LESSON9

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CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS

Lesson 9: PAS 41 Agriculture


PFRS 1 First-time Adoption of Philippine Financial Reporting Standards (PFRS)

Lesson Objectives:
1. State the core principle under PAS 41 and PFRS
2. Apply the accounting standards for agriculture and first-time adoption of PFRS
3. Describe the accounting and reporting requirements of PAS 41 and PFRS 1

Lesson 9.1 - PAS 41 Agriculture


Discussion:
I. Nature

PAS 41 prescribes the accounting treatment, financial statement presentation, and


disclosures related to agricultural activity. Agricultural activity is the management of the
biological transformation of biological assets (living animals or plants) and harvest of biological
assets for sale or for conversion into agricultural produce or into additional biological assets.

PAS 41 establishes the accounting treatment for biological assets during their growth,
degeneration, production and procreation, and for the initial measurement of agricultural produce
at the point of harvest. It does not deal with processing of agricultural produce after harvest (for
example, processing grapes into wine, or wool into yarn).

This Standard shall be applied to account for the following when they relate to agricultural
activity:
(a) biological assets, except for bearer plants;
(b) agricultural produce at the point of harvest; and
(c) conditional or unconditional grants relating to a biological asset measured at its fair
value less costs to sell.

This Standard does not apply to:


(a) land related to agricultural activity;
(b) bearer plants related to agricultural activity. However, this Standard applies to the
produce on those bearer
plants;
(c) government grants related to bearer plants;
(d) intangible assets related to agricultural activity; and
(e) right-of-use assets arising from a lease of land related to agricultural activity.

IAS 41 specifies the usual tests in order that a biological asset or agricultural produce be
recognized on the statement of financial position, namely:
Control: the enterprise must have ownership or rights of control akin to ownership that
result from a past event
Value: future economic benefits are expected to flow to the enterprise from its ownership
or control of the asset
Measurement: the cost or fair value of the asset can be measured reliably.
II. Measurement
Biological assets should be measured at initial recognition, and at the end of each
reporting period, at fair value less estimated costs to sell.
Agricultural produce is measured, at the point of harvest, at fair value less estimated costs
to sell at the point of harvest. The point of harvest represents the transition between accounting for
agricultural produce assets under IAS 41 and IAS 2. Fair value less costs to sell at the point of
harvest forms ‘cost’ for the purposes of IAS 2.
Costs to sell are incremental costs directly attributable to the disposal, excluding taxation
and finance costs, and would include commissions to brokers and dealers, levies by regulatory
agencies and commodity exchanges, and transfer taxes and duties. They exclude transport and
other costs necessary to get assets to a market (these are taken into account in arriving at fair
value).
Definition of Terms
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date.
Costs to sell are the incremental costs directly attributable to the disposal of an asset, excluding
finance costs and income taxes (e.g., Commissions to brokers, Levies by regulatory agencies and
commodity exchanges, and Transfer taxes and duties)
Costs to sell do not include transport costs, advertising costs, income taxes, and interest expense.
If location is a characteristic of the biological asset, the price in the principal (or most
advantageous) market shall be adjusted for the transport costs.
Gains or Losses
• A gain or loss arising on initial recognition of a biological asset at fair value less costs to
sell and from a change in fair value less costs to sell of a biological asset shall be included
in profit or loss for the period in which it arises.
III. Presentation
Biological assets and agricultural produce should be presented as separate line items
under the following headings:
Non-current assets
Property, Plant and Equipment – would include bearer plants
Biological assets – would include all agricultural produce to be harvested more than 12
months from the reporting date, livestock to be held for more than 12 months and trees cultivated
for lumber and fruit.
Current assets
Biological assets – would include produce to be harvested within 12 months of reporting
date, livestock to be slaughtered within 12 months and annual crops eg wheat, maize
Inventories – includes the inventories produced from agricultural produce eg the Tea to be
sold, produced from the tea leaves
IV. Disclosure
Disclosure of the following information is encouraged but not required:
1) Disclosure of consumable and bearer biological assets.
2) Disclosure of mature and immature biological assets.
a. Mature biological assets are those that have attained harvestable specifications or
are able to sustain regular harvests.
b. Immature biological assets are those that have not yet attained harvestable
specifications or are not yet able to sustain regular harvests.
3) Disclosure of breakdown of total “Gain (loss) from changes in FVLCS” during the period
attributable to price change and physical change
Example:

