A Gain Or Loss On Initial Recognition Of A Biological Asset

In the case of biological assets a loss may take place on initial recognition for the reason that costs to sell (which are deducted in arriving at fair value) may surpass the fair value. A profit may arise on initial recognition when, for instance, an animal is born.

Gains or losses on initial recognition of agricultural or biological assets may happen as a result of harvesting. For example, say the fair value of a tonne of grapes is $120 and the fair value of the related grape vines is $1100 at the date of harvest. On initial recognition, a loss of $120 is recognized to record the fair value of the grapes removed from the grape vines. These gains and losses are occasionally referred to as “day one gains or losses” and arise due to the application of the fair value model of valuation.

 Sample Problem and Response to Accounting for Biological Assets:

Gallo Vineyards, CA Inc. owns a plantation forest. As at the end of the reporting period the fair value of the plantation forest, including the land, was $2.5 million. Gallo Vineyards, CA Inc. needs to determine the fair value of the trees excluding the land to comply with IAS 41 at its reporting period. How does Gallo Vineyards, CA Inc. determine the fair value of the trees?

Gallo Vineyards, CA needs to determine the fair value of the land excluding the trees and then deduct that value from $2.5 million.

For items that are either biological assets or agricultural produce, the measurement model to be applied is fair value. For products that are a result of processing after harvest, generally IAS 12 Inventories applies.

Requirement of paragraph 18(b) of IAS 41 in the context of the CESR ruling in respect of immature salmon:

The Committee of European Securities Regulation (CESR) ruled that there was an active market for immature slaughtered salmon, and that an immature slaughtered salmon was “similar” (in accordance with paragraph 18(b) of IAS 41) to an immature live salmon.

In the absence of observable prices in the active market for live salmon, the fair value of live salmon should be determined based on observable prices in an active market for the same category of slaughtered salmon.

The implications of CESR’s ruling are that:

•    The value would need to be adjusted for the fact that one salmon was alive and the other was slaughtered but both had the same weight; and that,
•    a company could not say that fair value of an immature live salmon could not be reliably measured when there was an active market for similar assets – i.e. immature slaughtered salmon.

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