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Section 27 – Specialised Activities
Section 27 deals with the reporting requirements for micro entities involved in the specialist area of agriculture under FRS 105.
Agriculture – Recognition and measurement
Extract from FRS 105 – Section 27.2 – 27.4
Recognition
27.2 A micro-entity that is engaged in agricultural activity shall recognise a biological asset or an item of agricultural produce when, and only when:
(a) the micro-entity controls the asset as a result of past events;
(b) it is probable that future economic benefits associated with the asset will flow to the micro-entity; and
(c) the cost of the asset can be measured
Measurement
27.3 A micro-entity shall measure biological assets at cost less any accumulated depreciation and any accumulated impairment losses.
27.4 Agricultural produce harvested from a micro-entity’s biological assets shall be measured at the point of harvest at the lower of cost and estimated selling price less costs to complete and sell.
Such measurement is the cost at that date when applying Section 10 Inventories or another applicable section of this FRS.
OmniPro comment
The meaning of biological assets and examples
Appendix I of FRS 105 defines agricultural activity as ‘the management by an entity of the biological assets for sale, into agricultural produce or into additional biological assets’. It covers a wide range of activities, such as raising livestock, forestry, annual or perennial cropping, cultivating orchards and plantations, floriculture, and aquaculture (including fish farming).
A biological asset is ‘a living animal or plant’; and agricultural produce is ‘the harvested product of the entity’s biological assets’.
Example of biological assets, agricultural products and products that are the result of processing after harvest include (as extracted from IAS 41.4):
|
Biological assets |
Agricultural produce |
Products that are the result of processing after harvest |
|
Sheep |
Wool |
Carpet, Yarn |
|
Dairy cattle |
Milk |
Cheese |
|
Pigs |
Carcass |
Sausages etc |
|
Bushes plants |
Leaf |
Tea, Tobacco |
|
Trees in plantation of forest |
Felled Trees |
Logs, Timber |
|
Plants |
Cotton, Harvest Cane |
Thread, Clothing, Sugar |
|
Beef cattle |
Carcass |
Beef etc |
|
Vines |
Grapes |
Wine |
|
Fruit trees |
Picked Fruit |
Processed Fruit |
Regardless of the class of biological asset, the cost model (cost less impairment and accumulated depreciation if applicable) must be used, there is no other option.
It is clear from Section 10.2 in FRS 105 that agricultural produce after point of harvest is not within the remit of Section 27, instead these come within the remit of Section 10 Inventories.
Section 27 only applies to agricultural produce (i.e. harvested crops) at the point of harvest and not prior to or subsequent to harvest. Unharvested produce is considered to form part of the biological asset e.g. wool which has not been extracted from a sheep cannot be valued separately.
In order for to come within the definition of agricultural activity there must be a biological transformation which is managed. Biological transformation is where biological assets grow etc. For example, lambs are born and then reared to maturity as a sheep/ewe, which is then sold as lamb etc. Forestry grows throughout its life.
This process must be actively managed e.g. feeding cattle, sheep, arranging for those animal to reproduce.
Land and agricultural property do not come within this section as these are dealt with by Section 12.
The recognition criteria for biological assets is similar to any other asset, there must be:
- Ownership of the asset and have ability to control it
- Probable future economic activities will flow to the entity
- The fair value or cost can be reliably measured.
Cost for the purposes of this section is the lower of cost and estimated selling price less cost to complete and sell. Usually in assessing cost prices especially where the biological asset have been own bred/grown, entities determine the sales price at period end of the livestock for example less an appropriate margin based on industry norms to bring the value back to the estimated cost price. For other biological assets which are purchased from external parties the cost price is determined by the amount paid for the animal.
When looking at the selling price as a start to estimating the cost, it is likely that you will look to the markets e.g. local marts for cattle etc. However there may be more than one market for the biological asset and if this is the case the sales price to be used in applying a margin to get to cost is the market in which the entity is used to selling the assets etc.
Where an impairment is required, Section 22 should be reviewed. Once a biological asset is reared it then moves to be accounted for under Section 10-Inventories.
Example 1: Biological assets
Company A owned 100 calves. The Company values these animals at each period end by reference to the sales price less an appropriate margin which states these animals at deemed cost. The company determines the margin for the cattle to be 60%. In assessing the cost price the company should look to local marts where they would sell these assets at the year end to assess what the sales price would be. If we assume the estimated selling price of the animals would be CU350 per head, then the cost price to be recognised as a biological asset is CU140 (350*40%).
Disclosure in the notes
Extract from FRS 105 – Section 27.5 – 27.6
27.5 A micro-entity shall determine the amount of any financial commitments, guarantees and contingencies not recognised in the statement of financial position for the acquisition of a biological asset and disclose that amount within the total amount of financial commitments, guarantees and contingencies (see paragraph 6A.2).
27.6 A micro-entity shall disclose an indication of the nature and form of any biological asset or item of agricultural produce given as security in respect of its commitments, guarantees and contingencies (see paragraph 6A.3).
