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[/et_pb_text][/et_pb_column][/et_pb_row][/et_pb_section][et_pb_section admin_label=”Section” fullwidth=”off” specialty=”off”][et_pb_row admin_label=”Row”][et_pb_column type=”1_2″][et_pb_text admin_label=”Text” background_layout=”light” text_orientation=”center” text_font_size=”14″ use_border_color=”off” border_color=”#ffffff” border_style=”solid”] [button link=”http://www.frs102.com/members/premium-toolkit/” type=”big” color=”red”] Return to Main Index[/button] [/et_pb_text][/et_pb_column][et_pb_column type=”1_2″][et_pb_text admin_label=”Text” background_layout=”light” text_orientation=”center” text_font_size=”14″ use_border_color=”off” border_color=”#ffffff” border_style=”solid”] [button link=”https://uk.frs102.com/members/premium-toolkit/section-1/” type=”big” color=”red”] Return to Section 1 Home[/button] [/et_pb_text][/et_pb_column][/et_pb_row][/et_pb_section][et_pb_section admin_label=”Section” fullwidth=”off” specialty=”off” transparent_background=”off” allow_player_pause=”off” inner_shadow=”off” parallax=”off” parallax_method=”off” padding_mobile=”off” make_fullwidth=”off” use_custom_width=”off” width_unit=”on” make_equal=”off” use_custom_gutter=”off” gutter_width=”3″][et_pb_row admin_label=”Row”][et_pb_column type=”4_4″][et_pb_text admin_label=”Main Body Text” background_layout=”light” text_orientation=”justified” use_border_color=”off” border_color=”#ffffff” border_style=”solid”]Example 1: Fair value model
Company A owns calves/yearlings. These fall within the definition of biological assets. There are two active markets here, an entity could sell the cattle in a factory or in the mart both of which gives different answers. In determining the value to use the entity should determine whether they will dispose of the cattle in the mart or in the factory. This will require judgment.
Example 2: Application of the fair value model
Company A has sowed corn during the year. The company has applied the fair value model to biological assets. At the year-end a reliable measure cannot be determined due to very few sales occurring. In determining the cash flows the entities uses available information from as much external sources as possible to determine the future price obtainable when the corn is fully mature. These are then present valued at the appropriate market rate.
In assessing the outflows, it should include a notional amount for the cost of renting the land (although this may not be rented in reality – however it allows consistency with individuals who would have to rent the land) and discount all costs including this deemed rental cost to get the corn to its fully matured state. The net cash flow obtained here after discounting should be added to the deemed cost of the rental so as to determine the amount to recognise the field of corn in the financial statements.
Assume at the end of the year the net cash flows were CU10,000. This would be recognised in the financial statements.
|
|
CU |
CU |
|
Dr Agricultural/Biological Assets |
10,000 |
|
|
Cr Profit and Loss |
|
10,000 |
Assume at the end of the following year the actual fair value at the point of harvest was CU15,000. The difference of CU5,000 would be posted as a credit to the profit and loss account. All further costs and revenues between year-end and that date are recognised in the profit and loss account.
At the point of harvest the journal required would be to:
|
|
CU |
CU |
|
Dr Inventory on the Balance Sheet |
15,000 |
|
|
Cr Agricultural/Biological Assets |
|
15,000 |
From then on the corn would be dealt with under Section 13 of FRS 102.
If this was sold straight away there would be no gross profit shown as it is the same as the cost.
Where fair values cannot be reliably measured the cost model should be used. However, when a reliable measure becomes available at a point in the future, the fair value model should be recommenced.
Example 3: Application of the fair value model
Company A had the following transactions in the year.
On 1 November the entity purchased 10 cattle for beef production for CU10,000. If this entity were to sell the same cattle it would incur transportation costs of CU50 and auctioneering fees of CU50.
