Biological Assets comes under International Accounting Standard IAS 41 Agriculture. IAS 41 Agriculture is the first standard that specifically covers the primary sector. The scope of IAS 41 is accounting for agricultural activity. Agricultural Activity- It is the management of biological transformatRead more
Biological Assets comes under International Accounting Standard IAS 41 Agriculture.
IAS 41 Agriculture is the first standard that specifically covers the primary sector. The scope of IAS 41 is accounting for agricultural activity.
Agricultural Activity- It is the management of biological transformation by an entity and measuring the change in the quality and quantity of biological assets.
Biological Transformation- It comprises the process of growth, degeneration, production and procreation that cause qualitative or quantitative changes in a biological asset
Biological Asset – They are living plants or animals owned by an entity
Agricultural Produce- It is the harvested / detached product of the entity’s biological asset.
IAS 41 does not apply to
Agricultural land
Intangible assets related to agricultural activity
Products that are the result of processing after the point of harvest, for example, yarn, carpet, rubber, wine, etc
The land on which the biological assets grow, regenerate, degenerate.
Biological Assets
Definition
Biological assets are living plants or animals that go through biological transformation, owned by an entity to prepare agricultural produce for the purpose of agricultural activities only.
Living plants include plants that are consumable within 1 year and are harvested. It also includes plants that are used for lumbering and wood-cutting activities.
Farming: They are key to agriculture and food production.
Income: They generate substantial income for businesses in industries such as vineyards, livestock, silviculture, etc.
Sustainability: Properly managing them helps the environment.
Accounting & Presentation
Recognition
Under IAS 41 biological assets are recognised when
The business must have ownership over them from a past event.
The future economic benefits are expected to flow to the business from their ownership.
The cost or fair value of the asset can be measured reliably.
Agricultural produce is recognised
It is recognised at the point of harvest or detachment.
Agricultural produce is derecognised when
They enter the trading.
Enters the production process.
Measurement
Biological assets are measured on initial recognition and at each balance sheet date at their fair value less costs to sell.
Costs to sell are incremental costs incurred in selling the asset.
Agricultural produce is measured at the point of harvest, at fair value less costs to sell at the point of harvest.
Agricultural produce after the point of harvest/ detachment is transferred and treated under the IAS 2 Inventory
Gains & Losses
Gains and losses arising from the initial recognition of biological assets are reported in the statement of profit and loss.
The change in fair value less costs to sell of a biological asset between balance sheet dates is reported as gain or loss in the statement of profit and loss.
A gain or loss arising on initial recognition of agricultural produce at fair value less selling costs is included in profit or loss for the period in which it arises.
Treatment
The sale of agricultural produce is treated as revenue in the statement of profit and loss.
Agricultural produce to be harvested for more than 12 months, livestock to be held for more than 12 months and trees cultivated for lumber are recorded as Biological assets under the Non-current assets head in the balance sheet.
Agricultural produce to be harvested within 12 months, livestock to be slaughtered within 12 months and annual crops like wheat, and maize are recorded as Biological assets under the head Current assets in the balance sheet.
Inventories produced from agricultural produce are presented as Inventory under the head Current assets in the balance sheet.
Deferred Tax Liability A deferred tax liability represents an obligation to pay taxes in the future. These taxes are owed by a company but are not due to be paid until a future date. Companies that incur such an obligation prepare and maintain two financial reports every year: a tax statement and anRead more
Deferred Tax Liability
A deferred tax liability represents an obligation to pay taxes in the future. These taxes are owed by a company but are not due to be paid until a future date.
Companies that incur such an obligation prepare and maintain two financial reports every year: a tax statement and an income statement.
This is because companies maintain their books as per book accounting rules (GAAP/IFRS), but they have to pay taxes according to tax accounting rules, and they each have to follow their own guidelines.
For example, a tax statement follows the cash basis of accounting, and an income statement follows the accrual basis of accounting.
Companies calculate their profit as per the accounting rules as well as tax laws known as accounting income and taxable income, respectively. Some differences arise due to the application of different provisions of law.
These temporary differences are accounted for, recognized, and carried forward in the books of accounts and create deferred tax.
Example
Here is an example of deferred tax liability.
In the given example, tax as per income statement is 70,000, whereas as per tax statement it is 56,000. This temporary difference is termed as deferred tax liability of 14,000.
When accounting income is more than taxable income, it creates Deferred Tax Liability. It will be adjusted in the books of accounts during one or more subsequent year(s).
How Does it Arise?
There are several instances under which a company creates a deferred tax liability. Some other instances are:
Depreciation Methods
One of the most common reasons for deferred tax liability is when a company uses different depreciation methods in the Income and Tax Statement.
