School/Department : SCHOOL OF ACCOUNTING

Programme : Bachelor of Commerce /Accounting

Unit Code/Title :ACC702 International Corporate Reporting
Year :__2014___

Trimester :___II_____

Date of Exam :_________

Time :_________
Examiner’s Name : Sanjay Sharma

Signature : ……………………………………………… ………………..………………….

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Section A Discussion Questions 30 marks

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Answer all questions

1. Describe the qualitative characteristics of financial information according to the Conceptual

Framework, distinguishing between fundamental and enhancing characteristics.

According to the Conceptual Framework, the two fundamental qualitative characteristics of financial
information are:

• relevance and

• faithful representation.
The Conceptual Framework (paragraph QC19) identifies four enhancing qualitative characteristics:

• comparability

• verifiability

• timeliness

• understandability.

2. What are the recognition criteria for income under the Conceptual Framework? How do these
differ from the key stated purpose of IAS 18?

The recognition criteria for income under the Conceptual Framework are:

“Income is recognised in the income statement when an increase in future economic benefits
related to an increase in an asset or a decrease of a liability has arisen that can be measured reliably.
This means, in effect, that recognition of income occurs simultaneously with the recognition of
increases in assets or decreases in liabilities.”

This means that once an asset is recognised or a liability reduced or derecognised, under the
Conceptual Framework’s asset/liability model, income is recognised simultaneously.

The key purpose stated in IAS 18 is to identify when revenue should be recognised. IAS 18 (Objective
paragraph) states that: “Revenue is recognised when it is probable that future economic benefits
will flow to the entity and these benefits can be measured reliably.”

IAS 18 then specifies the circumstances in which the recognition criteria will be met.

3. Company B, a listed company, provides food to function centres that host events such as
weddings and engagement parties. After an engagement party held by one of Company
B’s customers in June 2012, 100 people become seriously ill, possibly as a result of food
poisoning from products sold by Company B.

Legal proceedingswere commenced seeking damages from Company B, which disputed

liability by claiming that the function centre was at fault for handling the food incorrectly.

Up to the date of authorisation for issue of the financial statements for the year to 30 June
2012, Company Lawyers advised that it was probable that company B would not be found
liable. However, two weeks after the financial statements were published, Company B’s
lawyer’s advice that, owing to developments in the case, it was probable that Company B
 would be found liable and the estimated damages would be material to the company’s
reported profits.

Should company B recognise a liability for damages in its financial statements at 30

June 2012?How should it deal with the information it receives two weeks after the
financial statements are published?

At 30 June 2013

Present obligation as a result of a past obligating event - On the basis of the evidence available
when the financial statements were approved, there is no obligation as a result of past events
because, according to legal advice, Company B does not have a present obligation. Even if
Company B did have a present obligation, the recognition criterion of probability of outflow of
resources is not met.

Conclusion - No provision is recognised. The matter is disclosed as a contingent liability (either a

possible liability or a present obligation that fails the recognition criteria) unless the probability of
any outflow is regarded as remote.

Once company B becomes aware of the new information:

Present obligation as a result of a past obligating event - On the basis of the evidence available,
there is a present obligation.

An outflow of resources embodying economic benefits in settlement - Probable.

Conclusion - A provision should be recognised for the best estimate of the amount to settle the
obligation. However, company B has already issued its financial statements. The fact that the
expected damages are material to the reported profit means that company B, being a listed
company, will be most likely to have a continuous disclosure obligation to disclose the new
information. Depending on the laws of its jurisdiction it may have to rescind the financial
statements and issue new ones, updating the disclosures about the contingent liability and
recognising the provision as required by paragraphs 19 and 20 of IAS 10 Events After the Reporting
Period.

4. Describe the main risks that pertain to financial instruments.

 The main risks are set out in Table 7.4, page 229, of the text. They include: market risk, credit risk
and liquidity risk.

Market risk is comprised of (1) currency risk – the risk that the value of a financial instrument will
fluctuate because of changes in foreign exchange rates; (2) interest rate risk – the risk that the value
of a financial instrument will fluctuate because of changes in market interest rates; (3) other price
risk – the risk that the value of a financial instrument will fluctuate as a result of changes in market
prices. Market risk embodies the potential for both loss and gain.

Credit risk is the risk that one party to a financial instrument will fail to discharge an obligation and
cause the other party to incur a financial loss.

