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Chapter 9 (Week 6 Tutorial) Heritage Assets and Biological Assets


Heritage Assets

Problems in recognizing heritage assets in balance sheet? (A control related issue)

Which government dept. ultimately controls the asset?
Federal, state or local government level?
Difficult to prevent access to heritage assets (e.g. parks)
Might be restrictions on what can be done with the assets (e.g. museums)
Unique characteristics of heritage assets?
Access to a written-down cost is problematic
Value for similar assets generally unavailable
Raises questions on how an external auditor may determine reasonableness of a
particular valuation?

Biological Assets

Unique characteristics of biological assets?

Natural ability to procreate/ grow will directly impact value.
Biological change is also dependent on input of free goods (e.g. water, air, sunlight),
although management is also important.
Cost vs return relationship is problematic Long production cycle = long period
between initial cost & future economic benefits
Accounting problems : Classification, measurement and revenue recognition.
Little cost, great returns due to production cycle.

Biological Asset (Sheep) AASB 141 Agricultural Produce (Wool) AASB 141 Products
after processing AASB 102 Inventories (Yarn)
Par 43 AASB 141 Group biological assets, distinguish between consumable and
bearers; Mature and immature.
Why Fair Value (FV) instead of Historical Cost (HCA)? Limitations of HCA:
i. Ignores accretion in value through natural events (not adding value for procreation)
ii. Ignores price changes.
iii. Provides irrelevant information.
iv. Does not reflect relative values of comparable forests.
v. Does not satisfy managements accountability obligations & provides relevant
information on performance.
vi. Ignores value of native forests.
vii. Relies on principles of matching and the artificial notion that costs can be attached.
(These concepts not sustainable under symmetrical recognition of elements proposed
under Framework)

Biological assets should be recognised at Fair Value les Point-of-Sale costs on initial
recognition (except where FV cannot be measured reliably)
Point-of Sale costs Commissions to brokers and dealers, levies by regulatory agencies and
commodity exchanges and transfer taxes and duties.
Excludes transport and other costs necessary to get asset to market.
2. What are some of the differences between heritage assets and assets typically held by private-

Heritage assets are more likely to have restrictions on their use and disposal .
They are more likely to generate expenses that are in excess of any revenues that are
They are not typically acquired or held with the expectation of generating positive net
cash flows either through continued use, or disposal.
Unlike assets that are typically held by private sector entities, those entities that hold
heritage assets will typically be unable to deny access by others to the resource.
Being commonly unique in nature, heritage assets typically pose difficult valuation
issues, relative to other assets.

3. Do you think heritage assets should be classified as assets pursuant to the Conceptual
Framework? Explain with reference to definition and recognition criteria found in the

Issue 1: Recognition as an asset? Problems which should be considered include:

Whether the requisite degree of control exists in relation to heritage assets (degree of
control not easily ascertained)
Whether heritage assets are expected to generate future economic benefits (not
guaranteed FEBs to entity)
Whether FEBs are probable and measurable (do not fulfil probable and measurable

A number of factors which may indicate that heritage assets are not clearly assets as defined in
the AASB Framework. These factors are:

heritage assets often do not provide economic benefits;

determination of control is problematic; and

the benefits are difficult to quantify in monetary terms.

Issue 2: Whether there is actually a demand for financial information pertaining to heritage
assets (i.e. demand for financial info for heritage assets has not been established).

Is such information useful for assessing the performance of those responsible for
managing or maintaining the heritage assets?
Should those in charge of looking after heritage assets be accountable for the financial
performance of such assets, or should they be accountable for other non-financial aspects
associated with the heritage assets use?
Valuation of heritage assets can be a costly exercise and, as such, the activity should only
be undertaken if there are some associated benefits.

To date, demand for financial information about heritage assets has not been clearly established.

5. Because heritage assets typically generate negative cash flows, some authors have argued they
should be treated as liabilities and not as assets. Agree? Why?

The Framework for the Preparation and Presentation of Financial Statements defines liabilities

a present obligation of the entity arising from past events, the settlement of which is
expected to result in an outflow from the entity of resources embodying economic

There are three key components in this liability definition, these being:

(i) there must be a future disposition of economic benefits to other entities;

(ii) there must be a present obligation; and,

(iii) a past transaction or other event must have created the obligation.

