
method used to value forestry assets
how value changes are measured & recognised
Balance disclosure of the classification
Extent of non-financial disclosure

Results:
notable for extent of diversity
1 in 8 using solely HC
4 in 8 used net market value but
only 1 of these 4 recognised the net Mkt value increments as an adjustment to periodic income.

[1] Herbohn, K., Peterson, R. and Herbohn, J. (1998) ‘Accounting for forestery assets: Current practice
and future directions’ Australian Accounting Review, May, pp54-66.

Limitations in using the historical cost method in relation to SGARAs / biological assets include:

ignores accretion in value through natural events

ignores price changes
it provides irrelevant information
does not reflect relative values of comparable forests
it does not satisfy management’s accountability obligations and provides irrelevant information on
performance
it ignores the value of native forests

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Alternative measurement models problematic:

Net present value requires numerous decisions or estimates to be made

Current market values are difficult to assess

However:

While the market can be volatile, market value reflects the actual economic value of the assets at at
particular time and is considered appropriate

There is an active market for livestock at all stages of development so this approach is easy and more
reliable

Net market value to be used to value SGARAs/biological assets as at the reporting date

AASB 141 (par. 12):

A biological asset shall be recognised on initial recognition and at each reporting date at its fair
value less estimated point-of-sale costs, except for the case where the fair value cannot be
measured reliably

‘Fair value’ less estimated point-of-sale costs is essentially the same as ‘net market value’

‘Fair value’ is defined by AASB 141 para 8 as ‘the amount for which an asset could be exchanged, or
a liability settled, between knowledgeable, willing parties in an arm’s length transaction’

Gains and losses associated with holding biological assets (AASB 141, par. 26) to be included in the
Income Statement:

A gain or loss arising on initial recognition of a biological asset at fair value less estimated point-
of-sale costs and from a change in fair value less estimated point-of-sale costs of a biological
asset shall be included in profit or loss for the period in which it arises

Point-of-sale costs (AASB 141, par. 14):

includes commissions to brokers and dealers, levies by regulatory agencies and commodity
exchanges, and transfer taxes and duties

does not include transport and other costs necessary to get assets to a market

Assessing fair value

AASB 141 requires that quoted prices from ‘active markets’ be used with deductions made for
transaction costs such as costs associated with transportation to point of sale or sale yard
commissions (Para 9)

Active market defined in AASB 141 as a market where all of the following conditions exist:
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 the items traded within the market are homogeneous
willing buyers and sellers can normally be found at any time
prices are made available to the public

AASB 141 states that where there is no active market for particular biological assets, an entity is to
use one or more of the following, when available, to determine fair value:
the most recent market transaction price, provided that there has not been a significant change in
economic circumstances between the date of that transaction and the reporting date;
market prices for similar assets with adjustment to reflect differences; and
sector benchmarks such as the value of an orchard expressed per export tray, bushel, or
hectare, and the value of cattle expressed per kilogram of meat.

Where market-determined prices or values are not available for biological assets in their present
condition, AASB 141 suggests that an entity use the present value of expected net cash flows from
the asset discounted at a current-market-determined pre-tax rate in determining fair value (Para
20)

Where biological asset is not separate from other assets AASB 141 (par. 25) states:

Biological assets are often physically attached to land (e.g. trees in a plantation forest). There
might be no separate market for biological assets that are attached to the land but an active
market might exist for the combined assets, that is the value of the raw land and land
improvements may be deducted from the fair value of the combined assets to arrive at a fair
value of biological assets

Should it still not be possible to measure fair value reliably on initial recognition, AASB 141 requires
biological assets to be measured at cost less any accumulated depreciation and any accumulated
impairment losses

Once the fair value of the biological asset can be measured reliably, the biological asset is measured at
the fair value, less point-of-sale costs (under AASB 141, par. 30)

When and how should revenue associated with biological assets be recognised?

AASB 141 (par. 26):

A gain or loss arising from initial recognition of a biological asset at fair value less estimated
point-of-sale costs and from a change in fair values less estimated point-of-sale costs of a
biological asset shall be included in profit and loss for the period in which it arises

Accounting for Agricultural Produce

Agricultural produce of a biological asset is defined by AASB 141 as ‘the harvested product of the
entity’s biological assets’

Includes fruit pulled from trees, wool shorn from sheep, felled logs, slaughtered livestock

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AASB 102 ‘Inventory’ requires inventory to be valued at the lower of cost and net realisable value—
what is the cost of agricultural produce?
AASB 141 (par. 13) states that agricultural produce harvested from an entity’s biological assets
is to be measured at its fair value less point-of-sale costs at the point of harvest. Such
measurement is the cost at the date when applying AASB 102 or another similar standard

Disclosure

AASB 141 (par. 41) requires that an entity provide a description of each group of biological assets

Par. Aus43.1 states:

An entity shall disclose the nature of biological assets and an estimate or relevant indication of
their physical quantity, separately classified between ‘plants’ and ‘animals’ and sub- classified as
appropriate to the circumstances of the entity, showing separately those biological assets subject
to a lease arrangement

AASB 141 (Para 50) - ‘requires’ disclosures that reconcile the changes between the carrying amount of
biological assets at the start and end of the current period which should include:

In such cases, an entity is encouraged to disclose, by group or Gain or loss due to change sin fair value
les POS costs;

Increases due to purchases;

Decreases due to harvest;

Decreases due to sales of biological assets classified as held for sale;

Increases due to business combinations;

Net exchange differences on translation of the financial report into a different presentation currency or
translation of a foreign operation into the presentation currency of the reporting entity;

Other changes

Opposition to AASB 1037 and AASB 141

These standards have been the subject of sustained criticism from members of industries affected by
them.

Criticisms include:
too academic
provide ‘nothing positive’ for local companies
make payout ratio look unfavourable
alienate US investors
conflict with activities aimed at harmonising Australian Accounting Standards with International
Financial Reporting Standards—AASB 1037 released prior to international standard in this area

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Examples

Example 1: – Biological asset sold as living asset

Type of asset = forest

Carrying amount (1.1.2007) = $100,000
Sold the asset (i.e. whole forest during the year) for $120,000

Journal:
Asset (forest) Dr 20,000
Reval. Increment (Rev) Cr 20,000
Update asset value to net realizable value

Cash Dr 120,000
Asset (forest) Cr 120,000
Sale of standing forest for cash

Example 2: – Biological asset is converted into non-living produce without further generating
capacity e.g. forest felled into logs or animals slaughtered for meat

Type of asset = forest

Value of the total forest at Fair value (1.1.2007) $5M
1/40 of the forest was logged (during the year)
Cost of logging $20,000
The logs were sold for $150,000
The forest was revalued again after logging and the value of the forest dropped by $115,000
(31.12.2007)

Required:
Journal entries to show the effect of transactions
Show the net effect of these entries

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Journal entries:

Inventory of logs Dr 125,000

Value of stock recognised as rev. Cr 105,000
Cash Cr 20,000
(1/40 of 5M =125,000 - 20,000
at NRV?

Cash Dr 150,000
Sales revenue Cr 150,000

Cost of logs sold Dr 125,000

Inventory of logs Cr 125,000

Fall in value recongnised as an expense Dr 115,000

Forest Cr 115,000

Net Effect
Revenue recognised in log inventory +105,000
Revenue from sales +150,000
Cost of goods sold - 125,000
Revaluation decrement - 115,000
Profit from operation 15,000

Example 3: – Non-living produce sold off and Biological asset (bearer) retained to produce into
the future

Type of asset = orchards

Value of the total orchards (1.1.2007) at Fair Value $5M
During 2005 fruits were picked with an estimated market value of $500,000
Cost of picking $50,000
The fruits were sold for $510,000
The orchards were revalued again after the harvesting (31.12.2007) @ $5.2M

Required
Journal entries to show the effect of transactions
Show the net effect of these entries

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Journal
Bring stock into account at cost – what about at NRV?
Inventory of fruit Dr 500,000
Value of Invt recognised as rev. Cr 450,000
Cash Cr 50,000

Record sale
Cash Dr 510,000
Sales revenue Cr 510,000

Cost of fruits sold Dr 500,000

Inventory of fruits Cr 500,000

Journal
Recognise the increase in asset value
Orchards Dr 200,000
Incr. in value recognised as rev. Cr 200,000

Net Effect
Revenue recognised when picked +450,000
Revenue from sales +510,000
Cost of goods sold -500,000
Revaluation increment +200,000
Profit from operation 660,000

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Summary

Main topic addressed in the chapter include:

Accounting for biological assets that relate to agricultural activities

Various arguments as to how these assets should be valued and disclosed were addressed Also
considered were the unique accounting attributes of biological assets—living animals and plants

Relative merits of historical cost vs market-based valuations were considered

The chapter noted that accounting regulators have opted to adopt market-based/fair valuations for
agriculture accounting standard

The changes in market value from one period to the next are treated as part of the entity’s profit and
loss—a departure from conventional approached such as historical-cost
A biological asset is measured on initial recognition and at each balance sheet date at its fair value less
estimated point-of-sale costs.

Agricultural produce harvested from an entity’s biological assets is measured at its fair value less
estimated point-of-sale costs at the point of harvest. Point-of-sales costs include commissions,
levies, and transfer duties and taxes.

A gain or loss arising on initial recognition at fair value less point-of-sale costs and from a change in
fair value less point-of-sale costs is included in profit or loss.

An unconditional government grant related to a biological asset is recognised as income when the grant
becomes receivable; a conditional government grant is recognised when the conditions attaching to
the grant are met.

IAS 41 specifies disclosures related to agricultural activity.

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