Liquidity risk is the risk that an entity will encounter difficulty in meeting obligations associated with
financial liabilities. This is also known as funding risk.

5. The management of an entity has decided to use the fair value basis for the measurement of its
equipment. Some of this equipment is very hard to obtain and has in fact increased in value over the
current period. Management is arguing that, as there has been no decline in fair value, no
depreciation should be charged on these pieces of equipment. Discuss.

IAS 16 notes that depreciation is a process of allocation. Depreciation is not a change in

value.
Depreciation is measuring the change in value due to the use of an asset over the period,
and not changes in value due to other factors such as changes in customer tastes.
The consumption of benefits is considered to be separate from changes in the fair value of
an asset.

6. Evaluate the criteria relating to recognition and measurement of intangible assets. Distinguish
between acquired and internally generated intangibles.
According to the IAS 3 ,An intangible asset is an identifiable non-monetary asset without
physical substance.

Recognition and measurement

The recognition of an item as an intangible asset requires an entity to demonstrate that the item
meets:
(a) the definition of an intangible asset; and
(b) the recognition criteria.

This requirement applies to costs incurred initially to acquire or internally generate an intangible
asset and those incurred subsequently to add to, replace part of, or service it. An asset is
identifiable if it either:

(a) is separable, i.e. is capable of being separated or divided from the entity and sold, transferred,
licensed, rented or exchanged, either individually or together with a related contract, identifiable
asset or liability, regardless of whether the entity intends to do so; or

(b) arises from contractual or other legal rights, regardless of whether those rights are
transferable or separable from the entity or from other rights and obligations.

An intangible asset shall be recognized if, and only if:

(a) it is probable that the expected future economic benefits that are attributable to the asset will
flow to the entity; and

(b) the cost of the asset can be measured reliably.

Internally generated intangible assets

Research phase
• No intangible asset arising from research / research phase can be recognized.
• Instead, expenditures on research / research phase are expensed as incurred.

Development phase
• An accounting policy choice must be made for expenditures on internally generated intangible
assets incurred during the development phase to either:
• Expense as incurred; or
• Capitalize as an intangible asset if all the following criteria can be demonstrated:
• Technical feasibility of completing the intangible asset so it will be available for use / sale;
• Intention to complete the intangible asset and use / sell it;
• Ability to use / sell the intangible asset;
• Availability of adequate technical, financial and other resources to complete development and
use / sell the intangible asset;
• Internally generated brands, mastheads, publishing titles, customer lists and items similar in
substance cannot be recognized as intangible assets as they cannot be distinguished from the cost
of developing the business as a whole. Therefore they are expensed as incurred.
Cost of an internally generated intangible asset:

• The sum of expenditures incurred from the date when the intangible asset first meets the
recognition criteria described above.
• Comprises all directly attributable costs necessary to create, produce and prepare the asset to be
capable of operating in the manner intended by management.

No intangible asset arising from research (or from the research phase of an internal project) shall
be recognised. Expenditure on research (or on the research phase of an internal project) shall be
recognised as an expense when it is incurred.
An intangible asset arising from development (or from the development phase of an internal
project) shall be recognized if, and only if,
 an entity can demonstrate all of the following:
(a) the technical feasibility of completing the intangible asset so that it will be available for use
or sale.
(b) its intention to complete the intangible asset and use or sell it. its ability to use or sell the
intangible asset.
(e) the availability of adequate technical, financial and other resources to complete the
development and to use or sell the intangible asset.
(f) its ability to measure reliably the expenditure attributable to the intangible asset during its
development.
Internally generated brands, mastheads, publishing titles, customer lists and items similar in
substance shall not be recognized as intangible assets.

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Section B Problem Solving and Calculation Questions 25 marks

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Answer both questions

On 1st June 2010, Big Ltd acquired the following assets and liabilities of Small Ltd:

Carrying Amount Fair Value

Land $310000 $340000
Plant ( cost $400000) 280000 295000
Inventory 80000 85000
Cash 15000 15000
Account payable (20000) (20000)
Loans (80000) (80000)

In exchange for these assets and liabilities, Big Ltd issued 100000 shares that has been issued for $1.20
per shares but at 1 June 2010 had a fair value of $6.30 per share.

