IPSAS 27 Biological Assets Presented by Felicitas T Irungu Director Ernst & Young and Council Member April 2011

Biological Assets IPSAS 27 Objective of IPSAS 27 To prescribe the accounting treatment and disclosures for agricultural activity.

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Biological Assets IPSAS 27

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Definitions Agricultural activity - is the management by an entity of the biological transformation and harvest of biological assets for: sale, distribution at no charge or for a nominal charge or conversion into agric produce or into additional biological assets for sale or for distribution at no charge or at nominal charge Agricultural produce - is the harvested product of the entity’s biological assets Biological asset is a living animal or plant

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Biological Assets IPSAS 27 Definitions Biological transformation - comprises the process of growth, degeneration, production and procreation that cause qualitative or quantitative changes in a biological asset ► Costs to sell - are the incremental costs directly attributable to the disposal of an asset, excluding finance costs and income taxes. Disposal may occur through sale or distribution at no charge or at nominal charge

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Biological Assets IPSAS 27 • • • • • •

Group of biological assets - is an aggregation of similar living animals or plants Harvest - is the detachment of produce from a biological asset or the cessation of a biological asset’s life processes. Active market - is a market where all the following conditions exist: - items traded in the market are homogeneous - willing buyers and willing sellers can be found any time - prices are available to the public

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Biological Assets IPSAS 27 1.

Carrying amount is the amount at which an asset is recognized in the statement of financial position

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Fair Value - is the amount for which an asset could be exchanged or a liability settled between a knowledgeable willing parties in an arms length transaction. Fair value of an asset is based on its present location ad condition. e.g the price of a cattle in a farm is the price for the cattle in the relevant market less any transportation costs and other costs of getting the cattle to the market or location where it is to be distributed at no charge or at a nominal charge

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Biological Assets IPSAS 27 Scope An entity that prepares and presents financial statements under the accrual basis of accounting shall apply this standard for agric activities relating to: - biological assets - agricultural produce at the point of harvest This standard applies to all public sector entities and not Government Business Enterprises

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Biological Assets IPSAS 27

Scope out The standard does not apply to: - land related to agric activity (see IPSAS 16 Investment property and IPSAS 17 Property, Plant and Equipment) - intangible assets related to agric activity (IPSAS 31) - biological assets held for the provision or supply of services

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Biological Assets IPSAS 27

Examples of biological assets held for the provision or supply of services include: horses and dogs used for policing purposes and plants and trees in parks and gardens operated for recreational purposes. The IPSASB concluded that such biological assets are not held for use in an agricultural activity because they are not routinely managed for the purpose of measuring and monitoring the change in quality or quantity brought about by biological transformation or harvest, as described in paragraph10.

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Biological Assets IPSAS 27

Scope out 1. Biological assets used in other ways not agric activity for instance on education, transportation, entertainment, recreation, customs control etc are not accounted for in this standard. If the transformation or growth of biological assets is incidental to another purpose or is not actively managed by the entity the activities are unlikely to meet the definition of an agricultural activity e.g trees in a public park/reserves or alongside rivers to prevent soil erosion, natural breeding of animals in a zoo. 2. The standard is not applied for agric produce after harvest - other standards are applied e.g IPSAS 12 on inventories. Processing of agric produce after harvest is also not Page 10covered e.g processing Presentation title of grapes into wine

Biological Assets IPSAS 27

Biological Asset

Agricultural Produce

Products that are the result of processing after harvest

Sheep

Wool

Yarn, Carpet

Trees in a plantation forest

Felled Trees

Logs, Lumber

Plants

Cotton, Harvested cane

Thread/Clothing, Sugar

Pigs

Carcass

Sausages, Cured Ham

Dairy Cattle

Milk

Cheese

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Biological Assets IPSAS 27

Biological Asset

Agricultural Produce

Products that are the result of processing after harvest

Bushes

Leaf

Tea, Cured Tobacco

Vines

Grapes

Wine

Fruit Trees

Picked Fruit

Processed Fruit

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Biological Assets IPSAS 27 Recognition and Measurement An entity should recognize a biological asset or agricultural produce when and only when: ► The entity controls the asset as a result of past events ► It is probable that future economic benefits or service potential associated with the asset will flow to the entity ► The fair value or cost of the asset can be measured reliably. Control may be evidenced by legal ownership of cattle, branding/marking the cattle on acquisition, birth or weaning.