BIOLOGICAL ASSETS AGRICULTURAL INVENTORIES


PRODUCE

PAS 41 PAS 41 PAS 2

Recognized at the point of Recognized at the point of Recognized after harvest


harvest harvest

Sheep Wool Yarn or Carpet

Trees on Plantation Forest Felled trees Logs or Lumber

Dairy Cattle Milk Cheese or Milk

Pigs Carcass Sausage or Ham

Illustrative Problem 1: Pepper Company provided the following assets in a forest plantation and
farm:
Freestanding Trees P 5.000.000 PAS 41
Land under trees 600.000 PPE
Roads in forests 300.000 PPE
Animal related to recreational activities 1.000.000 PPE
Bearer Plants 1,500,000 PPE
Bearer animals 2,000,000 PAS 41
What total amount of the assets should be classified as biological assets?
a. 7.000.000
b. 8.500,000
c. 5,000,000
d. 8.000.000

Illustrative 2:
Ella Company is a producer of coffee. The entity is considering the valuation of harvested coffee
beans. Industry practice is to value the coffee beans at market value and uses as reference a local
publication "accounting for successful farms",
On December 31, 2016, the entity has harvested coffee beans costing P 3,000,000 and with a fair
value less cost to sell of P 3,500,000 at the point of harvest.
Because of long aging and maturation process after harvest, the harvested coffee beans were still
on hand on December 31, 2017.
On such date, the fair value less cost of disposal is P 3,900,000 and the net realizable value is P
3,200,000.
1. What is the measurement of the coffee beans inventory on December 31, 2016?
a. 3,000,000
b. 3,500,000 @ FV-CTS
c. 3,200,000
d. 3,900,000
2. What is the measurement of the coffee beans inventory on December 31, 2017?
a. 3,000,000
b. 3,500,000
c. 3,200.000 @ LCNRV (Cost 3.5M vs NRV 3.2M)
d. 3.900,000

Illustrative 3:
Niel Company is engaged in raising dairy livestock. The entity provided the following information
during the
current year:
Carrying amount on January 1 P 5.000.000
+
Increase due to purchases 2,000,000
+
Gain arising from change in fair value less cost of disposal
attributable to price change 400.000
+
Gain arising from change in fair value less cost of disposal
attributable to physical change 600.000
+
Decrease due to sales 850.000
-
Decrease due to harvest 200,000
-
What is the carrying amount of the biological asset on December 31?
a. 6,950,000
b. 6,000.000
c. 8.000.000
d. 7,150,000

Lesson 9.2 - PFRS 1 First-time Adoption of Philippine Financial Reporting Standards


(PFRS)

Discussion:
In the past, the Philippines followed the US GAAP and then called SFAS (Statement of Financial
Accounting Standards) until such time that all reporting entities were mandated to adopt the IFRS
(International Financial Reporting Standards) called PFRS in 2005. During the transition from
GAAP to PFRS, PFRS 1 was applied. However, it is not only applicable during that year but also
for those entities exempted from applying full PFRS like the SMEs that follows PFRSs for SMEs,
when they opted to apply the full PFRSs.

- First PFRS statements are the first annual financial statements in which an entity
adopts full PFRSs by an explicit and unreserved statement of compliance with
PFRSs.
Illustration (in its statement of compliance portion): “The financial statements have been
prepared in accordance with Philippine Financial Reporting Standards (PFRSs). These
are the company’s first financial statements prepared in accordance with PFRSs and PFRS
1 First-time Adoption of Philippine Financial Reporting Standards has been applied.”