Required: Using knowledge of IFRS 3

i) Prepare the acquisition analysis (5 marks)

ii) Prepare the journal entries in the records of Big Ltd to account for the acquisition of the assets
and liabilities of Small Ltd. (5 marks)

Acquisition analysis:

Net fair value of identifiable assets and liabilities acquired:

Land $350 000

Plant 290 000

Inventory 85 000

Cash 15 000

740 000

Accounts payable 20 000

Loans 80 000

100 000
 Net assets $640 000

Consideration transferred:

100 000 shares at $6.50 each $650 000

Goodwill = $650 000 - $640 000 = $10 000

Journal entries: New Ltd, FV of shares = $6.50

Land Dr 350 000

Plant Dr 290 000

Inventory Dr 85 000

Cash Dr 15 000

Goodwill Dr 10 000

Accounts payable Cr 20 000

Loans Cr 80 000

Share capital Cr 650 000

2. Cherry Ltd acquired all the assets and liabilities of Hazel Ltd on 1 January 2010. Hazel Ltd’s activities
were run through three separate businesses, namely Sandstone Unit, the Sapphire Unit and the
Silverton Unit. These units are separate cash-generating units.

Cherry Ltd allowed unit managers to effectively operate each of the units, but certain central activities
were run through the cooperate office. Each unit were allocated a share of the goodwill acquired, as
well as a share of the corporate office.

At 31 December 2010, the assets allocated to each unit were as follows:

Sandstone $ Sapphire $ Silverton $

Factory 820 750 460
Accumulated (420) (380) (340)
depreciation
Land 200* 300** 150*
Equipment 300 410 560
Accumulated (60) (320) (310)
depreciation
Inventory 120 80 100*
Goodwill 40 50 30
Corporate property 200 150 120

*these assets have carrying amount less than fair valve less costs to sell.

**this asset has a fair valve less costs to sell of $293.

Cherry Ltd determined the valve in use of each of the business units at 31 December 2010.

Sandstone $ 1170

Sapphire 900

Silverton 800

Required: Using knowledge of IAS 36: Determine how Cherry Ltd should allocate any impairment loss at
31 December 2010. (15 marks)

Sandstone Sapphire Silverton

Factory $400 $370 $120

Land 200 300 150

Equipment 240 90 250

Inventory 120 80 100

Goodwill 40 50 30

Corporate property 200 150 120

1 200 1 040 770

Recoverable amount 1 170 900 800

Impairment loss (30) (140) 0

Sandstone Unit
Write down the goodwill by $30:

Impairment loss Dr 30

Accumulated impairment losses

- goodwill Cr 30

(Allocation of impairment loss)

Sapphire Unit
Write off goodwill of $50 and allocate the $90 balance of impairment loss:

Carrying Proportion Allocation Net Carrying

Amount of Excess Amount

Factory 370 37/91 36 334

Land 300 30/91 30 270

Equipment 90 9/91 9 81

Corporate property 150 15/91 15 135

910 90

As the land has a fair value less costs of disposal of $293, only $7 of the impairment loss can be allocated
to it. Hence, the remaining $23 must be allocated to the other assets:

Carrying Proportion Allocation Net Carrying

Amount of Excess Amount

Factory 334 334/550 14 320

Equipment 81 81/550 3 78

Corporate property 135 135/550 _6 129

550 23

The entry is:

 Impairment loss Dr 140

Goodwill Cr 50

Accumulated depreciation and

impairment losses – factory Cr 50

Land Cr 7

Accumulated depreciation and

impairment losses – equipment Cr 12

Accumulated depreciation and

impairment losses – corporate property Cr 21

(Allocation of impairment loss)

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Section C Short Essay Questions 45 marks

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Answer any 3 out of 4 question given below. (Each worth 15 marks)

1. ‘Business combination is a transaction or event in which an acquirer obtains control of

one or more businesses’

Discuss the above statement and explain the different forms and steps in the acquisition
method of accounting for business combinations with its disclosures requirements

Solution

IFRS 3 defines a business combination as:

 ‘The bringing together of separate entities or businesses into one reporting entity’

A ‘business’ is not just a group of assets; rather, it is an entity able to produce output;

Forms and steps in the acquisition method of accounting for business

combination

Step 1- Identify the acquirer

 The acquirer is the entity that obtains control of the acquiree

-An acquirer must be identified in every business combination.
-However, a loss of control does not mean another entity has necessarily gained control

 Usually clear which party is the acquirer, but in some transactions it is less clear:
-Multi party transactions
-Transactions in which the legal acquirer is not the accounting acquirer (i.e., reverse
acquisitions).