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Biological Assets IPSAS 27 Recognition ad Measurement • •

Future economic benefits or service potential is measured by significant physical attributes A biological asset shall be measured on initial recognition and at each reporting date at its fair value less costs to sell except where fair value cannot be measured reliably (para 34). In such a case the biological asset shall be measured at cost less any accumulated depreciation and any impairment loss

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Biological Assets IPSAS 27 Recognition ad Measurement ►

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A biological asset acquired through non-exchange transaction is measured on initial recognition and at each reporting date as in the above para (at fair value less costs to sell) 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.

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Biological Assets IPSAS 27 Recognition ad Measurement Determination of fair value for a biological asset or agricultural produce may be facilitated by grouping the assets or produce according to significant attributes e.g by age, quality etc. An entity selects the attribute corresponding to those used in the market for pricing. Entities often enter into contracts to sell their biological assets at a future date. Contract prices are not relevant for determining fair values since fair value reflects current market prices a willing buyer and willing seller are ready to take. Hence fair value for biological assets cannot be adjusted because of existence of a contract . Page 16

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Biological Assets IPSAS 27

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Recognition and Measurement If an active market exists then the quoted price in that market is the most suitable for fair value determination for that asset . Where there is no active market one or more of the following when available: - most recent market transaction price as long as there has not been a significant change in economic conditions between the date of the transaction and the reporting date - market price for similar assets with adjustments to reflect differences - sector benchmarks e.g kg of meat etc

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Biological Assets IPSAS 27 Recognition ad Measurement

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Where market determined prices or values may not be available for biological assets in its present condition the entity may use discounted cash flow techniques (present value of future cash flows) Biological assets are often attached to land and there may be no separate market for the separate assets, but for the combined one. In such cases the price of the combined assets will be used to determine fair value. Gain or loss on initial recognition of a biological asset at fair value less costs to sell are included in the surplus or deficit for the period it arises. Same for agric produce.

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Biological Assets IPSAS 27

Presentation an disclosure Disclosure ►

An entity shall disclose the aggregate gain or loss during the current period on initial recognition of biological assets (from change in fair values)

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An entity shall provide a description of biological assets that distinguishes between consumable and bearer biological assets and biological assets held for sale and those held for distribution at no charge or at a nominal charge

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Biological Assets IPSAS 27

Presentation an disclosure Consumable biological assets are those that are held for harvest as agric produce or for sale or distribution at no charge or at a nominal charge. Examples of consumable biological assets are animals and plants for one-time use, such as livestock intended for the production of meat, livestock held for sale, fish in farms, crops such as maize and wheat, and trees being grown for lumber. • Distinction should be made between mature and immature biological assets If not disclosed elsewhere an entity shall describe: Page 20 Presentation title • - the nature of its activities involving each group of biological assets

Biological Assets IPSAS 27 Presentation and disclosure ► Financial measures or estimates of the physical quantities of each group of bio assets at the end of the period out put of agric produce during the period ► Entity shall disclose the method and significant assumptions inn determining fair values for bio assets and agric produce ► Entity shall disclose fair value less cost to sell of agric produce harvested during the period determined at point of harvest ► Entity to disclose existence and carrying amounts of bio assets whose title is restricted and carrying amount of bio assets pledged as security for liabilities ► Entity to disclose nature and extent of restrictions on the Page 21 Presentation title entity’s use or capacity to sell biological assets

