 Hello and welcome to this session. This is Professor Farhad and this session we're going to be looking at accounting for biological asset and or agricultural activity. This is IAS 41. It's covered in international accounting. I'm not sure how much it will be covered on the CPA exam, but it will be beneficial to learn about this topic. As always, I would like to remind you my viewers to connect with me. If you have a LinkedIn account, please connect with me. If you don't have a LinkedIn account, I strongly suggest you create one. It's very important for your professional image and network development. YouTube is where you would need to subscribe. This is where I house all my lectures. Please like my lectures, share them, put them in the playlist, let the world know about them. If you're benefiting from my lectures, I have over 1500 accounting, auditing and tax lectures. Others might benefit as well. This is my Instagram. I'm trying to grow my Instagram. This is my Facebook. I do have some product on Gumroad and this is my website. So the first thing we want to learn about it, what are biological assets? Because the topic is about biological assets. Biological assets are assets that are living plant or animals owned by a business for agricultural activity. So it's either living plant or animal. So what are we talking about here? We're talking about chicken, cannabis plant, corn, cow, horse, tomatoes. All of these are considered biological assets. Now they are owned by a business for the purpose of agricultural activity. Now we need to define what is agricultural activity? Well, agricultural activity is the management by an entity for the purpose of biological transformation, which is growth of a biological asset. We already know what biological assets for the purpose of sale. For example, you might be growing cannabis plant to sell them. So that's a biological asset and the process is a transformation process. The growth process is an agricultural activity. Or you have a biological transformation, which is a form of reproduction of a biological asset for the purpose of creating additional biological asset. So that's another definition of agricultural activity. What does that mean? Well, there we go. You have a chicken in a hand and they create new chicken. So now you are creating new biological asset. And or biological transformation of a biological asset for the purpose of harvesting agricultural produce from that asset. Now, what is harvesting? Harvesting is when you detach the product from the biological asset. For example, notice here, we are milking the cow. The milk itself is the agricultural product and the process of milking is called harvesting. So all of these are considered agricultural activity. So biological transformation result in qualitative as well quantitative. So quantitative means you have more units. Qualitative, for example, this cow might grow or even might die for that matter, but it's qualitative. And notice here, the quality of the plant will change. So biological transformation results in both qualitative and quantitative. Now, what does the application of IAS 41 applies to? So what does it apply to? Simply put, we need to know what does it apply to? Well, the standard applies to account for the following when they relate to agricultural activity. Now I have to be really specific. What does it apply to? Biological assets. So it applies to biological assets. What are biological assets? Living plant and living animals except bearer plants. Now, what is bearer plants? We're going to talk about bearer plants in a moment. So any biological plants, any plant, tomato, corn, anything like that, any animal, that's biological plants and section, AIS section 41 applies. So biological assets are living animal and plants. Now, what are bearer plants? Bearer plants versus consumable plants is a living plant that used in the production of or supply of agricultural produce. So it's going to be giving us agricultural produce. But hold on a second, when the tomato plant give us agricultural produce and expected to bear produce for more than one period. So here's the kind of where it's kind of, it's a little bit different than consumable plant. Here's me and my son collecting cherries. This is one he was around six months old. Okay. And this is the cherry tree and I'm collecting cherries. This is my son and I, now he's three years old and believe it or not, this is the same agricultural tree. So notice two years later, we are still collecting the cherries. This is the agricultural produce from the same tree. This is a bearer plant. In other words, it's there. It was there expected to bear produce for more than one period, for multiple period. And has a remote likelihood of being sold as agricultural produce except for incidental scrap sales. For example, eventually this, this cherry, this cherry tree will eventually dies away, maybe 10, 15 years down the road. Then they'll have to cut it. Maybe they will sell the wood or maybe they use the wood for something else. Okay. But that's not what the tree is for. Okay. The same thing with applies to apples, which is I like to also pick