Step 2- Determine the Acquisition Date

 The acquisition date is the date on which the acquirer obtains control of the acquiree
-Most often the same as the closing date (i.e., date the consideration is transferred)
-Usually clear, but in some transactions the acquirer can obtain control of the acquiree either
earlier or later than the closing date, excluding transaction costs

 Determining the date is important because consideration, assets acquired, liabilities

assumed, and no controlling interests are measured as of the acquisition date.

Step 3-Recognize and Measure the Identifiable Assets Acquired, the Liabilities Assumed

 Recognition principle – the acquirer recognizes all of the assets acquired and all of the
liabilities assumed
 Measurement principle – the acquirer measures each asset acquired and each liability
assumed at fair value

 Despite these principles, there are a number of exceptions

Step-4 Recognize and Measure Goodwill

 Goodwill is a residual calculated as the excess of (a) over (b)

(a) The aggregate of the consideration transferred, the fair value of any no controlling
interests (in a partial acquisition), and the fair value of any previously held interest (in a
step acquisition) (b) The net identifiable assets acquired and liabilities assumed

 A bargain purchase is also a residual calculated as the excess of (b) over (a)
–Usually are infrequent –Immediately recognized as a gain.

2. Employee benefits includes all forms of consideration given by an entity in exchange for
services rendered by employees’

Discuss the above statement and explain the principles applied in accounting for
employee benefits and compare defined benefit & defined contribution post-employment
benefit plans

DEFINING EMPLOYEE BENEFITS

According to IAS 19 employee benefits are all forms of consideration given by the entity
in exchange for services rendered by employees. Employee benefits are usually paid to
employees but the term also includes amount paid to their dependents or to other parties.
(http://www.iasplus.com/en/standards/ias/ias19)
Wages, salaries and other employee benefits are usually recognized as expenses.
However, the costs of employee benefits may be allocated to assets in accordance with
other accounting standards. For example, the cost of labour used in the manufacture of
inventory is included in the cost of inventory in accordance with IAS 2 Inventories. The
cost of an internally generated intangible asset recognized in accordance with IAS 38
Intangible Assets, such as the development of a new production process, the cost of
employee benefits for staff, such as engineers, employed in generating the new
production process.

Employee benefits are various non-wage compensations provided to employees in

addition to their normal wages or salaries. Examples of these benefits include: housing
(employer-provided or employer-paid), group insurance (health, dental, life etc.),
disability income protection, retirement benefits, daycare, tuition reimbursement, sick
leave, vacation (paid and non-paid), social security, profit sharing, funding of education,
and other specialized benefits(Alfredson.K, Pg. 586, 2009)

COMPARE DEFINED BENEFIT AND DEFINED CONTRIBUTION

POST-EMPLOYMENT BENEFIT PLANS
In many countries, employment benefits can include amounts that are not paid until after
the employment retires. These are referred to as post-employment benefits. Where post-
employment benefits involve significant obligations, it is common (and in some countries
compulsory) for employers to contribute to a post-employment benefit plan for
employees. For example in Australia, it is compulsory for most private sector employers
to contribute to a superannuation plan for employees (Deegan.C, Pg. 30-35, 2007)

Post-Employment benefit plans are defined as the formal or informal arrangements under
which an entity provides post-employment benefit for one or more employee.
 Superannuation Plan is an arrangement between trustees and employers, employees or
self-employed persons that benefits will be provided upon the retirement (or other
specified events) of plan members.

Post-Employment benefits plans are also referred to as superannuation plans, employee

retirement plans and pension plans. The employer makes payments to fund. The fund,
which is a separate entity, invests the contributions to provide post-employment benefits
to the employee, who are the members of the fund. The two types of post-employment
benefit plans are defined benefit plans and defined contribution plans:

DEFINED BENEFIT PLAN

For defined benefit plans, the amount recognized in the balance sheet should be the
present value of the defined benefit obligation (that is, the present value of expected
future payments required to settle the obligation resulting from employee service in the
current and prior periods), as adjusted for unrecognized actuarial gains and losses and
unrecognized past service cost, and reduced by the fair value of plan assets at the balance
sheet date.(http://www.iasplus.com/en/standards/ias/ias19)

Over the life of the plan, changes in benefits under the plan will result in increases or
decreases in the entity's obligation.For a defined benefit plan

 Measured from a comprehensive actuarial review to determine present value of expected

future benefit payments
 Actuarial review requires assumptions about future salary levels, mortality rates, membership
turnover, etc.
 Measurement at least every three years
 Determining appropriate discount rate is not an easy exercise and depends largely on
professional judgment
 If rate based on the anticipated rate of return on an organisation’s assets cannot be determined
then rate on government bonds may be used.

