Using MPERS for agricultural activities

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This article was first published in the February 2018 Malaysia edition of Accounting and Business magazine.

In this final of the four-part series on the Malaysian Private Entities Reporting Standard (MPERS), which is effective for private entities in Malaysia from 1 January 2016, we take a closer look at the requirements and treatment prescribed for agriculture activities (as provided in section 34), as well as related key changes from the previous PERS framework for such activities.

Scope

Private entities that carry out agricultural activities – the management of the biological transformation of biological assets (ie living animals and plants) for sale into agricultural produce or into additional biological assets – will have to comply with the requirements of section 34. The management of biological assets is a key determinant of whether an activity carried out by an entity falls within the scope of section 34 or not. For example, harvesting from unmanaged sources (such as fishing from the open sea and deforestation) is not agricultural activity. In addition, agricultural activities do not include using living animals for activities such as competitions, racing or exhibitions.

For example, Northwest Livestock has 500 beef cattle for meat production, 90 dairy cattle for milk production and 12 buffaloes for pulling carts to distribute feed to its cattle. Female calves are retained by Northwest to maintain and expand its herds. Male dairy calves are sold soon after birth as meat for trade. Male beef calves are sold for the beef trade when they are two years old. Mature dairy cows are sold for meat after they have produced milk for five years. Mature beef cattle are sold in the meat trade when they are nine years old.

In this scenario, the company accounts for the 500 beef cattle and 90 dairy cattle as biological assets. The biological transformation of the cattle (biological assets) is managed by the entity for sale (all the entity’s cattle are at some point sold in the meat trade), turned into agricultural produce (milk and meat from the dairy cattle and carcasses from the beef cattle) or into additional biological assets (offspring of the beef and the dairy cattle).

The 12 buffaloes are accounted for as property, plant and equipment (PPE) in accordance with section 17. Even though they are biological assets, they are not accounted for in accordance with section 34 because they are not related to agricultural activity, ie their biological transformation is not managed by the entity for sale, or turned into agricultural produce or additional biological assets.

Measurement and recognition

An entity is required to use the fair value model for biological assets for which fair value is readily determinable without undue cost or effort. An entity shall measure a biological asset on initial recognition and at each reporting date at its fair value less costs to sell. Changes in fair value are recognised as fair value gain or losses in profit and loss during the period in which the change occurs. Measuring the fair value of the biological assets is similar to fair value measurements in other sections, such as financial instruments and investment property, with the exception that expected costs to sell are deducted.

In order to determine the fair value of a biological asset or agricultural produce, it may be relevant or even practical to group biological assets or agricultural produce according to their key attributes such as age or breed. The attributes selected usually correspond to characteristics used in an active market as the basis for pricing. It is common for livestock and agriculture produce to have market prices readily available because they take the form of basic commodities that are traded actively.

The quoted price for an identical asset in an active market is the best measure and is therefore the first priority when determining the fair value of the asset. However, if there is no active market, fair value can be determined using the alternative approaches such as:

• recent transaction price for the asset
• market prices for similar assets, adjusted to reflect any differences or
• sector benchmarks (such as the value of a plantation expressed per hectare and the value of cattle expressed per kilogram of meat).

In some circumstances, fair value may be readily determinable without undue cost or effort even though market-determined prices or values are not available for a biological asset in its present condition. In such instances, the entity shall consider whether the present value of expected net cashflows from the asset discounted at a current market-determined rate results in a reliable measure of fair value. For biological assets whose fair value is not readily determinable without undue cost or effort, an entity shall measure them at cost less any accumulated depreciation and any accumulated impairment losses. This would likely be the case for most private entities in Malaysia in plantation operations, especially in the cultivation of oil palm and rubber.

It is important to note that an entity must apply the fair value model to classes of biological assets for which fair value is readily determinable without undue cost or effort, even if circumstances prevent the entity from using the fair value model for other classes of biological assets because the fair value of those other assets is not readily determinable without undue cost or effort.

Agricultural produce

Agricultural produce is the harvested product of the entity’s biological assets. It is crucial that the entity clearly distinguishes the biological assets, agricultural produce and products that are the result of processing agricultural produce after harvest. Some examples are as follows:

• Biological assets used in an agricultural activity are accounted for in accordance with section 34, while agricultural produce is accounted for in accordance with section 34 only at the point of harvest, and subsequently in accordance with section 13 Inventories or another applicable section of MPERS. Products that are the result of processing agricultural produce after harvest are outside the scope of section 34 and are accounted for in accordance with section 13 or with another applicable section of the MPERS.
• Agricultural produce harvested from an entity’s biological assets shall be measured at its fair value less costs to sell at the point of harvest, regardless of the model applied for the biological assets. Such measurement is the cost at that date when applying section 13 Inventories or another applicable section of MPERS.

Agricultural land

MPERS does not explicitly provide any prescription for land used in agriculture activity and thus such land would be treated as PPE according to section 17, separate from biological assets. As such, the land should be separated from crops cultivated on the land (ie the biological assets – for example, oil palm trees and rubber trees) and treated and classified as PPE.

Key changes from PERS

Under the previous PERS framework, there was no explicit standard for agriculture activities and biological assets, and, as such, MAS 8, Pre-cropping Costs, was used to account for plantation activities. While all pre-cropping costs of new planting were capitalised as PPE, two methods were allowed for the subsequent treatment. Entities that used the capitalisation and amortisation method amortised the capitalised costs over the useful life of the crop and replanting costs were capitalised as new PPE. The other method used was the capital maintenance method, whereby the capitalised cost of new planting is not amortised. Instead, the replanting expenditure is charged as an expense when incurred. The capital maintenance method is obviously no longer allowed under MPERS. The capitalisation and amortisation method would likely prevail if an entity can demonstrate that the biological asset’s (not PPE under MPERS) fair value is not readily determinable without undue cost or effort. Agricultural produce was measured at the lower of cost and net realisable value, which is no longer the case under MPERS.

MPERS will also have an effect on aquaculture activities, whereby previously under MAS 5, an entity uses the cost model to measure the aquaculture stock (such as fish and prawns) in grow-out ponds or cages. Income was recognised when the aquaculture produce is harvested and sold. Under MPERS, aquaculture operations would apply the same principles as agriculture activities. This entails that aquaculture stock such as fishes and prawns in ponds or cages be measured at fair value at the end of each reporting period and changes in the fair values be recognised as fair value gain or losses in profit and loss. Just like the biological assets in agriculture activities, it would be important to determine physical attributes such as the age of aquaculture species to apply the fair value model.

Ramesh Ruben Louis is a professional trainer and consultant in audit and assurance, risk management and corporate governance, corporate finance and public practice advisory