At issue here is whether there is a present obligation to transfer funds in the future. Arguably,
there is no such obligation, and although the asset may be likely to generate negative net cash
flows in the future this in itself would not be sufficient to say that it is a liability.
11. What particular attributes of biological assets differentiate them from other assets?

Unlike most assets, biological assets have a natural capacity to grow and/or procreate
which directly impacts the value of the asset.
A great deal of the increase in value of the resource may be due to the input of free
goods, such as sun, air and water.
Frequently, a great deal of the costs are incurred earlier in the life of the asset (for
example, the establishment of a forest), yet the economic benefits (FEBs) are not
derived until many years later.
The production (growing cycle) of the assets may be particularly long (for example,
some forests may take in excess of 30 years to generate millable timber), with resultant
issues as to when the revenue should be recognised. In relation to a forest, should we wait
until the ultimate harvest before we recognise revenue?
There is not necessarily any relationship between expenditure on the asset and the
ultimate returns, perhaps due to such things as droughts, flooding, variations in qualities
of soils, and so on.

13. Roberts, Staunton and Hagen (1995) suggest that increases in valuation of lifestock can be
broken down into 2 components:

i. Changes in current market value as result of biological changes (e.g. growth, quality,
ageing and changes in composition (volume) )
ii. Changes in market value as result of price change

They suggest that only volume changes should be treated as part of the periods profit and loss.
What is the basis of their argument and is it valid?
Robert, Staunton etc say we should take into account the physical change and not price
change looking at realisation principle.
Unless gains are realised it shouldnt be recorded.
WRONG, because standards say we should value them at fair value, not historical cost.
Author argues that only real changes taken into P/L and not increase in value of the asset
due to market conditions and not taken into profit and loss acc. This is not consistent with the
standards, they recommend the change in fair value of asset is to be taken into P/L.
AASB 141 states that both volume change and price change is brought into the p/l account
with a disclosure note, giving price change and volume change.

The basis of their argument is that profits or losses should only take into account real
changes in the value of resources, that is, changes which adjust for price changes in the
underlying assets. For example, if an entity had only one asset at the beginning of the year
(perhaps a building) and the value of the asset increased due to market conditions then this
change in value should not, according to the approach discussed by Roberts, Staunton and
Hagen, be treated as part of the periods profit or loss. Rather, the change should be credited to a
reserve which forms part of shareholders funds. This view is consistent with Roberts (1988), an
extract of which is provided in the text. There does seem to be merit to their argument. However,
this view is not consistent with the contents of a number of recently released Accounting
Standards (such as those that relate to general insurers, life insurers and superannuation plans).
Such Standards require the change in the value of an asset to be fully treated as part of the
periods profit or loss. AASB 141 also does not incorporate the views of Roberts, Staunton and
Hagenit includes both the volume change and price change in income (although paragraph 51
of AASB 141 recommends disclosures that separately identify the physical changes and price

18. In the April 1998 edition of Charter (p.71), an article appearing on self-generating and
regenerating (biological) assets. In the article it is noted that:

The main criticism against the market value accounting is that it does not reflect any
actual events. It is accounting for whats going to happen in the future, not whats already
happened. A common sentiment of many blue-blood accountants is that if its not realised, its not
real. An unrealised gain on lambs might not be worth a penny if they fall over and die before
sale time

The argument being provided here is consistent with the traditional realisation principle. The
argument is that revenue should not be recognised until such time that an actual transaction
occurs. We can consider particular parts of the quote from Charter:

it does not reflect actual events. This could be challenged. An increase in the market
price of an asset could be considered to be an actual event (although, not a transaction)
and one which could be verified by reference to recent sales of the same commodity. A
central point here is whether historical cost data is relevant (historical value does not
represent the value of the asset), or whether reference to the current market prices of
similar assets is more relevant

Its accounting for whats going to happen in the future, not whats already happened.
Part of this is true, as the actual market price is used (actual market price used is sale
price at that point of time, and has already happened) as a guide to what the entity
would receive if it made a salewhich it will do at a future time. However, the increase
in market price has already happened as at reporting date, and perhaps should not be
ignored. Remember, it is estimated market price at reporting date.

