Specialised activities Agenda Accounting for specialised activities Agriculture Property development Service concession arrangements Extractive activities
Biological assets Common accounting practices for the plantation industry A living animal or plant (other than harvesting unmanaged sources such as ocean fishing and deforestation) Measurement of biological assets (a) Capital maintenance method New planting costs are capitalised and not amortised. Replanting costs are charged to profit or loss when incurred. (b)cost amortisation method Initial and subsequent costs are capitalised and amortised. 2 Accounting for biological assets Initial and subsequent measurements At fair value less costs to sell. Unless fair value cannot be readily determinable without undue cost or effort, then measure at cost less accumulated depreciation and impairment loss. Gain or loss on initial recognition is recognised in profit or loss (or retained earnings for first-time adopter). Subsequent changes in fair value less costs to sell are recognised in profit or loss. 3
Case Study 1 Readily determinable without undue cost or effort Company A cultivates slow-growing hardwood timber trees. Company A maintains detailed management records and costing. Based on historical records that have been adjusted for recent trends, management forecasts expected future income and expenses by species of tree harvested. The forecasts help management to determine which species should propagate and manage for harvest in the future. Active market does not exist. Cost Fair value Historical records are available - fair value can be readily determinable without undue cost or effort. 4 Case Study 2 Readily determinable without undue cost or effort Same facts as per Case Study 1. Company A has recently begun cultivating plantation timber in a new jurisdiction where it operates. The environment conditions in the jurisdiction are different from those in other areas. Management has not forecasted the future income and expenses by species of tree harvested. Active market does not exist. Cost Fair value Significant unknown factors fair value is not readily determinable without undue cost or effort. 5
Accounting for agricultural produce PERS MPERS Section 34 Measure at the lower of cost and net realisable value. Initial measurement Measure at fair value less costs to sell at the point of harvest. This becomes the cost of the inventories at that date for application of Section 13, Inventories. Subsequent measurement Lower of cost and estimated selling price less costs to complete and sell, in accordance with Section 13, Inventories. Input cost of other inventories may be affected 6 Hierarchy for determining fair value Active market Use quoted price in the active market. Note: If an entity has access to different active markets, the entity uses the price existing in the market it expects to use. No active market Use most recent market transaction price, provided no significant change in economic circumstances between the date of that transaction and the end of the reporting period. Use market prices for similar assets with adjustment to reflect differences. Use sector benchmarks. 7
Disclosures under MPERS Cost method Fair value model Description of each class of biological assets Method and significant assumptions applied in determining fair value Reconciliation of changes in the carrying amount between the beginning and the end of current period Explanation of why fair value cannot be measured reliably Depreciation method used Useful lives or the depreciation rates used Gross carrying amount and accumulated depreciation at the beginning and end of the period 8 Transition to MPERS Cost amortisation model Cost model Fair value model Removal of cost that cannot be capitalised, e.g. borrowing cost Perform fair valuation Opening balance of carrying amount Capital maintenance model Cost model Determine the cost of the biological asset Amortise the cost until the date of transition Other issues to consider: What if the plantation was bought from a third party? How is the cost of the biological assets going to be reconstructed? 9
Transition to MPERS Significant impact expected on biological assets Retrospective adjustments No transition exemption provided for first-time adopter. Apply requirements retrospectively at the date of transition. Significant impact on earnings reporting. If applying fair value model, need to fair value biological assets for the opening balances at the date of transition and closing balances for comparative period. 10 Key differences with MFRS Biological assets Bearer biological assets Consumable biological assets Plants Others MFRS 116 apply, except for produce growing thereon Cost depreciation model Agricultural produce Revaluation depreciation model Continue to apply MFRS 141 Fair value unless clearly unreliable Produce of the bearer plant will still need to be fair valued 11
Agenda Accounting for specialised activities Agriculture Property development Service concession arrangements Extractive activities Revenue recognition by property developers in Malaysia PERS MASB 32 =Except borrowing cost MPERS Section 34 13
Property development activities under MFRS NOW 1 Jan 2017 Revenue recognition Inventories IC 15, Agreements for the Construction of Real Estate MFRS 102, Inventories New revenue standard, MFRS 15, Revenue from Contracts with Customers MFRS 15, Revenue from Contracts with Customers and MFRS 102, Inventories Land held for development Property, plant and equipment OR Investment property OR Inventory Property, plant and equipment OR Investment property OR Inventory KPMG Malaysia publication A new era without FRS 201 14 Property development Key differences between MPERS and MFRS MPERS MFRS Subsequent measurement Borrowing costs cannot be capitalised. Borrowing costs that are directly attributed to construction are capitalised. 15
Agenda Accounting for specialised activities Agriculture Property development Service concession arrangements Extractive activities Recognition and measurement MPERS Financial asset model Intangible asset model 17
What are service concession arrangements? Government or public sector Public infrastructure Develop or upgrade Operate and maintain Private sector Common features: The grantor controls or regulates what services the operator must provide using the assets, to whom, and at what price, and also controls any significant residual interest in the assets at the end of the term of the arrangement Does not provide guidance on accounting by grantor 18 Example Construction phase Operation phase 0 Year 5 Year 30 Service Cash inflow Cash outflow Construct a road None Construction costs Operate and maintain a road Road tolls Operating costs What kind of asset should the operator recognise? 19
Construction phase Operator does not recognise concession infrastructure as its property, plant and equipment ( PPE ) Operator does not control the infrastructure Dr??? XXX Cr Revenue for the construction XXX Financial asset to the extent that it has an unconditional right to receive cash irrespective of usage of the infrastructure initially measured at fair value AND/ OR Intangible asset to the extent it receives a right to charge users initially measured at fair value 20 Financial asset vs. Intangible asset Test your knowledge What asset should the operator recognise in these cases? Grantor pays operator a fixed amount that does not depend on usage of infrastructure Users pay operator for use of infrastructure Grantor pays operator according to the use of the infrastructure ( shadow tolls ) Users pay operator for the use of infrastructure, and Grantor pays short between actual revenue and predetermined level ( shortfall guarantee ) 21
Operation phase Operation revenue is accounted for in accordance with Section 23, Revenue Financial asset payments received are allocated between pay down of the financial asset and compensation for operation services. Intangible asset charge users charges for use of the infrastructure are recognised in revenue as earned. Construction Phase Operation Phase 22 Transition to MPERS Date of transition e.g. 1 January 2015 Service concession arrangement entered before the date of transition and ends after the date of transition entered after the date of transition and ends after the date of transition New arrangements Apply prospectively Continue to use its existing accounting treatment Apply prospectively to service concession arrangement Apply the financial asset model and/or intangible asset model 23
Agenda Accounting for specialised activities Agriculture Property development Service concession arrangements Extractive activities Recognition and measurement Expenditure incurred on acquisition or development of tangible or intangible assets used in extractive activities Obligation to dismantle or remove an item, or to restore the site Apply MPERS Section 17, Property, Plant and Equipment and Section 18, Intangible Assets Apply MPERS Section 17, Property, Plant and Equipment and Section 20, Provisions and Contingencies 25
Transition to MPERS Transition exemption May elect to measure oil and gas assets at the amount determined under the PERS at the date of transition, provided the first-time adopter used full cost accounting under PERS. Shall test those assets for impairment at the date of transition. 26 MFRS standards related to extractive activities MFRS contains the following industry specific standard and interpretation: IFRS 6, Exploration for and Evaluation of Mineral IFRIC 20, Stripping Costs in the Production Phase of a Surface Mine 27
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