Financial Accounting and Theory: AASB 141 and Farm Accounting

This financial accounting assignment explores the distinction between biological assets and agricultural produce as defined by AASB 141. It details the accounting treatment, including fair value measurement and journal entries for biological assets. The solution analyzes the recognition and valuation of biological assets and agricultural produce, with a focus on the specific examples of Nerang Orange Farms Ltd and Lynne Melinda Ltd. The assignment includes journal entries to recognize the harvest of oranges and lavender, as well as the calculation of net profit for both companies. It also references key accounting principles and relevant literature.

Running head: FINANCIAL ACCOUNTING AND THEORY 1
Financial accounting and theory
Name
Institution

FINANCIAL ACCOUNTING AND THEORY 2
Question 1
Distinction between biological asset and an agricultural produce
AASB 141 Agriculture sets out the accounting for agricultural activities, the conversion of
biological assets to agricultural produce (Argilés, Garcia, & Monllau, 2011). According to this
principle, biological assets as living plant and animals like trees in a farm, sheep or cattle into
agricultural produce. Consequently, agricultural produce is considered to be the harvested
products from the organization’s biological assets.
Agricultural produce and biological assets that form part of the farming activity are basically
recognized firstly at fair value instead of cost. This aspect is for the reason that biological
assets are usually not attained via purchase transactions. For instance, prevailing biological
assets might yield offspring (Fischer, & Marsh, 2013). In organizations that do not attain
biological assets, the fair value is considered to be equal to the procurement consideration that
is paid.
Biological assets in a latitude of AASB 141 are basically evaluated on initial recognition and at
consequent dates of reporting at fair value less probable selling cost unless the fair value
cannot be consistently measured (Hinke, & Starova, 2013). Agricultural harvest is basically
measured at fair cost less valued selling costs at the harvesting point. This is because
harvested products are considered to be a merchantable commodity and there is no
measurement consistency, thus exclusion for produce. (AASB 141.12)
A gain on biological assets initial recognition at fair cost less selling costs and variations in
fair cost less selling biological assets costs in a period are basically incorporated in the loss or
profit by an organization (Bohušová, Svoboda, & Nerudová, 2012). A gain on initial
recognition as a result of harvesting of agricultural produce at fair cost less selling costs are
basically incorporated in loss or profit by a company for the financial year in which it occurs.
(AASB 141.28)

FINANCIAL ACCOUNTING AND THEORY 3
All the costs that are correlated to biological assets that are basically measured at fair cost are
recognized as expenditures when sustained by an organization other than costs to procure
biological assets (Burritt, & Cummings, 2002). The variation in fair cost of biological assets is
considered to be a part unit price change, and part physical change since separate disclosure of
the two elements are encouraged but not necessarily needed. Agricultural produces are
measured at fair value less selling at yield costs and this measurement is deliberated as the
value of the harvest at that period for the purpose of stocks. (AASB 141.13)
Question 2 (a): Nerang Orange Farms Ltd.
Journal entries to recognize the harvest of oranges on 30th April 2010
Dr. Inventory – Oranges $300,000
Cr. Revenue – Harvest of Oranges $150,000
Cr. Cash (Muhammad, & Ghani, 2013) $150,000
Net profit
Nerang Orange Farm
Limited
Net profit for the year ending 30 June 2017
US$ US$
Estimated fair value of the orange trees 1500000
Orange trees had a fair value
1,600,00
0
Oranges sold
(310,000
)
1,290,00
0
Cost of sorting, picking, and packing 150,000
(1,440,00
0)
Net profit 60,000
Question 2 (b): Lynne Melinda Ltd (Marsh, & Fischer, 2013)

FINANCIAL ACCOUNTING AND THEORY 4
Journal entry required on 31st 2009
Dr. Lavander Farm (Asset) $100 000
Cr. Revenue – Harvest of Oranges (Muhammad, & Ghani, 2013) $90 000
Cr. Cash $10 000
Net profit
Lynne Melinda Ltd
Net profit for the year ending 30 June 2017
US$
Fair value less costs to sell 100000
Picking costs and delivery charges
(10,000
)
Net profit 90,000

FINANCIAL ACCOUNTING AND THEORY 5
References
Argilés, J. M., Garcia-Blandon, J., & Monllau, T. (2011). Fair Value versus historical cost-
based valuation for biological assets: Predictability of financial information. Revista
de Contabilidad, 14(2), 87-113.
Bohušová, H., Svoboda, P., & Nerudová, D. (2012). Biological assets reporting: Is
the increase in value caused by the biological transformation revenue? Agricultural
Economics/Zemedelska Ekonomika, 58(11).
Burritt, R. L., & Cummings, L. S. (2002). Accounting for biological assets-the experience of
an Australian conservation company. Asian Review of Accounting, 10(2), 17-42.
Fischer, M., & Marsh, T. (2013). Biological assets: Financial recognition and reporting using
us and international accounting guidance. Journal of Accounting and Finance, 13(2),
57.
Hinke, J., & Starova, M. (2013). Application possibilities and consequences of biological
assets and agricultural produce reporting in accordance with IFRS principles in the
Czech Republic. Agris on-line Papers in Economics and Informatics, 5(4), 77.
Marsh, T., & Fischer, M. (2013). Accounting for agricultural products: US versus IFRS
GAAP. Journal of Business & Economics Research (Online), 11(2), 79.
Muhammad, K., & Ghani, E. K. (2013). A fair value model for bearer biological assets in
promoting corporate governance: A proposal. Journal of Agricultural Studies, 2(1),
16-26.