Biological Assets IPSAS 27 Presentation and disclosure • Amount of commitment for the development or acquisition of bio assets • Financial risk management strategies related to agric activity • Presentation 1. An entity shall present a reconciliation of changes in carrying amounts between the beginning and end of current period showing: - gain/losses arising from changes in fair values less cost to sell disclosed separately for bearer and consumable bio assets Page 22

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Biological Assets IPSAS 27 Presentation and disclosure - increase due to purchases - increase due to assets acquired through non-exchange transaction - decrease attributable to sale and classification of bio assets as held for sale - decrease due to distribution at no charge or at nominal charge - decrease due to harvest - increase arising from entity combinations - net exchange differences arising from translation of financial statements into a different presentation currency Page 23 Presentation title or translation for foreign operation into the currency of the reporting entity. ►

Biological Assets IPSAS 27 Presentation and disclosure ►

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Additional disclosure for bio assets where fair value cannot be measured reliably: a description of the bio assets explanation why fair value cannot be measured reliably range of estimates within which fair value is likely to lie depreciation method used useful lives or the depreciation rates used gross carrying amount and the accum depr at the beginning and end of period

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Biological Assets IPSAS 27 Presentation and disclosure • Any gain/loss recognized on disposal of a bio assets and a reconciliation showing: (para 53) • - impairment losses • - reversals of impairment losses • - depreciation • Where previously fair value of bio asset could not be measured reliably is now measurable in the current period this needs to be disclosed and: • - description of the asset given, • - explanation why fair value is now measurable • - effect of the change Page 25 Presentation title T

Biological Assets IPSAS 27 Disclosure requirement Statement of Financial Position Entity XYZ Notes December 31, 20X8 December 31, 20X7 Currency Unit (CU) CU ASSETS Notes 2008 2007 Current assets Cash Receivables Inventories Total current assets

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10,000 88,000 82,950 180,950

10,000 65,000 70,650 145,650

Biological Assets IPSAS 27 Disclosure requirement Non current assets

Notes

2008

Bearer biological assets Dairy livestock – immature 1 52,060 Dairy livestock – mature 1 372,990 Subtotal–bearer biological assets 3 425,050 Property, plant and equipment 1,462,650 Total non-current assets 1,887,700 Total assets 2,068,650

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2007

47,730 411,840 459,570 1,409,800 1,869,370 2,015,020

Biological Assets IPSAS 27 Disclosure requirement LIABILITIES Current liabilities Payables Total current liabilities NET ASSETS/EQUITY Contributed capital Accumulated surplus Total net assets/equity Total net assets/equity and liabilities Page 28

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Notes

2008

2007

122,628 122,628

150,020 150,020

1,000,000 946,022 1,946,022 2,068,650

1,000,000 865,000 1,865,000 2,015,020

Biological Assets IPSAS 27 Disclosure requirement An entity is required to provide a description of biological assets that distinguishes between consumable and bearer biological assets and between those held for sale and those held for distribution at no charge or for a nominal charge. Such disclosures would take the form of a quantified description that may be accompanied by a narrative description. An entity is also encouraged, but not required, to distinguish between mature and immature biological assets, as appropriate.

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Biological Assets IPSAS 27 Disclosure requirement Examples of Bearer biological assets are those biological assets that are used repeatedly or continuously for more than one year in an agricultural activity. Bearer biological assets are not agricultural produce but, rather, are self regenerating. Examples of types of animals that are bearer biological assets include breeding stocks (including fish and poultry), livestock from which milk is produced, and sheep or other animals used for wool production. Examples of types of plants that are bearer biological assets include trees, vines and shrubs cultivated for fruits, nuts, sap, resin, bark and leaf products and trees from which firewood is harvested while the tree remains. Page 30

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Biological Assets IPSAS 27 Disclosure requirement Statement of Financial Performance Entity XYZ Notes Year ended Notes December 31, 20X8 Fair value of milk produced Gains arising from changes in fair 3 value less costs to sell of dairy livestock held for sale Inventories used Staff costs Depreciation expense Other operating expenses Surplus for the period Presentation title