DEFINED CONTRIBUTION POST-EMPLOYMENT BENEFIT PLAN

Defined contribution post-employment plans are those for which the employer pays fixed
contributions into a fund. The contributions are normally based on the wages and salaries
paid to employees. The amount received by employees on retirement is dependent upon the
level of contributions and the return earned by the fund on its investments. The employer has
no legal or constructive obligation to make further contributions if the fund does not hold
sufficient assets to pay all benefits relating to employees past service when they retire.

EXPLAIN HOW TO MEASURE AND RECORD LONG SERVICE LEAVE

Long-term employee benefits are benefits for services provided in the current period that will
not be paid until more than 12 months after the end of the period. A common form of long-
term employee benefits is a long service leave, which is a compensated absence after the
employee has provided a long period of service, such as 3 months paid leave after 10 years of
continuous employment. (Alfredson.K, Pg. 604-605, 2009)

Long service leave is defined as leave with pay to which an employee becomes entitled after
a specified period of lengthy continuous service or employment with an employer. The
purpose of this leave as articulated over time in various cases and parliamentary proceedings
is to provide a reward for long service and to provide long serving employees with a respite
from work and enable them to renew their energies at intervals during their working life. It
can also provide an incentive for employees to remain with their employer and therefore help
reduce labor turnover. (http://www.workplaceinfo.com.au/resources/employment-topics-a-
z/long-service-leave definition)

EXPLAIN WHEN A LIABILITY SHOULD BE RECOGNISED FOR

TERMINATION BENEFITS AND HOW IT SHOULD BE MEASURED

TERMINATION BENEFIT
Termination benefit arise when an employee is made redundant, the employee may be
obliged to pay termination benefits, a fall in the economy will cause a manufacturer to
decrease the scale of its operation, giving rise to some portion of the entity’s workforce being
made redundant.
The definition of termination benefits in IAS 19 includes employee benefits that are payable
as a result of an employee’s decision to accept voluntary redundancy in exchange for those
benefits.

IAS 19 states that termination benefits should be recognized when the entity is demonstrably
committed either to terminating the employment of employees before the normal retirement
date in order to encourage voluntary redundancy.

3. Entities are required to conduct impairment tests to ensure their assets are not overstated’
Discuss the above statement and explain when to undertake an impairment test. Explain
how to undertake an impairment test for an individual asset and a cash-generating unit.

WHEN TO TAKE AN IMPAIRMENT TEST

The impairment test’s purpose is to ensure that disclosed assets do not have carrying
amounts that is higher than its recoverable amount. But at the balance date, it is not
necessary to test each and every asset to see if it is impaired. An entity is required to
assess those assets where there is any indication that it may be impaired.
But there are some types of assets for which the recoverable amounts are measured
annually notwithstanding whether there is any indication if it may be impaired or not. In
some cases, the most recent calculation for recoverable amount made in the previous
period could be used in the impairment test for that particular asset in the current period.
The assets that should be measured for impairment annually are as follows:
 an intangible asset with an indefinite useful life
 as intangible asset not yet available for use
 goodwill acquired in a business combination