up, pick my own apples. It applies to peaches. It applies to plums. Same exact concept. Those are bearer plants. Now what are consumable plants? Well, that's my son and I also now we are harvesting strawberry. See that field right here? This is a strawberry field. We're harvesting strawberry. Also, here's my son and I, we are harvesting corn. Now guess what? If I go back next year to that corn field, I'll, by the way, this tree right here is from the movie Shawshank Redemption. Okay. Just kidding. But it's, it resemble it, right? You guys see that? All right. Now it's one of my favorite movies. Now, if I go back to that strawberry field, or if I go back to that corn field, this is what it would look like. Nothing. Just every year they, it's a consumable plant. They remove the whole thing and they will start over again. So it's not a bearer plant, like an apple tree, like a cherry tree. Same thing applied to the cannabis plant. Cannabis plant are considered consumable. So every year they have to, they have to plant them. Same concept applies. Also, AIS 41 applied to agricultural produce. What are agricultural produce? Milk, eggs. What comes out of the biological asset? What can you detach from a biological asset at the point of harvest? Tomatoes, so on and so forth. It also applied to conditional and unconditional grant relating to biological asset measure at fair value, less cost to sell. So conditional grant from the government. Sometimes the government might give you a money for the purpose of agricultural purpose or for the purpose of forming. AIS 41 will apply. It tells you when is it revenue, when do you have to wait, whether, whether it's revenue or not. So just, we don't have to worry about this. I'm not going to cover this. FYI. Okay. Now, here are some examples of biological assets. Once again, sheep, you get wool out of the sheep, trees, you get fat. And by the way, the wool eventually they will form into a yarn and you can turn it into carpet, many other product. Trees, felt trees, you can turn it into lumber. And this is a picture of mine. And this is some felt trees. And I was, you know, this is this picture in the mountains of Lebanon. I don't remember what year it was a springtime. I was helping my brother clear some land and we planted cherry trees. So we did not put a parking lot or something like that. So we plant trees, but we need to remove the old trees that doesn't produce anything. So I happened to be there and this picture was taking dairy cattle, milk, okay, cutting plant grapevine. Those are all biological asset. And this is the agricultural produce, the harvested produce from a biological asset. What can you get out of the biological asset? AIS 41 does not apply to the following. So you might, you have to know this land related to the agricultural activity. So there we go. You have the land and you have, I'm really bad at planting. And this is a tree. This is a tree, which is a biological asset. And this is the land. Those are two separate assets. The land is the land itself and the tree is the tree. So it doesn't relate, AIS 41 does not relate to the tree. Remember, it relate to biological asset. The land is not a biological asset. Also, it doesn't apply to bearer plants. This could be a bearer plant. This could be an apple tree, okay. It doesn't apply. However, it applies to the produce. So there's apples in that tree. Those are agricultural produce. AIS 41 applies to those produce. It doesn't apply to government grant related to bearer plants. Again, bearer plants, they follow a different rules. They follow AIS 16. Intangible asset related to agricultural activity. Any intangible asset, that's an intangible, separate intangible asset. It has nothing to do with biological asset. Any right of use arising from a lease of land relating to agricultural activity, anything that has to do with the lease or the right use of an asset, that's a lease. That's a separate asset. Okay. So it doesn't apply to those. Recognition, okay. An entity shall recognize a biological or agricultural produce when the following exit. Basically like an asset. When do you recognize an asset? When the entity controls the asset as a result of a past event. For example, you could purchase a cow, okay. Or from, you can get a cow from procreation. Once you have that cow and you could use that cow, either to milk it or for whatever reason you want to, whatever reason you need to, you have it under control. Two, it's probable that future economic benefit associated with the asset will flow to the entity. For example, milk production. You have the cow and the future benefit is milk production. And obviously you have to have the fair value or cost of the asset can be measured reliably. Okay. If you bought the cow, well, you have, you know how much you paid for it. And if it's a baby calf, it's what's the fair value if the cow was procreated. Okay. So basically, this is if you bought it, you know how much it is. And this is a baby calf. For example, you did not buy it, but what's the fair value? Okay. What's the fair value? Measurement. We have two types of assets, biological asset and agricultural, agricultural