Ramesh Ruben Louis explains how bearer plants will be accounted for following changes to MFRS 141, Agriculture and MFRS 116, Property, Plant and Equipment
This article was first published in the July/August 2015 Malaysia edition of Accounting and Business magazine.
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An eagerly anticipated announcement on the accounting treatment for the agriculture industry especially in Malaysia was finally availed by the Malaysian Accounting Standards Board (MASB) on 2 September 2014, when it issued amendments to MFRS 141, Agriculture relating to bearer plants and corresponding amendments to MFRS 116, Property, Plant and Equipment.
The amendments are principally based on the International Accounting Standards Board’s (IASB) issues paper on IAS 41, Agriculture. Bearer plants will come under the scope of MFRS 116/IAS 16 and will be accounted for in the same way as property, plant and equipment.
The amendments are based largely on feedback from stakeholders expressing concerns about the relevance and usefulness of using a fair value model to account for mature bearer biological assets, which no longer undergo significant biological transformation and are used solely to grow produce. The IASB issues paper revealed that mature bearer biological assets such as oil palms are similar to that of manufacturing and a cost model under MFRS 116/IAS 16 should be permitted for such bearer biological assets because it is permitted for property, plant and equipment.
The amendments are effective for annual periods beginning on or after 1 January 2016, with earlier application being permitted. However, it is worth taking note that due to the issuance of MFRS 15, Revenue from Contracts with Customers (effective for annual periods beginning on or after 1 January 2017 in Malaysia), all transitioning entities in Malaysia (ie entities involved in the real estate and agriculture industries that were given the option to continue applying the Financial Reporting Standards (FRS) framework) will be required to adopt the MFRS framework by 1 January 2017.
In order to bring bearer plants from the scope of MFRS 141/IAS 41 to MFRS 116/IAS 16, a definition is introduced into both standards. A bearer plant is defined as ‘a living plant that:
1 is used in the production or supply of agricultural produce;
2 is expected to bear produce for more than one period; and
3 has a remote likelihood of being sold as agricultural produce, except for incidental scrap sales.’
All of the above criteria have to be satisfied in order for a biological asset to be treated as a bearer plant and consequently to measure them at cost subsequent to initial recognition or at revaluation in accordance with MFRS 116/IAS 16.
Agriculture entities have to make careful considerations in establishing whether their ‘plant’ meets the definition in order to account for it according to MFRS116/IAS 16. The definition encompasses biological assets or plants that are essentially bearer, such as grape vines and oil palm. In addition, some perennial plants such as sugar cane or bamboo are likely to be scoped into the definition. However, crops that are planted solely to be harvested as agricultural produce, such as wheat, corn and soya, are unlikely to be scoped in as bearer plants. Some plants may contain both bearer and consumable attributes such as rubber trees which encompass both bearer attribute (ie the rubber milk) and consumable attribute (ie the lumber). The IASB has decided to restrict the amendments to biological assets that are used as only bearer biological assets.
Livestock such as cattle and sheep may be held solely for the produce that they bear. However, such bearer animals have been excluded from these amendments and will continue to be accounted for under MFRS 141/IAS 41. The use of cost model for livestock would be more complex and the existence of an active market for livestock would make fair value information readily available, consequently making the fair value model more appropriate.
Accounting for bearer plants
Before the amendments came into effect, MFRS 141 or IAS 41 required all biological assets to be measured at fair value less cost to sell, except in circumstances where fair value cannot be measured reliably. This was under the view that a fair value measurement was the best basis to reflect the biological transformation of these assets. However, as mentioned earlier, in the case of mature biological assets which were no longer undergoing significant biological transformation and used solely to grow produce, such a measurement basis was deemed inappropriate. These assets were therefore excluded from the fair value scope of MFRS 141/IAS 41 and are now accounted for based on MFRS 116/IAS 16.
The table (above) shows the comparison of the accounting treatment of bearer plants before and after the amendments take effect:
The agriculture produce growing on the bearer plant will remain within the scope of MFRS 141/IAS 41. This is because the growth of the produce directly increases the expected revenue from the sale of the produce. Moreover, fair value measurement of the growing produce provides useful information to users of financial statements about future cashflows that an entity will actually realise as the produce will ultimately be detached from the bearer plants and sold separately. These produce will continue to be scoped in MFRS141/IAS 41 and will be measured at fair value less costs to sell, with changes recognised in profit or loss.
Prior to the amendments, agriculture entities treat a bearer plant and its agricultural produce as a single asset until the point of harvest. The amendments, however, will now require an entity to recognise a bearer plant separately from its agricultural produce prior to harvest; deciding when to recognise the bearer plant separately from the produce will entail some judgement.
At present, as bearer plants and their agricultural produce are deemed to be one asset up to the point of harvest, this ‘single asset’ is presented as either current or non-current (depending on the asset’s useful life) and termed as biological assets. With the effective adoption of the amendments, the bearer plant is separated from its produce even before the point of harvest, and thus would be classified separately. Bearer plants will more likely than not be classified as non-current assets, while agricultural produce will be classified as current asset, unless it has more than 12 months’ maturity.
As bearer plants have been scoped out of MFRS 141/IAS 41 and are now included as part of MFRS 116/IAS 16, government grants related to bearer plants will now fall under the scope of MFRS 120/IAS 20, Accounting for Government Grants and Disclosure of Government Assistance. Under MFRS 120/IAS 20, government grants related to bearer plants will be:
- recognised as deferred income and then recognised in profit or loss on a systematic basis over the useful life of the asset or
- netted off in calculating the carrying amount of the asset and then recognised in profit or loss over the life of a depreciable asset as a reduction to depreciation expense. (Note: MFRS141/IAS 41 does not permit this approach for government grants related to biological assets measured at fair value less costs to sell.)
Ramesh Ruben Louis is a professional trainer and consultant in audit and assurance, risk management and corporate governance, corporate finance and public practice advisory
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Accounting treatment of bearer plants: what the changes will mean
|Existing requirements (under fair value model of MFRS 141/IAS 41)||Amendments to bearer plants – MFRS 141/IAS 41 and MFRS 116/IAS 16|
|Initial recognition||Measured as fair value less cost to sell. The bearer plant, together with any produce attached to the plant, is measured together as a single unit.||Measured at cost up to the maturity of the plant. Any produce of the plant is measured separately (see discussion below on produce).|
|Subsequent measurement||The plant and attached produce are measured at fair value less cost to sell at each reporting date as a single unit. Changes in fair value are recognised in profit and loss.||
* Plant is measured at cost less accumulated depreciation and impairment losses, with changes recognised in profit and loss.
* Plant is measured at fair value at each revaluation date, less subsequent accumulated depreciation and impairment losses. Revaluation changes are dealt with in comprehensive income, while all other changes are recognised in profit and loss.
CPD technical article
"The amendments will require an entity to recognise a bearer plant separately from its agricultural produce prior to harvest"