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Definitions
Biological Asset a living plant or animal
Biological transformation processes of growth, degeneration,
production and procreation causing changes in a biological asset
Agricultural activity management of the biological transformation of
biological assets for sale, into agricultural produce
Agricultural produce the harvested produce of biological assets
A farmer buys a dairy calf The calf is a biological asset
The calf grows into a mature cow Growth
The cow produces milk Production (the milk is agricultural
produce)
The cow gives birth to a calf Procreation (of more biological
assets)
The cow becomes old and
unproductive
Degeneration
Typically farmers account for a group of biological assets, such as a
herd, rather than individual animals.
Biological assets
A biological asset should be recognised if:
Recognition and measurement
Initial measurement is at:
Subsequent measurement:
It is probable that economic benefits will flow to the asset
the cost or fair value of the asset can be reliably measured
the entity controls the asset
Fair value less any estimated point of sale costs
If there is no fair value, then use the cost model
Revalue to fair value less point of sale costs at year end, taking and gain
or loss to the statement of profit or loss
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Definitions
Agriculture is fundamentally different from other types of business. Most
noncurrent
assets wear out or are consumed over time and therefore
they are depreciated. Many agricultural assets grow, rather than wear
out. Arguably, depreciation is irrelevant in this situation. Therefore
biological assets are measured at fair value and changes in fair value
are reported as part of net profit. This means that a farmers profit for the
year reflects the increase in the value of his productive assets as a
whole, as well as the profit on any sales made during the year.
Many commentators have been wary of this departure from traditional
realisation concepts , claiming that it is wrong to recognise profit before
a sale has been made. Indeed, under IAS 41 profits could be
recognised years before the products are even ready for sale. However,
supporters of IAS 41 claim that the opposite is true. By requiring all
changes in the value of a farm to be reported openly, farm managers will
be unable to boost profits by selling off an unsustainable amount of
produce. For instance, under traditional accounting rules a forestry
company could make huge shortterm
profits by felling all of its trees
without replacing them. Profit would reflect the sales but ignore the fall in
value of the forest.
IAS 41 contains a rebuttable presumption that the fair value of a
biological asset can be measured reliably. Many biological assets are
traded on an active market, so it is normally easy to determine the fair
value of an asset by ascertaining the quoted price in that market.
If there is no active market for the asset then it may be possible to
estimate fair value by using:
If there is no active market and the alternative methods of estimating fair
value are clearly unreliable, then a biological asset is measured at cost
less depreciation on initial recognition until a reliable fair value can be
established. For example, seedlings being grown on a plantation will not
have any market value until they are a few years old.
Gains and losses can arise when a biological asset is first recognised.
For example , a loss can arise because estimated selling costs are
deducted from fair value . A gain can arise when a new biological asset
(such as a lamb or a calf) is born.
the most recent market price
the market price for a similar asset
the discounted cash flows from the asset
net realisable value.
Inventories, agriculture and construction contracts
260 KAPLAN PUBLISHING
Fair value
Agricultural produce
At the date of harvest the produce should be recognised and measured at
fair value less estimated costs to sell.
Show extracts from the financial statements for 20X1 for these
activities, assuming that no cows were purchased or sold during
the year.
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