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Accounting Agriculture

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Submitted By ash1988
Words 1384
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Executive Summary
Agricultural activities are rarely the focus of accounting research, and up until December 2000 no accounting standard existed for accounting activities in the industry at an international level. This report investigates the AASB 141 Agricultural accounting standard, discusses the background of the standard, which entities are affected by the standard and evaluates its usefulness and applicability in the industry. It was found that despite been acknowledged as a standard which provides a good conceptual framework it is often held back by its focus on theory and shift away from practicality (Elad, 2004).

Intro & Background to the standard
Recently, as jobs are getting diverse, there are people or companies interested in agriculture and spending time on growing their biological assets and selling the produce from the assets. It is obvious that people or companies describe above are doing those not as hobby but job because they earn profit from the activities. The size of the activities might be different but mostly regardless of how the size is, the activities and the following outcomes need to be reported in financial statements. To describe what the activities are and explain how the activities shall be treated in accounting, AASB 141 was made.
AASB 141 Agriculture focuses on recognising, measuring, and disclosing agricultural activities such as biological assets and agricultural produce. Agricultural activities are defined in AASB 141 as ‘the management by an entity of the biological transformation and harvest of biological assets for sale or for conversion into agricultural produce or into additional biological assets’ (AASB, 2010). Also, it clarifies what a biological asset is and what agriculture produce is by saying that a biological asset is a living animal or plant and agriculture produce is the harvested product from the biological asset by entities.
However, there are some issues for the measurement of biological assets and produce in the financial statements because of the ambiguity of in what cost, biological assets should be measured and what kind of expenditures shall be capitalised.

The theories applicable to the assigned standard
The reflection of biological assets and agricultural produce in financial statements for stakeholders is necessary so that they precisely analyse companies focusing on agricultural products. Once biological assets and agricultural produce are recognised, they need to be measured properly. First, biological assets are measured through initial recognition at fair value minus the projected sales costs at each reporting date if the fair value can be measured reliably. Otherwise, there might be some problems for measuring biological assets.
If the historical method is used instead of fair value minus estimated point of sale costs, it is likely that historical cost provides irrelevant information, not reflecting any price change in biological assets, and the cost cannot accurately portray the accretion in value (Deegan, 2012). There were two methods expected to replace fair value less estimated point of sale costs; net present value and current market value. Net present value method indicating the present value of future cash flows by discounting future cash flows has some problems because it tends to reduce the reliability of the amount calculated. That is mainly because the method has many assumptions, which seems to be that the method does not reflect the reality (Elad & Herbohn, 2011).
The conceptual framework requires probability and reliable measurement when any item needs to be presented in financial statement. However, if net present value method is adopted, the decision ignores what should be done. Using current market value has difficulties when there is a huge time gap before biological assets are ready for sale (Ioanas, Dumitru, Tutu & Nichita, n.d.). Hence, fair value less estimated point of sale costs method is optimal.

If market determined prices are not available anymore with no reliable alternatives of fair value, the value of an asset is measured by taking the cost and subtracting both accumulated depreciation and impairment losses . Also, any gain or loss arising from initial recognition of the asset measured at fair value less estimated point of sale costs and from any change in the amount of fair value less estimated point of sale costs shall be presented in profit or loss statement.

Second, agricultural produce including wool shorn from sheep and fruit pulled from trees shall be measured at its fair value less estimated point-of-sale costs. Also, like the case of biological assets, any gain or loss on the amount of agricultural produce shall be included in profit and loss account (CPA Australia, n.d.).

Conclusion
Reporting methods for biological assets presents many difficulties to entities in the agricultural industry, and the IAS 41 standard has faced many criticisms. Elad (2004) comments that “Overall, the IASC’s project on agriculture appears to have portrayed a dubious triumph of theory of pragmatism” (Elad, 2004, p. 638). The standard is broad in scope, and ambitious with its aim for generalised applicability to biological assets across a wide range of industries within the agricultural setting - farming, forestries etc. The IAS 41 has introduced far reaching changes to the existing practices across many countries, and Australia has been one of these countries. The findings in this report show there is a large amount of subjectivity in the areas of unrealised gains, and measurement of fair value, resulting in an increased volatility of income as a result of unrealised gains. It has been shown that the standard faces issues with providing a true reflection of the nature of investment within the industry, in particular that of timber forestries. The shift towards fair value and recognition of fair value change is however consistent with International Accounting standards and entities should be aware of this inevitable shift.

