FAKULTI INOVASI PERNIAGAAN DAN TEKNOLOGI (FIPT)

BACHELOR OF ACCOUNTING (BACC)

SEMESTER 5

SPECIALISED INDUSTRIES IN MALAYSIA

(BKA 3093)
TOPIC: ACCOUNTING FO AGRICULTURE

PREPARED TO: CIK FARAH SANIAH BINTI MOHD ZAIDI

PREPARED BY: NURFATIHAH BINTI AZMI (B1710078)
SALEHA BINTI ROHMAN (B1710055)
SUBTOPIC
• 16.3.1 background for agriculture
• 16.3.2 amendments to IAS 16 and IAS 41

• 16.3.3 why the change to a cost-based model ?

• 16.3.4 requirement in MPERS
• 16.3.5 recognition and measurement in MFRS 141

• 16.3.6 gains and losses

• 16.3.7 fair value measurement
• 16.3.8 inability to measure fair value reliably
• 16.3.9 cost incurred in the biological transformation
• 16.3.10 estimating fair value of biological assets
• 16.3.11 other principle

• 16.3.12 presentation and disclosure

• 16.3.13 physical and price changes of biological assets
 16.3.1 BACKGROUND OF IAS 41
AGRICULTURE
• Prescribe the accounting treatment and the related financial statement presentation and disclosure for agricultural activity
• The standard defines agricultural activity as “the management by an entity of the biological transformation of biological assets into
agricultural produce for sale, processing, consumption or into additional biological assets”.
• For example in the management of an oil palm plantation ,the biological assets are the palm within the plantation and the
agricultural produce at the point of harvest is the fresh fruit bunches (FFB)
• Biological assets in the form of plants would therefore include rubber trees and oil palm in a plantation.
• Agricultural activity differs from the other activities is that there is biological transformation that comprises the process of growth,
degeneration, production and procreation that cause qualitative and quantitative changes in a living animal or plant, and
generation of new assets in the form of agricultural produce or additional biological assets of the same class (offspring)
• For example collection of wild rattans and fishing in the deep seas would be outside the scope of agricultural activity in the
standard
• IAS 41 specifically prescribe principle oh how:
a) To account for all biological assets used in agricultural activity
b) To initially measure agricultural produces created from biological assets at
the point of harvest
c) To account for governments grants relating to agricultural assets.
• The Standard takes the view that these activities after harvest are “manufacturing activities”
to which accounting standards for inventories (for example, MFRS 102 inventories) apply.
• The most significant feature in IAS 41 is the adoption of the fair value model for all biological
assets and agricultural produce at the point of harvest
• The use of fair value accounting and measurement of performance under the financial capital
maintenance approach
• The IASB believes that the fair value basis provides a more relevant and reliable measure of
performance in agricultural activity. In Malaysia this IFRS took nomenclature of MFRS 141 in
the year 2012
16.3.2 AMENDMENTS TO IAS 16 AND IAS 41