asset, biological asset, cow, chicken, cotton plant, so on and so forth, shall be measured in on initial recognition. And at the end of reporting period at fair value, less cost. What does that mean? It means you have to report it at fair value, but less cost to sell. It's either at the initial as well at the end of every period. Okay. When there is no fair value, then you have to determine cost or cost minus deep mines, accumulated depreciation, minus impairment, if you don't know the fair value. Agricultural asset. What are we talking about here? Agricultural produce harvested such as eggs, milk, apple, cherries, those are extracted from the biological asset. Again, they should, they're supposed to be reported at fair value, less cost to sell at the point of harvest, at the point of harvest. So when you collect them, you report them at fair value. Let's just kind of look at an example. Let's assume a farmer harvested just for the sake of example, 100,000 bushels of, bushels of corn. Okay. And let's assume the fair market value per bushel is $3. Well, you have $300,000 on your hand. Okay. And let's assume the cost to sell is minimal. Let's assume it's zero. There's no cost to sell. Someone just, they will show up and they'll pay you $300,000 just, just to keep the example, just keep, to keep the example simple, so you understand. And basically, this is, I'm just trying to illustrate the concept. So what do you do when, when you, what does the farmer do? And this is basically a concept that doesn't have to be 100% this way. But basically, they will debit some sort of an inventory account, $300,000. And they will have an gain of $300,000 gain. You want to call it gain? You want to call it revenue? It doesn't matter. Now the cost to grow those, the corn, the corn will be already recorded. So this is gain, but there's also cost, but we're not recording the cost here. We're only recording the gain or revenue. Let's assume someone shows up the next day and paid this farmer $300,000. Okay. So somebody paid $300,000. We debit cash $300,000. And we credit the inventory $300,000. So basically, the inventory is gone. Basically, we sold the corn for $300,000. Now let's assume that did not happen. Let's assume instead, nobody bought the corn and we kept the corn. And a year later, the price of bushel went to $330,000. Now the price of bushel is $330,000 a year later at the end of the period. Now you have $100,000. Now you have to calculate the fair value, which is $330,000. So what you have now is you have an inventory, an additional $30,000, and you have, sorry, a gain of $30,000. Sorry. Let's assume the price of the per bushel went down to $270,000 instead. Then you have $270,000. Now you have a loss of $30,000, and you reduce your inventory by $30,000. Now is this exactly how it happens? Is this exactly how it happens? No, because remember, there's a cost of sale. I'm just giving you the concepts. You understand what does it mean, fair value less cost of sale. Just for simplicity, I'm keeping the cost of sale out. There could be transportation cost of sale. You might have to transport this according to the market. It might cost you $3,000. Then guess what? You don't have $300,000 in inventory. You have $297,000. It's the fair value minus the cost of sale. So FYI, you know how it works. And once you have the inventory, an inventory, then AIS-2 inventories might apply to that inventory. Subsequent measurement, the same thing. You have to find the change. What happened? From the fair value minus less cost of sale, from the beginning of the period till the end of the period, fair value minus the cost of sale. And anything should go into the profit and loss. So whatever you have, again, it goes into the profit and loss statement. It goes in the income statement. Again, if there is no fair market value, then if there is no fair market value, then you have to use the cost minus depreciation. You have to depreciate that asset. Now, when do you start depreciating that asset? That's another different story. When it mature, okay? What does it mean? When it mature, it means it's ready to produce what it's supposed to produce. So if you have a baby cow, if you're just born, you don't, you don't depreciate it because it's not really producing anything to you. You'll have it at cost. Once that baby cow became a cow and you're milking it, that's producing, then you will start to depreciate it. It mature. Same thing with an apple tree. When you plant an apple tree, it may take five, seven, I'll think eight years for the apple tree to start producing, but it doesn't mature until later. So you don't depreciate that asset until it mature, okay? You might have a loss on the initial recognition of a biological asset because the cost of the cell are deducted in determining the fair value, less the cost of the cell. What does that mean? It means let's assume you bought a cow, just I don't know how much the cows go for. I'm just going to say a thousand dollars, but I really don't know. A thousand dollars, you bought the cow for a thousand dollars. Now to resell that cow today, you have to take it to the market. You