Enquiry:

We are thankful for referring ICAP Selected Opinion No. 1.10 of Volume 19 (XIX) dated November 08, 2013.

In this regard, it is submitted that in the enquiry, three questions were raised, which are being reproduced for your kind consideration:

I) Whether the cost of breeding the bird is to be treated as biological asset or inventory?
2) If it is treated as biological assets at what cost it should be recognized?
3) How the cost of biological assets is to be charged cost of production?

Considering the above question raised, the opinion provided by learned Committee is clear regarding Question 1, however, Question 2 & 3 are answered in generality.

In this regard, you are requested to kindly provide specific answers to Question 2 & 3 above and provide the guidance on accounting treatment of “biological assets” in financial statements i.e. how biological asset is to be recognized and how biological assets will be consumed over its useful life, whether on cost or fair value less cost to sell and how to charge biological assets to cost of production/sales.

Opinion:

The Committee noted the following opinion regarding Question 1 provided by earlier Committee:

As regards to other two questions, the Committee would like to draw your attention to the following relevant paragraph of IAS 41: (underline is ours)

26. A gain or loss arising on initial recognition of a biological asset at fair value less costs to sell and from a change in fair value less costs to sell of a biological asset shall be included in profit or loss for the period in which it arises.

51. The fair value less costs to sell of a biological asset can change due to both physical changes and price changes in the market. Separate disclosure of physical and price changes is useful in appraising current period performance and future prospects, particularly when there is a production cycle of more than one year. In such cases, an entity is encouraged to disclose, by group or otherwise, the amount of change in fair value less costs to sell included in profit or loss due to physical changes and due to price changes. This information is generally less useful when the production cycle is less than one year (for example, when raising chickens or growing cereal crops).

The first part of para 26 explains gain/loss on initial recognition of a biological asset (procreation/ new breed). Whereas, the second part about the changes in fair value less costs to sell of biological assets, represents the difference/changes in value from period to period, normally on an aggregated basis. Changes in fair value may be due to both physical changes and price changes in the market. A reconciliation of changes in the carrying amount of biological assets between the beginning and the end of the period is also required under IAS 41 para 50.

In light of above, the Committee is of the view that fair value and physical changes are required to be taken to P&L account.

(November 07, 2016)