• IAS 41 is an activity-based Standard that recognises fair value gains and losses in
profit or loss when the fair value of a biological assets is enhanced or diminished
over time.
• The fair value model is argued as the best measurement of the performance and
financial position of entities in agriculture because farming efforts and activities are
reflected in he performance measure when the value of biological assets is enhanced
by height or weight gain, quality content, or improved productivity
• The scope amendment to IAS 41 is restricted to bearer biological assets that
are plants. Bearer plants that are within the scope of IAS 16 are restricted to
bearer biological assets if they have no consumable attributes
• This means that they can only be used in the production and supply of
agricultural produce (so there is no alternative use other than use an bearer
biological assets).
• The amendments to IAS 16 equates a bearer biological plant with a physical plant
or machine that produces goods separately. A bearer plant within the scope of IAS
16 is defined as “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
c) Has a remote likelihood of being sold as agricultural produce, except for incidental
scarp sales” [IAS 16.6]
 16.3.2.2 SUBSEQUENT
16.3.2.1 ELEMENTS OF COST
MEASUREMENT ELEMENTS OF
RECOGNITION
COST RECOGNITION
 ELEMENTS OF COST RECOGNITION
• In IAS 16, the initial measurement of an item of property, plant and equipment is at cost. The amendment to IAS 16 clarifies
that bearer plants are accounted for in the same way as self-constructed items of property, plant and equipment before they
are in the location and condition necessary to be capable of operating in the manner intended by management.
• The cost that are include in the cultivation of bearer plants(such as oil palms and rubber trees) would typically include:
a. Land preparation such as field roads, irrigation and drainage development
b. Planting material such as seedlings, cover crops and other supplies
c. Fertilisers, chemicals and other inputs
d. Direct labour
e. Supervision and other maintenance costs including sub-contractors costs
f. Plantation overheads
g. Borrowing costs to the extent that they ae incurred and capitalised only during the immature period of the bearer plants.
 SUBSEQUENT MEASUREMENT ELEMENTS OF COST
RECOGNITION
• In IAS 16,the subsequent measurement of a class of property plant and equipment is an accounting policy
choice of either measuring it at:
a) Cost less accumulated depreciation and accumulated impairment losses, or
b) Revalued amount less accumulated depreciation and accumulated impairment losses.
• In IAS 16, an entity selects a depreciation method that most appropriately reflects the pattern of
consumption of the asset over time. As the productivity of a bearer plant is not constant over time, an entity
may use that productivity pattern as a basis for depreciation i.e. the equivalent of the units-of-production
method if that is readily determinable.
• Otherwise, a straight-line method may be used.
• The declining balance or increasing balance method is generally considered not an appropriate method
for depreciation of bearer plants
16.3.3 WHY THE CHANGE TO A COST-BASED
MODEL?

Useful information Complexities in fair value

measurement
16.3.4 REQUIREMENTS IN MPERS

An Accounting Policy Choice in MPERS

 Section 34.2 Agriculture of MPERS requires a private entity using MPERS that is engaged in
agricultural activity to determine its accounting policy for each class of its biological assets, in a
hierarchy as follows:
a) The entity shall use the fair value model for those biological assets for which fair value is readily
determinable without undue cost or effort
b) The entity shall use the cost model for all other biological assets.
 However, MPERS also requires that agricultural produce shall be measured at fair value less costs
to sell at the point of harvest regardless of the measurement model applied to the biological
asset.
16.3.5 RECOGNITION AND MEASUREMENT IN MFRS
141

Recognition Measurement
 RECOGNITION
• MFRS 141 prescribes that “an entity shall recognise a biological asset or an agricultural produce when:

a. The entity the assets as a result of past events

b. It is probable that future economic benefits associated with the asset will flow t the entity

c. The fair value or cost of the asset can be measured reliably”

• This recognition principle is similar to that of other assets except that when it is applied in the agricultural activity,
the future economic benefits of biological assets shall normally be measured by the significant physical attributes
of the asset

• For example, measurement of physical attributes of biological assets may be based on size, weight, protein or fat
content but sampling, age or circumference of trees, pregnancy scanning and so on

• Also, the economic benefits from the biological assets are associated with legal ownership, lease or joint venture in
respect of the land on which a crop, plantation or herd is raised or license or concession to harvest.
MEASUREMENT

• The standard prescribes that “a biological asset shall be measured on initial

recognition and at the end of each reporting period at its fair value less
estimated point-of-sale costs, except for the specified case where the fair
value cannot be measured reliably”
• The Standard clarifies that fair value of biological asset or an agricultural
produce is based on its present location and condition.
 EXAMPLE 4

Peladang BHD owns a herd of 100 cattle which are saleable in their current condition. Of
this herd, 60 cattle have been earmarked for sale in Singapore whilst the balance will be
sold in the local market. The market price of the 60 cattle in the Singapore market
RM180,000 and cost of transport to get the herd to Singapore is estimated at RM9,000. The
market price of the remaining 40 cattle is estimated at RM112,000 and cost of transport is
estimated at RM3,000.
Commissions to brokers and other point-of-sale costs are estimated at 3% of the market
price in each market.
 REQUIRED :
Compute the fair value less point-of-sale costs of the biological assets
SOLUTION:

Singapore Market Local Market (RM) Total (RM)

(RM)
Price at destination 180,000 112,000
Less: Transport costs (9,000) (3,000)
Fair value of cattle 171,000 109,000
Less Point-of-sale costs (5,400) (3,360)
Fair value less point-of-sale costs 165,600 105,640 271,240
 16.3.6 GAINS AND LOSSES

• The standard requires that “a gain or loss arising on the 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
arise”.
EXAMPLE 6

• Ladang Sdn Bhd commences cultivation of pulpwood trees, a timber crop, on 1

January 2016. Costs (Planting materials, labour and other planting costs) incurred in
2016 to develop a 10-hectare timber crop amounts to RM 2, 000, 000. On 31
December 2016, the fair value less costs to sell of the 10-hectare timber crop with
one-year old pulpwood tress is estimated at RM 3, 000, 000.
Required:
Calculate the gain or loss for the crop.
SOLUTION 6

• In this case, the gain or loss is recognised in income as follows:

Extract of the income statement
Year ended 31 December 2016
RM
Gain from change in
fair value less costs to sell of 3 000 000
pulpwood tress
Costs of crop development (2 000 000)
Profit from plantation operation 1 000 000
INTEGRATED AND MIXED FARMING

• Integrated and mixed farming operations cultivate various crops, some of

which are consumable biological assets while others are bearer biological
assets.
• For example, in an integrated vegetable farming operation, the bearer crops
may include chili, tomatoes, cucumbers whilst the consumable crops may
include green-leaf vegetables of various kinds, carrot and other tuber crops in
ground
AGRICULTURAL PRODUCES OF BEARER PLANTS

• In both aquaculture (such as prawn farming) and vegetable farming (such as

carrots), the consumable biological assets are cultivated in distinct batches,
and in each batch, the growing produce has more or less, a homogeneous
grow-out in its transformation and harvesting is done in batches at a point in
time or over a short period.
PROCESSING AFTER HARVEST

• For integrated oil palm cultivation, the FFB(fresh fruit bunches)are normally
processed immediately after harvest into crude palm oil and palm kernel as
the extraction rate will decrease with time.
 16.3.7 FAIR VALUE MEASUREMENT
• The Standard does not establish a priority on the basis of fair value measurements for biological assets
or agricultural produce.
• Guidance on fair value measurement should be based on MFRS 13 Fair Value Measurements which
establishes a hierarchy in terms of the levels of fair value measurement.
• MFRS 13 clarifies that an entity need not make an extensive search for the principal market , as it may
assume that the market that it normally enters into to sell the biological asset or agricultural produce , is
the principal markets.
• Biological assets , such as cattle , sheep , pigs , deer , and broilers , active markets exits as there assets
are traded daily.
• Agricultural produce , such as vegetables , meat , fish , and prawns , fresh fruit bunches and latex ,
traded daily also.
• But some bearer biological assets, such as oil palms trees, there is generally no active market.
THE STANDARD CLARIFIES THAT IF AN ACTIVE MARKET DOES NOT EXIST , AN
ENTITY USES ONE OR MORE OF THE FOLLOWING WHEN AVAILABLE , IN
DETERMINING FAIR VALUE :

a) the most recent market transaction

price , provided that there has not been
a significant change in economic b) market prices for similar assets with
circumstances between the date of that adjustments to reflect differences ; and
transaction and the end of the reporting
period;