- First PFRS financial statements are said to be prepared by the entity if its previous
financial statements:
o Were prepared in accordance with other reporting standards not consistent
with the PRFSs.
o Did not contain an explicit and unreserved statement of compliance with
PFRSs
o Contained an explicit and unreserved statement of compliance with some,
but not all
o Were prepared using some, but not all applicable PFRSs
o Prepared in accordance with PFRSs but were used for internal reporting
purposes only
o Did not contain a complete set of financial statements as required under
PAS 1
o The entity did not present financial statements in previous periods.
- The standard requires an entity to prepare and present an opening PFRS statement
of financial position at the date of transition to PFRSs, which is the beginning of
the earliest period for which an entity presents full comparative information under
PFRSs.
- PFRS 1 requires an entity to do the following in its opening PFRS statement of
financial position:
o Recognize all assets and liabilities whose recognition is required by PFRSs
o Not recognize items as assets or liabilities if PFRSs do not permit such
recognition
o Reclassify items recognized under previous GAAP that have different
classifications under PFRSs
o Apply PFRSs in measuring all recognized assets and liabilities.
Illustrations:

Included in Previous PFRS Principle Application


GAAP
Derecognize the deferred
losses that were recognized
Significant losses have Impairment of assets and as assets and charge them to
been deferred pending related compensation from retained earnings
recovery from insurance third party are separate Recognize compensation
company. economic events from the insurance company
in profit or loss when it
becomes receivable
Organization costs have
Derecognize the organization
been capitalized and are PAS prohibits recognition of
costs and charge them to
being amortized over 5 organization costs as assets
retained earnings
years
Redeemable preference Redeemable preference
shares issued are shares are classified as debt Reclassify to liability
classified as equity instruments
Deferred taxes have been
PAS 12 prohibits the Restate the deferred taxes to
discounted to its present
discounting of deferred taxes its undiscounted amounts.
values
Recognize the derivative
Derivative assets and PFRS requires the
assets and liabilities
liabilities were not recognition of derivative
measured at fair values on
recognized assets and liabilities
the date of transition
Research and development
Research and
costs are generally expensed Derecognize the carrying
development costs
when incurred although amount of the research and
incurred in developing an
development costs may be development costs and
intangible asset have been
capitalized if all the criteria charge to retained earnings.
capitalized
under PAS 38 are met.
Non-current assets are
Land was sold a few days
classified as current only
after transition date to Reclassify the land back to
when all criteria under PFRS
PFRS was classified as non-current assets.
5 are met as of the end of the
current asset.
reporting period and not after

- The entity selects its accounting policies based on the latest versions of PFRSs as
at the current reporting date to be applied retrospectively to all except as follows:
o Derecognition of financial statements – when it has already derecognized
under the previous GAAP prior to the date of transition
o Hedge accounting – the first-time adopter is required to do the following at
the date of transition to PFRS:
 Measure all derivatives at fair value
 Eliminate all deferred losses and gains on derivatives that were
reported under its previous GAAP
o Business combination – the entity is exempted from applying PFRS 3
retrospectively that occurred prior to the date of transition to PFRSs.
o Fair value or revaluation amount as deemed cost – the entity is permitted to
measure PPE, intangible assets and investment property at the date of
transition to PFRSs at fair value and use that fair value as their deemed
cost at that date.
o Cumulative translation differences – the entity is permitted to zero-out any
cumulative translation differences recognized in equity under previous
GAAP.
o Compound financial instruments – the entity need not separate the two
components of a compound financial instrument if the liability component
is no longer outstanding at the date of transition.

- Presentation and Disclosure:


o The first PFRS financial statements shall include at least one year
comparative information.
o If the entity presents non-PFRS comparative information and historical
summaries for periods before the transition date (if more than 2 years
comparative figures), it need not restate those summaries but should label
them as prepared with previous GAAP and disclose the nature of the main
adjustments to make it comply with PFRSs.
o The entity shall explain how the transition to PFRSs affected the financial
position, performance and cash flows which includes:
 Reconciliations of equity both at the date of transition and end of
the last annual period under the previous GAAP
 Reconciliation of total comprehensive income for the last annual
period under GAAP to total comprehensive income under PFRS for
the same period.
 Disclosure of impairment losses and its reversals recognized when
the opening statement of financial position was prepared.
 Disclosures of erros discovered in the course of transition to PFRSs
 Material adjustments made to restate the financial statements to
PFRSs
 Appropriate explanations if the entity has elected to apply any of
the exemptions permitted under PFRS 1.

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