OmniPro comment
The above disclosure as self explanatory. See some illustrations in the example below.
Example 2: Example disclosures
Company A are committed to purchasing XX maiden heifers at the year end for a cost of CUXXX.
Company A has provided Bank Plc a floating charge over all of the Company’s Biological assets which are carried in the balance sheet at CUXX at the year end.
Company A has given a guarantee to Bank Plc which his supported by the biological assets the company owns.
In addition to the above disclosures for entities incorporated in the Republic of Ireland there is a requirement to disclose the accounting policies. See below an example of such a policy.
Example 3: 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 12 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 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.
Transition exemptions
Section 28 provides no transition exemptions. This therefore this must be applied retrospectively.
Under old GAAP/FRSSE, there was no specific guidance on accounting for biological assets, and therefore most entities followed the guidance on fixed assets (FRS15) and applied a cost model or the guidance on stock and long term contracts (SSAP 9) and applied the lower of cost or net realisable value. Therefore as this mirrors the requirements of Section 27 there should be no differences on transition from these GAAP’s.
FRS 102 provided the option to carry biological assets at cost or fair value. Therefore where an entity has applied the fair value model under FRS 102 an adjustment will be required to restate it to cost under FRS 105 and this must be applied retrospectively. There will also be a corporation tax adjustment as a result.
Principal transition adjustments
1) Change from fair value model to cost model (applicable for entities transitioning from FRS 102)
FRS 102 provided the option to carry biological assets at cost or fair value. FRS 105 only permits the cost model. Therefore where an entity has applied the fair value model under FRS 102 an adjustment will be required to restate it to cost under FRS 105 and this must be applied retrospectively (impact to be recognised to P&L reserves at the date of transition and fair value movement reversed in the comparative year). There will also be a corporation tax adjustment as a result and this adjustment will be given as a deduction over a 5 year assuming the tax authority guidelines state 5 years.
Example 4: Change from fair value model to cost model (applicable for entities transitioning from FRS 102)
Company A hold cattle as biological assets. Under FRS 102 at fair value. these were valued at cost under SSAP9. On transition to FRS 105, the entity must apply the cost model. The fair value of the cattle as recognised under FRS 102 at the 31 December 2014, 2015 and 2016 was CU125,000, CU150,000 and CU 150,000 respectively.
The total cost of biological assets if the cost model were to be applied at 1 January 2015 being the date of transition was CU100,000 and at the 31 December 2015 and 2016 was CU130,000. Assume a corporation tax rate of 10%. The transition adjustments required are:
On 1 January 2015
|
|
CU |
CU |
|
Dr Corporation Tax on balance sheet (CU25,000*10%) |
|
2,500 |
|
Dr Profit and Loss Reserves Net of Corporation Tax |
|
22,500 |
|
Cr Biological Assets |
25,000 |
Being journal to reflect the restatement of asset from fair value to cost and transfer to a separate line item including the corporation tax impact (so as to show the ta
Journals required for the year ended 31 December 2015 assuming the above journals are posted to opening reserves
|
|
CU |
CU |
|
Dr Biological Assets ((CU150k as stated less journal posted above of CU25k) less required amount of CU130k) (CU130,000-CU125,000) |
CU5,000 |
|
|
Dr Change in Fair Value of Biological Assets in P&L (CU150,000-CU125,000) |
CU25,000 |
|
|
Cr Cost of sales in P&L – movement in stock |
|
CU30,000 |
Being journal to reflect corporation tax on movement in the year which will be taxable over the next 5 years(so as to show the tax charge/liability/asset at what it would have been had FRS 105 applied from inception).
Journals required for the year ended 31 December 2016 assuming the above journals are posted to opening reserves
As the cost and fair value remained the same at 31 December 2016 and given that the journals will be brought forward from reserves above, no adjustment is required other than the journal required to release 1/5th of corporation tax asset recognised up to 31 December 2015 to reflect the fact that 1/5th of the amount will be tax deductible in the 2016 tax return. The remaining amount will be released over the following 4 years in line with when the deduction is allowed in the tax computation. The journal required is:
|
|
CU |
CU |
|
Dr Corporation Tax in P&L (CU2,000/5 years) |
400 |
|
|
Cr Corporation Tax Asset |
|
400 |
Being journal to reflect the additional deduction for 1/5th of the item previously taxed up to 31/12/15 which has therefore fallen out under FRS 105. Note this assumes that the tax journal posted will include the transition tax adjustment for the CU when it is finally recognised. If there was no corporation tax in 2016, then the CU400 would still be recognised as a debit to the P&L as it would be no longer be payable to the tax authorities. As no deferred tax can be recognised under FRS 105 it cannot be held as deferred tax asset on the balance sheet as a timing difference. The remaining CU1,600 (CU2,000-CU400) will still be included as an asset at the year end in the corporation tax nominal and released over the remaining 4 yrs.
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