c) sector benchmarks , such as the value

of the an orchard expressed per export
tray , bushel , or hectare ,and the value
of cattle expressed per kilogram of
meat.
• For example, when estimating the fair value of an oil palm crop , an entity
may use the market price of a recent sale and purchase transaction of an oil
palm business between willing parties , adjusting for differences due to the
land factor.
• The objective of a calculation of the present value of expected net cash flows
is to determine the fair value of a biological asset in its present location and
condition. An entity considers this in determining an appropriate discount rate
to be used and in estimating expected net cash flows.
• For example , in selecting the appropriate discount rate for valuing an oil
palm crop , an entity may use the market-determined earnings yield(rate of
return) of entities quoted on the stock exchange as a basis or as an input to
the capital asset pricing model applied.
THE STANDARD FURTHER CLARIFIES THAT THE PRESENT CONDITION OF A BIOLOGICAL ASSET
EXCLUDE ANY INCREASES IN VALUE FROM ADDITIONAL BIOLOGICAL TRANSFORMATION AND
FUTURE ACTIVITIES OF THE ENTITY , SUCH AS THOSE RELATED TO ENHANCING THE FUTURE
BIOLOGICAL TRANSFORMATION , HARVESTING AND SELLING [MFRS 141.21]

• Valuation of Cattle by Age Group

Age Group Quantity count Fair value per cattle Total fair value
RM
RM
Calf 2,000 566.00 1,132,000
1 year 2,500 1,004.00 2,510,000
2 year 3,000 1,600.00 4,800,000
3 year 3,000 2,385.00 7,155,000
4 year 2,500 3,400.00 8,500,000
13,000 24,097,000
16.3.8 INABILITY TO MEASURE FAIR VALUE
RELIABLY
• Biological asset shall be measured at its cost less any
accumulated depreciation and any accumulated impairment
losses.
• Once the fair value of such a biological asset becomes reliably
measurable, the entity shall measure it at its fair value less
estimated point-of-sale costs.
• Once a non-current biological asset meets the criteria to be
classified as held for sale in accordance with IFRS 5, it is
presumed that fair value can be measured reliably.
 16.3.9 COSTS INCURRED IN THE BIOLOGICAL
TRANSFORMATION

• The requirement that all costs of producing and harvesting biological assets and/or agricultural produce from
the biological assets shall be recognised as an expense when incurred follows naturally from the fair value
principle prescribed for income recognition
• These would avoid the need for detailed costing and cost allocation to products or processes in agriculture , as
any such costing or cost allocation is often arbitrary and of limited usefulness.
• The Standard further encourages classification and presentation of expenses by nature rather than by
functions , as it is believed that the nature-of-expense method provide more useful information on expenses
of agriculture operations , where activity levels are likely to vary because of the inherent risk in agricultural
operations.
16.3.10 ESTIMATING FAIR VALUE OF
BIOLOGICAL ASSETS – A DISCOUNTED CASH
FLOW APPROACH
 16.3.11 Other Principles

Agricultural Land Government Grants

16.3.12 PRESENTATION AND DISCLOSURE
• An entity engaged in agricultural activities discloses its accounting policy for its biological assets
and agricultural produce.
• As required by MFRS 101 Presentation of Financial Statements , an entity shall present the
carrying amount of its biological assets separately on the face of its statement of financial position
. Bearer plants that are accounted for in accordance with MFRS 116 may be presented in
property , plant and equipment and disclosed as a separate class of property , plant and
equipment.
• An entity shall disclose the aggregate gain and loss arising during the current period on initial
recognition of biological assets and agricultural produce, and from the change in fair value less
costs to sell of biological assets [MFRS 141.40].
• An entity shall provide a description of each group of biological assets. For example, in plantation
cultivation, the biological assets may be grouped oil palm and rubber . These may further be divided
into mature and immature biological assets, as follows:

Biological Assets: Oil Palms Rubber Tress

Hectares RM’000 Hectares RM’000
Immature trees 20,000 40,000 10,000 15,000

Mature trees 180,000 560,000 90,000 115,000

Total 200,000 600,000 100,000 130,000

• If not disclosed elsewhere in information published with the financial statements, an entity shall
describe:
a) the nature of its activities involving each group of biological assets;
b)non-financial measures or estimates of the physical attributes of:
i) each group of the entity’s biological assets at the end of the period ; and
ii) output of agricultural produce during the period.
• An entity shall disclose:

the existence and carrying amount

of biological assets whose title is the amount of commitments for the
restricted, and the carrying development or acquisition of
amounts of biological assets biological assets; and
pledged as security for liabilities;