An unrealised gain on lambs might not be worth a penny if they fall over and die before
sale time. This might be true, but the valuation would be based on probabilities and
the probability that they might fall over and die might be quite low. Indeed, there is
a possibility that all assets might be destroyed, but we do not record them on this basis
because such events are not deemed to be probable. There is always a trade-off between
relevancy and reliability. To many users of financial reports, market values are more
relevant, even though they might not be as reliable as historical costs. However, historical
cost information might not be too relevant for many current decisions. With the release of
many recent Australian accounting standards it is clear that there is an increasing
preference by standard-setters for valuations based on current market values. Hence,
there is a clear movement away from the traditional realisation principle. Clearly,
recording assets at market values has direct implications for a reporting entitys profits
and it is the possible volatility in profits which many managers have objected to. Where
there have been criticisms of AASB 1037 and its replacement standard AASB 141, the
criticism appears to relate more to assets that will not be sold for many years (which
might have many fluctuations in market values and will not generate actual cash flows for
many years), as opposed to assets which are near to sale.

(Valuation under AASB 141 should be based on probabilities and revenue recognition should
take account the assets being destroyed. There is a trade-off between relevancy and faithful
representation. With the recent standards, there is a move towards current market value and
movement away from the realisation principle.)

22. (a) Costs incurred in maintaining biological assets

30 June 2015
Dr Expenses (salaries, fertiliser, etc.) 50 000
Cr Cash /Accounts payable 50 000

The expenses incurred in maintaining the biological assets are expensed as

incurred and are not capitalised. Pursuant to AASB 141, the amount capitalised
for a biological asset is measured on initial recognition, and at the end of each
reporting period, at its fair value less estimated point-of-sale costs.
(b) Harvesting of agricultural produce
23 June 2015
Dr Inventory 220 000
Cr Gain arising on recognition of harvested apples 220 000
The above entries are consistent with paragraphs 13 and 28 of AASB 141, which
13. Agricultural produce harvested from an entitys biological assets shall be
measured at its fair value less estimated point-of-sale costs at the point of
28. A gain or loss arising on initial recognition of agricultural produce at fair
value less estimated point-of-sale costs shall be included in profit or loss for
the period in which it arises.
23 June 2015
Dr Picking and packing costs 15 000
Cr Cash 15 000
The picking and packaging costs would be treated as a cost of the period, and not treated
as point-of-sale costs, which would be offset against inventory. This is consistent with
paragraph 14 of AASB 141, which states:
Point-of-sale costs include commissions to brokers and dealers, levies by regulatory
agencies and commodity exchanges, and transfer taxes and duties. Point-of-sale
costs exclude transport and other costs necessary to get assets to a market.
(c) Sale of agricultural produce
30 June 2015
Dr Cash 210 000
Cr Sales revenuemangoes 210 000

Dr Selling costs 3 000

Cr Cash/payables 3 000

30 June 2015
Dr Cost of good sold 198 000
Cr Inventory 198 000

The cost of goods sold is determined as 90% x $220 000 = $198 000. The fair value less
estimated point-of-sale costs (previously recognised) is deemed to be cost for the
purposes of inventory and, therefore, also for determining cost of good sold. As noted
above, paragraph 13 of AASB 141 states:
Agricultural produce harvested from an entitys biological assets shall be measured
at its fair value less estimated point-of-sale costs at the point of harvest. Such
measurement is the cost at that date when applying AASB 102 or another applicable
Between the date of picking the mangoes, and the date of selling them (one week), there
has been a change in the value of the inventory. We are told that on 23 June, the date
when they were picked, the inventory had a fair value less estimated point-of-sale cost of
$220 000. When 90 per cent of the inventory was sold they were sold for $210 000,
which was more than was anticipated. Without a change in price the mangoes would have
sold for $220 000 x 0.90, which equals $198 000. Yet Nambour Limited received $210
000, or $12 000 more than was expected. With 10 per cent of the inventory on hand at
reporting date, the question becomes whether we should revalue the balance of inventory.
The answer to this is noonce inventory is measured at the point of harvest it cannot be
revalued upwardshowever, if the net realisable value of the inventory fell below the
notional cost of the inventory then there would need to be an inventory write-down.
(d) Changes in fair value of biological assets between the ends of the reporting
30 June 2015
Dr Biological assets 70 000
Cr Gain arising from increase in valuation of mango trees 70 000
The above entry recognises the change in fair value less estimated point-of-sale
costs of the biological assets ($550 000 $480 000).