Therefore the amount to be recognised as a biological asset at that time is the fair value less cost to sell:
|
|
CU |
CU |
|
Dr Biological Assets (CU10,000 less CU100 costs to sell) |
9,900 |
|
|
Dr Loss on Initial Recognition |
100 |
|
|
Cr Bank |
|
10,000 |
At year end 31 December the market value of the cattle was CU11,000 less costs to transport and auctioneer fees of CU50= CU10,950. Therefore the gain should be recognised at year end. It incurred vet fees in the intervening period. The following journal should be posted:
|
|
CU |
CU |
|
Dr Biological Assets (fair value of CU10,950 less CU9,900 original cost) |
1,050 |
|
|
Cr Profit and Loss with Gain |
|
1,050 |
Note the vet fees are expensed as incurred.
On 31 March the company sold 5 of the cattle in the factory for CU7,000 and incurred CU300 in transportation fees. The journal required is:
|
|
CU |
CU |
|
Dr Bank |
6,700 |
|
|
Dr Transport Fees in P&L |
300 |
|
|
Cr Revenue |
|
7,000 |
The below journal is also required to transfer from biological assets at that date to inventory:
|
|
CU |
CU |
|
Dr Inventory |
6,700 |
|
|
Cr Biological Asset (CU10,950 / 10 cattle * 5) |
|
5,475 |
|
Cr Fair Value Gain on Cattle (CU6,700-CU5,475) |
|
1,225 |
The journal is then posted to derecognise the inventory and recognise the cost of sales.
At the end of the following year the fair value of the cattle was CU8,000 less cost of transport and auctioneer fees CU100 (CU7,900). The journal required to show the value at the end of that year is:
|
|
CU |
CU |
|
Dr Biological Assets |
CU2,425 |
|
|
Cr Gain on Fair Value in P&L (CU7,900-(CU10,950-CU5,475) |
|
CU2,425 |
Example 4: Biological Assets held at fair value
Extract from accounting policies note for forestry
Biological assets (fair value)
The acquisition of land for forest projects is originally recorded at cost in accordance with Section 17 of FRS 102. Biological assets are stated at fair value, less estimated point of sale costs at each period end. The fair value is determined using the present value of expected net cash flows from the asset, discounted at a current market rate other than for young seedling stands. The fair value of the young seedling stands is the actual reforestation cost of those stands.
The gain or loss in fair value of these biological assets is reported in net profit. The measurement of biological growth in the field is an important element of this valuation. Initially at the start of the plantation cycle the fair value is equal to the standard costs of preparing and maintaining a plantation, including the appropriate cost of capital, assuming efficient operations. Towards the end of the plantation cycle the fair value depends solely on the discounted value of the expected harvest, less estimated point of sale costs. The calculation takes into account the growth potential, environmental restrictions and other reservations of the forests. Felling revenues and maintenance costs are calculated on the basis of actual costs and prices, taking into account the company’s projection of future price development.
Periodic changes resulting from growth, felling, prices, discount rate, costs and other premise changes are included in operating profit in the profit and loss account.
Extract from critical judgements note
The company owns XX hectares of forest land. Biological assets (i.e. living trees) are measured at fair value at each balance sheet date. The fair value of biological assets is determined based among other estimates on growth potential, harvesting, price development and discount rate. Changes in any estimates could lead to recognition of significant fair value changes in the profit and loss account.
Extract from accounting policies note for livestock (Extracted from Appendix to IAS 41)
Livestock are measured at their fair value less costs to sell. The fair value of livestock is determined based on market prices of livestock of similar age, breed, and genetic merit. Milk is initially measured at its fair value less costs to sell at the time of milking. The fair value of milk is determined based on market prices in the local area. Changes in fair value are recognised within cost of sales in profit and loss.
Extract from accounting policies note for livestock
Livestock are measured at their fair value less costs to sell. The fair value of livestock is determined based on market prices of livestock of similar age, breed, and genetic merit. Changes in the fair value are recognised within cost of sales in the profit and loss.