financial risk management

strategies related to agricultural
activities .
• An entity shall present a reconciliation of changes in the carrying amount of
biological assets between the beginning and the end of the current period.
• The reconciliation shall include:

a)the gain or loss arising c) decreases attributable to sales

from changes in fair value b) increases due and biological assets classified as
less estimated point-of-sale to purchases; held for sale in accordance with
costs; MFRS 5;

d) decreases due to e) increases resulting

harvest; from business g) other changes.
combinations;

f) net change differences arising on the translation of financial

statements into a different presentation currency , and on the
translation of a foreign operation into the presentation currency of the
reporting entity;
 ADDITIONAL DISCLOSURES WHERE FAIR VALUE
CANNOT BE MEASURED RELIABLY
• If an entity measures biological assets at their cost less any accumulated depreciation
and any accumulated impairment losses at the end of the period, the entity shall
disclose for such biological assets:
a. A description of the biological assets;
b. An explanation of why fair value cannot be measured reliably;
c. If possible, the range of estimates within which fair value is highly likely to lie;
d. The depreciation method used;
e. The useful lives or the depreciation rates used;
f. The gross carrying amount and the accumulated depreciation at the beginning and
end of the period.
• Government Grants
An entity shall disclose the following related to agricultural
activity covered by this Standard:

a) the nature and extent of government grants recognised in

the financial statements;

b) unfulfilled conditions and other contingencies attaching to

government grants ; and

c) significant decreases expected in the level of government

grant.
16.3.13 PHYSICAL AND PRICE CHANGES OF
BIOLOGICAL ASSETS
• Physical changes are attributable to the biological transformation which results in growth,
degeneration, production and procreation of the biological assets.
• Prices changes are unrelated to the physical changes in the biological assets, but are
attributable to changes in the per-unit fair value due to market forces.
• The amount of change in fair value attributable to the change in per-unit fair value is the
difference between:
b)the carrying amount at the beginning of the period re-measured at end of period per-
unit fair values for biological assets with the same physical characteristics as those held at
the beginning of the period ; excluding increase due to purchases and decreases due to
sales.
a)the carrying amount(fair value) at the beginning of the period ; and
a)the carrying amount at the beginning
of the period re-measured at end of
period per-unit fair values for biological
assets with the same physical
characteristics as those held at the
beginning of the period ; and
b)the carrying amount(fair
value) at the end of the period
, excluding increases due to
purchases and decrease due to
sales.

Physical change is measured

as the difference between:

a)the carrying amount(fair value)
at the beginning of the period ;
and
b)the carrying amount at the
beginning of the period re-
measured at end of period per-
unit fair values for biological assets
with the same physical
characteristics as those held at the
beginning of the period ; excluding
increases due to purchases and
decreases due to sales.

The amount of change in fair value attributable

to the change in per-unit fair value is the
difference between:
EXAMPLE 12
Rusa Bhd is in the business of deer farming. A herd of 100 deer is held throughout
the financial year of 20X1. The only change during the year is the increase in their
physical attributes due to ageing from 2 to 3 years. The relevant data are as follows :
Fair value of a 2-year old deer at 1 January 20X1 RM1,000
Fair value of a 2-year old deer at 31 December 20X1 RM1,100
Fair value of a 3-year old deer at 31 December 20X1 RM1,600

Required
For the year ended 31 December 20X1, calculate the change in fair value of the
herd of deer that shall be recognised as income and analyse the change in fair
value due to physical change and price change.
SOLUTION 12
RM
The change in fair value of the herd of deer is
[100x1600]- [100x1000] 60,000
Physical change is [100x1600]-[100x1100] 50,000
Price change is [100x1100]- [100x1000] 10,100
The increase in fair value can be reconciled as follows:
Fair value of herd at 1 January 20x1 [100x1000] 100,000
Increase in fair value due to physical change
100x[1600-1100] 50,000
Increase in fair value to price change 100x[1100-1000] 10,000
Fair value of herd at 31 December 20x1 100x1600 160,000

The measurement of fair values and changes in the components shall exclude increase due
to purchases and decreases due to sales . These purchases and sales shall respectively be
recognised separately in the income statement.