Annual impairment tests are compulsory for these assets because the carrying amount of
these assets are considered to be more uncertain than those of other assets. There are two
main reasons for carrying out the tests annually. Firstly, is there is no amortization
charges for intangible assets with indefinite useful lives, therefore, there is no ongoing
reduction in the carrying amount of the asset. It becomes necessary to test the carrying
amount against recoverable amounts since the assets are not being reduced through
amortization. There is also no amortization charges for Goodwill.
The second reason is the concept of depreciation which is the process of allocation rather
than valuation even if an asset is measured at a revalued amount. The carrying amount
shows the unallocated measure of the asset rather than benefits to be received from the
asset in future. The impairment test communicates the assessment of recoverability of
the asset whereas depreciation relates to allocation of the asset.
There is a list of external and internal indicators of impairment and any indication
requires the asset’s recoverable amount to be calculated.
External Indicators of Impairment are:
i) Drop in the market value of an asset more than would normally be expected
during the period.
ii) Entity’s Environment/Market – negative changes in the market, technological,
economic or legal environment where the entity operates.
iii) Increases in market rates.
iv) Net assets of the company higher than market capitalization.
Internal Indicators of Impairment are:
 i) Obsolescence or physical damage affecting the asset.
ii) Significant adverse changes that have taken place or are expected in the near
future. For example as there may be plans to sell an asset or asset becomes idle.
iii) Deterioration in the expected level of the asset’s performance.
iv) Cash flows for maintaining the asset are higher than forecast.
Source: http://www.iasplus.com/en/standards/ias/ias36

3.2 IMPAIRMENT TEST FOR AN INDIVIDUAL ASSET

A test must be conducted to see whether the asset is impaired and to what extent. The
carrying amount, recoverable amount, fair value less cost of disposal and value in use of
identified assets are calculated.
The recoverable amount of an asset or a cash-generating unit is the higher of its fair value
less cost of disposal (sometimes called net selling price) and its value in use. Fair value
less costs to sell is the amount that would be received from selling an asset or cash-
generating unit in an arm’s length transaction between knowledgeable willing parties,
less cost of disposal. Cost of disposal are the incremental costs directly attributable to the

4
selling/disposal of an asset or cash-generating unit. Value in use is the present value of
the future cash flows expected to be derived from an asset or cash-generating unit.

The carrying amount is tested for impairment against i) fair value less cost to sell and
ii) value in use.
i) Fair value less cost to sell – fair value is the market price where an active market
exists. If there is no active market then amounts paid in recent similar sales
transactions are looked at. Cost to sell includes legal costs, stamp duty, cost of
removing the item and direct incremental costs to bring an asset into condition of
sale.
ii) Value in use – the elements that should be reflected in the calculation of an asset’s
value in use are:
i) An estimate of expected future cash flows
ii) Expectations about possible variations of the above cash flows
iii) Uncertainty inherent in the price of the asset
iv) The time value of money (that is the discount rate)
v) Other relevant factors that market participants would reflect in pricing the
future cash flows (such and liquidity).
5
Recognition of an Impairment Loss
An impairment loss is recognized if the recoverable amount is less than the carrying
amount. If the recoverable amount is more than the carrying amount, no loss is recorded.
The impairment loss is recognized as an expense immediately in profit or loss.
Companies usually need to write off asset impairment amounts as a loss against net
income. Companies need to disclose any asset impaired to stakeholders to inform them
of these major business changes.

IMPAIRMENT TEST FOR A CASH GENERATING UNIT

Goodwill should be tested annually for impairment. Impairment testing for goodwill is
done like other impairment test, that is, it compares the carrying amount of the unit’s
assets with the recoverable amount of the unit’s assets. The annual impairment for a
cash-generating unit to which goodwill has been allocated maybe performed at any time
during the year provided that it is done at the same time every year. Goodwill is not
recognized if it is internally generated. It is only recognized when it is acquired in a
merger etc.
 A cash-generating unit is the smallest identifiable group of assets that generate cash
inflows that are largely independent of the cash inflows from other assets or groups of
assets. An impairment loss shall be recognized for a cash-generating unit (the smallest
group of cash-generating units to which goodwill or a corporate asset has been allocated)
only if the recoverable amount of the unit (group of units) is less than the carrying
amount of the unit (group of units). The impairment loss shall be allocated to reduce the
carrying amount of the assets of the unit (group of units) as follows:
a) firstly, to reduce the carrying amount of any goodwill allocated to the cash-
generating unit.
b) Secondly, to the other assets of the unit or group of units pro rata on the basis of
the carrying amount of each asset in the unit.
These reductions in carrying amounts are treated as impairment losses on the individual
assets of the unit and recognized as any other impairment losses on assets.
The carrying amount of an asset should not be reduced below the highest of –
i) its fair value less costs to sell (if determinable)
ii) its value in use (if determinable) and
iii) zero
If the preceding rule is applied, further allocation of the impairment loss is made pro rata
to the other assets of the unit.