Example 5: Extract from notes to the financial statements for biological assets held at fair value
|
Analysis of Biological Assets by Class |
2015 |
2015 |
2015 |
2015 |
2014 |
2014 |
2014 |
2014 |
|
|
CU |
CU |
CU |
CU |
CU |
CU |
CU |
CU |
|
|
Mature Cattle |
Immature Cattle |
Wheat |
Forests |
Mature Cattle |
Immature Cattle |
Wheat |
Forests |
|
Opening Balance |
100,000 |
50,000 |
40,000 |
30,000 |
100,000 |
50,000 |
40,000 |
40,000 |
|
Purchases |
20,000 |
2,000 |
10,000 |
10,000 |
20,000 |
2,000 |
10,000 |
10,000 |
|
Sales |
-40,000 |
-33,000 |
– |
– |
-40,000 |
-33,000 |
– |
– |
|
Harvest |
– |
– |
-30,000 |
-30,000 |
– |
– |
-30,000 |
-30,000 |
|
Acquired through Business Combinations |
30,000 |
– |
– |
– |
30,000 |
– |
– |
– |
|
Newborns |
– |
40,000 |
– |
– |
– |
60,000 |
– |
– |
|
Transfer from Immature to Mature |
19,000 |
-19,000 |
– |
– |
19,000 |
-19,000 |
– |
– |
|
Other Changes |
– |
– |
– |
– |
– |
– |
– |
– |
|
Gains/(loss) arising from Fair Value less Costs to Sell |
25,000 |
-10,000 |
10,000 |
10,000 |
25,000 |
-10,000 |
10,000 |
10,000 |
|
Closing Balance |
154,000 |
30,000 |
30,000 |
20,000 |
154,000 |
50,000 |
30,000 |
30,000 |
|
|
|
|
|
|
|
|
|
|
|
Biological Assets – Forestry: The pre-tax used in determining fair value in the year was X% (2014:X%). A 1% move in discount rate would affect the fair value by CUXXX. In addition to the discount rate, the growth of the forest stock, and timber prices are other essential assumptions used in valuation. |
||||||||
Example 6: Extract from accounting policies notes for livestock/biological assets carried at cost
Biological assets – Forestry (Cost)
The acquisition of land for forest projects is originally recorded at cost in accordance with Section 17 of FRS 102. Biological assets are measured at the lower of cost and estimated selling price less costs to complete and sell.
Depletion represents the costs of forests clearfelled during the year, calculated as the proportion that the area harvested bears to the total area of similar forests. The depletion amount is charged to the profit and loss account and is based on cost.
Extract from accounting policies notes for livestock
Biological assets – Livestock
Livestock are measured at the lower of cost and net realisable value. The purchase price of livestock bought in is measured at the purchase price plus directly attributable purchase costs. Own reared stock is measured at cost based on the selling price of the livestock less an appropriate margin based on industry norms to bring the value back to the estimated cost price.