References

AASB. 2010. AASB 141 Agriculture. Retrieved from http://www.aasb.gov.au/admin/file/content102/c3/AASB141_07-04_ERDRjun10_07-09.pdf
Australian Accounting Research Foundation (1997), Responses to Invitation to Comment: ED 83,AARF, Melbourne.
Benston, G. (2008), “The shortcomings of fair-value accounting described in SFAS 157”, Journal of Accounting and Public Policy, Vol. 27 No. 2, pp. 101-114.
Booth, B. and Walker, R.G. (2003), ‘Valuation of SGARAs in the wine industry: time for sober reflection’, Australian Accounting Review, 13(3): 52–60.
CPA Australia. (n.d.). Australian accounting standards fact sheet. Retrieved from http://www.cpaaustralia.com.au/cps/rde/xbcr/cpa-site/AASB-141-fact-sheet.pdf
Deegan, C. (2012). Australian Financial Accounting. North Ryde: McGraw Hill.
Dowling, C. and Godfrey, J.M. (2001), ‘AASB 1037 Sow the seeds of change: a survey of SGARA measurement methods’, Australian Accounting Review, 11(1): 45–51.
Elad, C., & Herbohn,K. (2011). Implementing fair value accounting in the agricultural sector. Retrieved from http://www.google.com/url?sa=t&rct=j&q=biological%20assets%20and%20net%20present%20value&source=web&cd=8&cad=rja&sqi=2&ved=0CF4QFjAH&url=http%3A%2F%2Ficas.org.uk%2Fres%2Felad_report_feb_2011.pdf&ei=nNiJUdnKG-z6iQeRm4HgAQ&usg=AFQjCNGTkv3Amitiwj8CwfJ7G0iFFxRrXQ&bvm=bv.46226182,d.dGI

Elad, C. (2004), “Fair value accounting in the agricultural sector: Some implications for international accounting harmonisation”, European Accounting Review, Vol. 13 No.4, pp. 621-641.

Fargher, N. (2001), “Management perceptions of fair-value accounting for all financial instruments”,
Australian Accounting Review, Vol. 11 No. 2, pp. 62-72.

Herbohn, K.F. (2006), ‘Accounting for SGARAs: a stock take of accounting practice before compliance with AASB 141 agriculture’, Australian Accounting Review, 16(2): 63–77.
Herbohn, K. (2005, August 8-13), International Accounting Standards: How adequately are forest assets reported in the balance sheet and income statement?, Paper presented at the IUFRO World Conference 2005, Brisbane, Australia.
Ioanas, C., Dumitru, C. G., Tutu, A., & Nichita, M. (n.d.) Recognition and valuation of biological assets in tourism area. International accounting standards. Journal of Tourism, 7. Retrieved from http://www.google.com/url?sa=t&rct=j&q=biological%20assets%20and%20current%20market%20value&source=web&cd=10&cad=rja&ved=0CG0QFjAJ&url=http%3A%2F%2Frevistadeturism.ro%2Findex.php%2Frdt%2Farticle%2Fdownload%2F117%2F86&ei=jd6JUdbWJuLyiAe5r4C4Cg&usg=AFQjCNEFrFY5HufrVgDuVZQ49Rekc1nVjQ&bvm=bv.46226182,d.dGI

Laux, C. & Leuz, C. (2009), “The crisis of fair-value accounting: Making sense of the recent debate”, Accounting, Organisations and Society, Vol. 34 No. 6-7, pp. 826-834.
Penman, S. H. (2007), “Financial reporting quality: is fair value a plus or a minus?”, Accounting and Business Research, Special issue: International Accounting Policy Forum, pp. 33-44.

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