4. ‘IAS 41 establishes standards of accounting for agricultural activity, biological assets and
agricultural produce’.

Discuss the above statement and explain the meaning of ‘fair value’ when applied to
biological assets and agricultural produce. Critique the practical implications of
measuring these assets at fair value, including interpreting the disclosures made by
companies applying the standard.

 Biological assets are living plants or animals such as trees in a

plantation forest or cattle
 Agricultural produce is the harvested product of an entity’s biological
asset such as wool, milk or beef
 Biological transformation is the processes of growth, degeneration,
production and procreation that cause qualitative or quantitative
changes in a of biological assets. For example, calves are born
(procreation), they grow into mature cattle(growth) then they yield milk or
are reared for beef (production)
 Management of biological transformation normally takes the form of
activity to enhance, or at least stabilise, the conditions necessary for the
process to take place. For example, management of cattle would involve
sheltering and feeding them as well as maintaining their health.
Harvesting from unmanaged sources such as sea fishing is not
agricultural activity.

The initial recognition of biological assets and agricultural produce is

subject to the general recognition criteria for assets set out in the
Conceptual Framework for financial reporting and other IFR’s. The entity
must demonstrate control over the asset that will generate future
benefits and whose fair value can be measured reliably [IAS 41 para10].
Control over biological assets would usually be evidenced by legal
ownership and for example the branding or marking of cattle on
acquisition or birth. Initial recognition will occur at the point of purchase
or when biological assets are generated from existing assets, such as
calves from livestock. Agricultural produce that is attached to a biological
asset, such as wool to sheep and grapes to the vine, is not recognised
separately the unit of harvest. IAS 41 paragraph 10 states that an entity
shall recognise a biological assets or agricultural produce when and only:

 The entity controls the assets as a result of past events

 It is probable that future economic benefits associated with the assets
will flow to the entity
 The fair value or cost can be measured reliably

THE HARVEST DISTINCTION

There is a very important distinction between agricultural produce,

which is harvested product of the entity’s biological assets and products
that result from processing after harvest. IAS 41 only applies to the
harvested product at the point of harvest. Thereafter, IAS 2 or another
applicable standard is applied. The standard includes examples to
 illustrate the difference between biological assets, agricultural produce
and products that are the result of processing after harvest. The
tabulated below is based on IAS 41 to modify the understanding more
clearly.

Biological Assets Agricultural Products that are a result

Produce of processing after
harvest
Plants Cotton , Paper Thread, Clothing
Dairy Cattle (Cow) Milk Cheese, Butter
Pigs Carcass/ Waste Sausages/ Cooking Gas
Sheep Wool Yarn, Carpet, Woollen
Clothing
Grapes Vines Wine
Sugar Cane Harvest Cane Juice Sugar
Coconut Tree Coconut Copra/ Oil
Forest Trees Logs Furniture

Agriculture produces after the point of harvest. It is likely that such

produce will be inventory and hence within the scope of IAS 2. While the
produce is still growing or still attached to the biological asset, its value
forms part of the value of the biological asset.

One of the initial criticisms of IAS 41 was that it requires assets for
which there is often an active and ready market are measured at cost
under IAS 2. For example, it can be difficult to determine a fair value for
immature trees in a plantation because there may not be an active or
ready market for trees before they are fully grown.

FAIR VALUE

Biological assets are measured at fair value less cost to sell unless it is
no possible to measure at cost and at both initial recognition and at each
subsequent reporting date and so are within IFRS 13’s scope for both
measurement and disclosure. Biological asset’s fair value cannot be
measured at cost less accumulated depreciation and impairment losses,
if any [IAS 41 para30].

Fair value is the amount which an asset could be exchanged, or a

liability settled between knowledgeable willing parties in an arm’s length
transaction. There is a presumption that fair value can be rebutted only
on initial recognition for available and for which alternative estimates of
fair value are determined to be clearly unreliable. In such a case that
biological asset shall be measured at its cost less any accumulated
depreciation and any accumulated impairment losses.

Entities often enter into contracts to sell their biological assets or

agricultural produce at a future date. Contract prices are not necessarily
relevant in determining the fair value, because of the existence of a
contract. In some of the case, a contract for the sale of a biological asset
or agricultural produce may be an onerous contract, as defined in IAS 37
Provision, Contingent Liabilities and Contingent Assets. IAS 37 applies to
onerous contract.

The End