Assets are depreciated by calculating the straight-line method in the Income Statement, while the written-down value method is used in the Tax Statement.
Since the straight-line value method produces lower depreciation when compared to the WDV method, accounting income is temporarily higher than taxable income.
The company recognises deferred tax liability as this difference between accounting income and taxable income.
Treatment of Revenue & Expenses
Deferred tax liability can also arise when there is a difference in the way revenue and expenses are treated in books of accounts.
As mentioned earlier, accounting rules follow the accrual basis of accounting while tax laws follow the cash basis of accounting.
Meaning in the tax statement, income and expenses are recorded when they are received or paid, not when they are incurred or realised.
This difference in the treatment of revenue and expenses creates deferred tax liability.
Impact on Financial Statements
Recognising deferred tax liability and its subsequent effect on the company’s financial statement is important as it simplifies the process of auditing and analysing financial reports.
Balance Sheet
Deferred tax liabilities are recorded on the liability side of the balance sheet under non-current liabilities.
Cash Flow Statement
The deferred tax liability is added back to the net income in calculating cash flow from operating activities to show the actual cash flow.
What are biological assets? What is their accounting treatment?
Biological Assets comes under International Accounting Standard IAS 41 Agriculture. IAS 41 Agriculture is the first standard that specifically covers the primary sector. The scope of IAS 41 is accounting for agricultural activity. Agricultural Activity- It is the management of biological transformatRead more
Biological Assets comes under International Accounting Standard IAS 41 Agriculture.
IAS 41 Agriculture is the first standard that specifically covers the primary sector. The scope of IAS 41 is accounting for agricultural activity.
IAS 41 does not apply to
Biological Assets
Definition
Biological assets are living plants or animals that go through biological transformation, owned by an entity to prepare agricultural produce for the purpose of agricultural activities only.
Living plants include plants that are consumable within 1 year and are harvested. It also includes plants that are used for lumbering and wood-cutting activities.
Examples
Examples of biological assets are:
Sheep, pigs, poultry, beef cattle, fish, dairy cows, plants for harvest etc
Importance
Accounting & Presentation
Recognition
Under IAS 41 biological assets are recognised when
Agricultural produce is recognised
Agricultural produce is derecognised when
Measurement
Gains & Losses
Treatment
- The sale of agricultural produce is treated as revenue in the statement of profit and loss.
- Agricultural produce to be harvested for more than 12 months, livestock to be held for more than 12 months and trees cultivated for lumber are recorded as Biological assets under the Non-current assets head in the balance sheet.
- Agricultural produce to be harvested within 12 months, livestock to be slaughtered within 12 months and annual crops like wheat, and maize are recorded as Biological assets under the head Current assets in the balance sheet.
- Inventories produced from agricultural produce are presented as Inventory under the head Current assets in the balance sheet.
See lessWhat is a deferred tax liability?
Deferred Tax Liability A deferred tax liability represents an obligation to pay taxes in the future. These taxes are owed by a company but are not due to be paid until a future date. Companies that incur such an obligation prepare and maintain two financial reports every year: a tax statement and anRead more
Deferred Tax Liability
A deferred tax liability represents an obligation to pay taxes in the future. These taxes are owed by a company but are not due to be paid until a future date.
Companies that incur such an obligation prepare and maintain two financial reports every year: a tax statement and an income statement.
This is because companies maintain their books as per book accounting rules (GAAP/IFRS), but they have to pay taxes according to tax accounting rules, and they each have to follow their own guidelines.
For example, a tax statement follows the cash basis of accounting, and an income statement follows the accrual basis of accounting.
Companies calculate their profit as per the accounting rules as well as tax laws known as accounting income and taxable income, respectively. Some differences arise due to the application of different provisions of law.
These temporary differences are accounted for, recognized, and carried forward in the books of accounts and create deferred tax.
Example
Here is an example of deferred tax liability.
In the given example, tax as per income statement is 70,000, whereas as per tax statement it is 56,000. This temporary difference is termed as deferred tax liability of 14,000.
When accounting income is more than taxable income, it creates Deferred Tax Liability. It will be adjusted in the books of accounts during one or more subsequent year(s).
How Does it Arise?
There are several instances under which a company creates a deferred tax liability. Some other instances are:
Depreciation Methods
Treatment of Revenue & Expenses
Impact on Financial Statements
Recognising deferred tax liability and its subsequent effect on the company’s financial statement is important as it simplifies the process of auditing and analysing financial reports.
Balance Sheet
Cash Flow Statement
- The deferred tax liability is added back to the net income in calculating cash flow from operating activities to show the actual cash flow.
See less