have to pay transportation cost. You have to pay commission and you have to pay admission fee to the market. So you have to pay in total 200 dollars, okay? So you paid for it a thousand, but it's, if you really want to sell it, fair value, less cost, the cell is 800. So upfront, kind of in a sense, let's look at the journal entry. The journal entry would look something like this. You paid a thousand. The cow should be valued at 800 and you have a loss of 200 dollars. Now, hold on a second. You might be saying, why did I buy this cow if I'm going to record a loss? Well, you buy the cow for two reasons. Maybe you're going to feed this cow and this cow is going to grow quantitatively, okay? A year from now, this cow, it's heavier, it has more meat and therefore the cow, the fair value of the cow might become 1500. So that's why you bought it. You know, although you're taking a loss if you want to sell it today, okay? Also, you're going to milk that cow. You're going to have agricultural produce from it. So that's why you bought it. You're going to make up this. So just in case you're wondering, why would I buy something and record the loss? Well, because you buy it for future use, okay? Again, may arise on the initial recognition of a biological asset such when a cow is born. So again, the same concept. When a calf is born, let's assume the calf is worth 100 dollars. Then if you want to sell it today, it's going to cost you 25 dollars cost to sell. Therefore, it will be recorded at 75 dollars. Again, we don't depreciate it because it's not producing anything until later. Agricultural product, you know, again, a loss arising on the initial recognition of agricultural produce at fair value. Again, less cost to sell should be included in the profit or loss. So a new harvest that asset, you would record it at cost minus cost to sell. At fair value minus cost to sell. Now, if fair value is not measurable, is not available, if the fair value is not available, is not initially measurable, biological asset should be recorded at cost less accumulated depreciation and impairment. Basically, it's an asset, it's recorded at cost and what comes to cost? It's cost minus depreciation, accumulated depreciation. Let's take a look at this, let's take a look at this balance sheet. This is for canopy growth corporation, which is they have the, the cannabis plan. This is their biological asset. Notice you have to go to note five. This is their amount and notice they have a count receivable cash and receivable, but notice the biological asset. This is a biological asset and the biological, their biological asset is considered a current asset because they expect to sell it within the next, to convert it to cash in the next 12 months. It's not part of, you know, property, plant and equipment. Okay. Overview of biological assets simply put, IFRS require company to carry biological asset at fair value minus cost to sell with revaluation, gain or loss, recognize and the income statement. Now, the U.S. gap, except of course for bearer plants, for bearer plants, either you could use the cost model or the revaluation model. But remember, if you're using the revaluation model, it goes into OCI for the bearer plants because it follows IAS 16, which we talked about already, not in this recording, but in another recording. U.S. gap did not explicitly establish fair value for biological asset, although some agricultural commodity maybe marked to market in certain cases. What does that mean? It means for certain, I'm not going to get into this topic. I do have another recording for another course about it under certain circumstances, certain commodity, as long as they have an established market, like for example, the corn. If you want to know how much the corn is worth today, then you can go on any website and you say, you know, how much the corn is selling it or soybeans or anything like that. There's a market prices readily available. If that's the case, then once you harvest that product, then you can market to market just like similar to the IFRS under certain circumstances. Here's some presentation and disclosure. I'm not going to read over this. You can look at it, you can pose, read it. Additional presentation and disclosure. You have to reconcile everything. You have to tell us, you know, what biological assets you have, their different classification, what happened to them, that they increase in qualitatively, quantitatively, so on and so forth. And here's some presentation and disclosure about any grants received from the government. You know, did you fulfill the conditions, did not fulfill the conditions, the nature of the grant, the purpose of the grant, so on and so forth. So hopefully, this is an overview about AIS 41. And again, there's a lot of pictures of me in this recording just I wanted to illustrate the concept. So I find it, you know, maybe helpful that you guys would like the pictures. If you have any questions about this recording, please email me. If you happen to visit my website for additional lectures, please consider donating. Good luck and study hard, especially if you're studying for your CPA exam.