Example 7: Extract from the notes to the financial statements disclosing biological assets held at cost:
|
Analysis of Biological Assets by Class |
2015 |
2015 |
2015 |
2015 |
2014 |
2014 |
2014 |
2014 |
|
|
CU |
CU |
CU |
CU |
CU |
CU |
CU |
CU |
|
|
Mature Cattle |
Immature Cattle |
Wheat |
Forests |
Mature Cattle |
Immature Cattle |
Wheat |
Forests |
|
Opening Balance |
100,000 |
50,000 |
40,000 |
30,000 |
100,000 |
50,000 |
40,000 |
40,000 |
|
Purchases |
20,000 |
2,000 |
10,000 |
10,000 |
20,000 |
2,000 |
10,000 |
10,000 |
|
Sales |
-40,000 |
-33,000 |
– |
– |
-40,000 |
-33,000 |
– |
– |
|
Harvest |
– |
– |
-30,000 |
– |
– |
– |
-30,000 |
– |
|
Depletion |
– |
– |
– |
-30,000 |
– |
– |
– |
-30,000 |
|
Acquired through Business Combinations |
30,000 |
– |
– |
– |
30,000 |
– |
– |
– |
|
Newborns |
– |
40,000 |
– |
– |
– |
60,000 |
– |
– |
|
Transfer from Immature to Mature |
19,000 |
-19,000 |
– |
– |
19,000 |
-19,000 |
– |
– |
|
Other Changes |
– |
– |
– |
– |
– |
– |
– |
– |
|
Gains/(loss) arising from Fair Value less Costs to Sell |
25,000 |
-10,000 |
10,000 |
10,000 |
25,000 |
-10,000 |
10,000 |
10,000 |
|
Closing Balance |
154,000 |
30,000 |
30,000 |
20,000 |
154,000 |
50,000 |
30,000 |
30,000 |
Example 8: Cost model to a fair value model
Company A holds cattle as biological assets. Under old GAAP, these were valued at cost under SSAP9. On transition to FRS 102, the entity decides to apply the fair value model. The total cost of biological assets stated in the balance sheet at 1 January 2014 being the date of transition was CU100,000 and at the 31 December 2014 and 2015 was CU130,000. The fair value of the cattle was CU125,000. Assume deferred tax rate of 10% and the transition adjustment will be taxable/tax deductible over a 5 year period. The fair value at 31 December 2014 and 2015 was CU150,000. The transition adjustments required are:
On 1 January 2014
|
|
CU |
CU |
|
Dr Biological Assets |
125,000 |
|
|
Cr Inventory |
|
100,000 |
|
Cr Deferred Tax Liability (CU25,000*10%) |
|
2,500 |
|
Cr Profit and Loss Reserves Net of Deferred Tax |
|
22,500 |
Being journal to reflect the uplift to fair value and transfer to a separate line item including the deferred tax impact.
Journals required for the year ended 31 December 2014 assuming the above journals are posted to opening reserves
|
|
CU |
CU |
|
Dr Biological Assets (CU150,000-CU125,000) |
25,000 |
|
|
Dr Change in Fair Value of Biological Assets in P&L |
CU5,000* |
|
|
Cr Inventory (CU130,000 as stated at end of 2014 less CU100,000 journal posted in the journals on transition of CU100,000) |
|
CU30,000 |
Being journal to reflect uplift on value to fair value including the deferred tax impact and the related reclassification adjustment.
* (being movement that should have been posted to the P&L of CU25,000 credit (i.e. CU150,000 this year vs CU125,000 in prior year) less what has already been posted under old GAAP of CU30,000 credit (CU130,000 in current year vs CU100,000 in stock at date of transition) already posted to the P&L.
|
|
CU |
CU |
|
Dr Deferred Tax Asset (CU5,000*10%) |
500 |
|
|
Cr Deferred Tax in P&L |
|
500 |
Being journal to reflect deferred tax on movement in the year which will be taxable over the next 5 years.
Journals required for the year ended 31 December 2015 assuming the above journals are posted to opening reserves
As the fair value and carrying amount under the old GAAP at 31 December 2015 has remained the same as 2014, no reclassification is required. The only journal required will be to release 1/5th of deferred tax assets recognised up to 31 December 2014 to reflect the fact that 1/5th of the tax deduction will be obtained in the 2015 tax return based on the assumption included in this example. The remaining amount will be released over the following 4 years in line with when the deduction is allowed in the tax computation based on the assumption in this example. The journal required is:
|
|
CU |
CU |
|
Dr Deferred Tax Liability ((CU150,000 being the fair value at 31 December 2014 – CU130,000 being the carrying amount under old GAAP at that date) – (CU20,000/5 yearsx10%)) |
400 |
|
|
Cr Deferred Tax in P&L |
|
400 |
Being journal to reflect the release of the deferred tax liability for the year so as to match the 1/5th deduction allowed in the 2015 tax computation (as assumed in the question).
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