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2008 CU 518,240 39,930

558,170 (137,523) (127,283) (15,250) (197,092) (477,148) 81,022

Biological Assets IPSAS 27 Disclosure requirement Cash Flow Statement Entity XYZ Year ended December 31, 20X8 Cash flows from operating activities Cash receipts from sales of milk Cash receipts from sales of livestock Cash paid for supplies and to employees Cash paid for purchases of livestock Net cash from operating activities Cash flows from investing activities Purchase of property, plant and equipment Net cash used in investing activities Net increase in cash 0 Cash at beginning of the year Page 32 Presentation title Cash at end of the year

CU 498,027 97,913 (504,025) (23,815) 68,100 (68,100) (68,100) 10,000 10,000

Biological Assets IPSAS 27 Disclosure requirement This statement of cash flows reports cash flows from operating activities using the direct method. IPSAS 2, “Cash Flow Statements” requires that an entity reports cash flows from operating activities using either the direct method or the indirect method. IPSAS 2 encourages use of the direct method

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Biological Assets IPSAS 27 Disclosure requirement Biological Assets 20X8 Reconciliation of Carrying Amounts of Dairy Livestock CU Carrying amount at January 1, 20X8 Notes 459,570 Increases due to purchases 26,250 Gain arising from changes in fair value less costs to sell attributable to physical changes 3 15,350 Gain arising from changes in fair value less costs to sell attributable to price changes 4 24,580 Decreases due to sales (100,700) Page 34 Presentation title Carrying amount at December 31, 20X8 425,050

Biological Assets IPSAS 27 Disclosure requirement

Separating the increase in fair value less costs to sell between the portion attributable to physical changes and the portion attributable to price changes is encouraged but not required by this Standard

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Biological Assets IPSAS 27

The main differences between IPSAS 27 and IAS 41 are as follows: •

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The definition of “agricultural activity” includes transactions for the distribution of biological assets at no charge or for a nominal charge. IAS 41 does not deal with such transactions. The scope section clarifies that biological assets held for the provision or supply of services are not addressed in this Standard. IAS 41 does not include such a clarification.

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Biological Assets IPSAS 27 •

IAS 41 includes requirements for government grants relating to biological assets measured at fair value less costs to sell. IPSAS 27 does not include requirements and guidance for government grants, because IPSAS 23, “Revenue from Non-Exchange Transactions (Taxes and Transfers)” provides requirements and guidance related to government grants in non exchange transactions.

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IPSAS 27 contains requirements for the measurement at initial recognition, and at each reporting date, of biological assets acquired through a non exchange transaction.

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Biological Assets IPSAS 27 This Standard contains an additional disclosure requirement for biological assets for which the entity’s use or capacity to sell are subject to restrictions. • This Standard contains a requirement to distinguish between consumable and bearer biological assets and between biological assets held for sale and those held for distribution at no charge or for a nominal charge. Such disclosures would take the form of a quantified description that may be accompanied by a narrative description. IAS 41 encourages, but does not require, entities to provide a quantified description of each group of biological assets, distinguishing between consumable and bearer biological assets, or between mature and immature biological as appropriate. Page assets, 38 Presentation title •

Biological Assets IPSAS 27 This Standard contains an additional disclosure requirement for biological assets for which the entity’s use or capacity to sell are subject to restrictions. • This Standard contains a requirement to distinguish between consumable and bearer biological assets and between biological assets held for sale and those held for distribution at no charge or for a nominal charge. Such disclosures would take the form of a quantified description that may be accompanied by a narrative description. IAS 41 encourages, but does not require, entities to provide a quantified description of each group of biological assets, distinguishing between consumable and bearer biological assets, or between mature and immature biological Page 39 Presentation title assets, as appropriate. •

Biological Assets IPSAS 27

Effective date The standard is applicable for financial period beginning 1 April 2011. Early adoption is encouraged and this fact must be disclosed

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Biological Assets IPSAS 27

E N D Q & A Session

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Thank you