Biological Assets and Fair Value Adjustments
The market value adjustment of biological assets valued by Australian Agriculture Company (AAC), reflect the Cattle fair value adjustments. In the annual report of AAC, this item is recognized as revenue and is recorded in the income statement. The calculation of the amount is done as per the AASB13. Referring to note A3, as a biological asset, AASB 141 agriculture, values the livestock at fair values all the times, prior to sales and harvest. The movements in the price and external factors helps in determining the fair value. It can been seen from the annual report that the cattle fair value adjustments has increased over the year. Reason being rise in the value of herd. The adjustments also include a term biological transformation which, according to AASB 141, includes reclassification of an animal as it goes through the whole process of becoming a trading animal and then it ages and become less valuable.
Making fair value adjustments brings benefits to AAC as they are recognized as unrealised assets, which supported income statement to show a profit. In 2017, they are reported at $300,026,000.
The item ‘Change in fair value of property’ reflects the realisation value of the property held by AAC. In the company’s annual report, it is mentioned that the property is valued independently by the valuers CBRE. They determine the fair value by using the market based direct comparison method. However, as per the AAC report pg. 59, directors determined the fair value with reference to the work of independent valuers and market based evidences. The item affected both the income statement and balance sheet. The calculation is done by analysing the comparable sales and some external factors such as location, size and many more. According to the director’s report, the change in fair value of property, plant and equipment shows an increase of $2.3 million in the value of property, as compare to the $6.2 million increase in the prior corresponding period.The increase is recorded on the balance sheet of the company and as an expense in the income statement before EBITA.
Net profit after tax is basically an income calculated by deducting cost of goods sold, operating expenses, depreciation, interest expense and taxes from the total revenue earned during the year. This item is also shown in the cash flow statement under the head ‘cash flow from operating activities’. The figure is shown in the income statement which is usually the first item displayed in the cash flow statement on the top.
Net Profit After Tax and Net Cash Flow from Operating Activities
Net cash flow from operating activities represented the cash generated by the company from its operations. It is the sum of net profit after tax, adjustments made for the non-cash expenses and changes in working capital. The difference between the figures of these two items is due to their accounting treatment. In income statement, net profit calculation includes all noncash expenses whereas such figures do not reduce the amount of cash, therefore they are added back to the net income to derive at the operating cash flow. Similarly, changes in assets and liabilities are not considered while determining net profit but the same is taken into account at time of calculating cash flow from operating activities.
Part B
Livestock is been shown on the balance sheet under the head ‘current assets’ at $269,850 and also under ‘non-current assets’ at $392,632. According to the note A3, the accounting policies related to livestock states that AAC measured this item at fair value less cost of sales. Sales cost include all the cost required for selling the assets, including freight charges. According to AASB 141, livestock is valued at fair value and once the fair value of biological assets become measurable, the company recognized it at the fair value less cost to sell. In addition to this, if a non-current biological asset meet the conditions of AASB 5 ‘Non-current Assets Held for sale and Discontinued Operations’, then it is assumed that fair value is measurable reliably.
Referring to note A4, the accounting policies for property, plant and equipment, apart from industrial plant and equipment, all are recorded at revalued amount. The amount is the fair value at the date of revaluation less accumulated depreciation and impairment losses. The increment at time of revaluation is been credited to asset revaluation reserve reported under equity section on the balance sheet. All the lump-sum payments related to pastoral and perpetual property leases are classified as land. In addition to this, the industrial land and buildings are reported at historical cost which includes cost of replacing parts. Accumulated depreciation and impairment losses are deducted. As per the pg. 83 of the annual report, depreciation is calculated on straight line method. It is also mentioned on the same page that a property, plant and equipment is derecognized, when it is disposed or when it does not derive any future economic benefits. Any gain or loss on derecognition is included in the income statement at the time when the asset is derecognized. The gain or loss is calculated by subtracting the carrying amount from the net disposal proceeds.
Accounting Policies for Livestock and Property, Plant, and Equipment
Borrowings under non-current liabilities comprises of obligations related to financial leases, secured bank loan facility and convertible notes. In 2017, they are at $362,918,000 which is less than that of in 2016. As per the note C1, AAC has taken Facility A and Facility B loans which are to be paid on June 30, 2018. The interest is been charged at the applicable rate of BBSY + Margin. Financial facilities are also provided on secured basis, keeping fixed and floating assets as security.
AAC issued 160 convertible notes to one of its existing shareholder for $80 million under a deed. They are unsecured and subordinated to the senior bank debt of the company. The face value of the notes is $50,500,000 and the coupon rate is 6 months BBSW rate plus 0.15% subject to a floor of 3% per annum. The value of the notes is the sum of its face value, accumulated amortisation less capitalized costs, fair value of the interest rate and value of other equity securities.
Under, Note to Financial Statements, E1 and E2 includes those commitments and contingencies which are defined as unrecognized items in the annual report of AAC. In note E1, an item named as future minimum lease payments related to non-cancellable operating leases is shown with an amount of $7,718,000, made up of various time periods. As these are unrecognized items so they are not reported on the balance sheet of the company. According to the old standards of leases, ACC report these lease obligations off balance sheet, which means it is not necessary to show these payments as liability in a statement of financial position. Instead the operating leases are recorded under notes. So none of the financial statement is been affected.
IFRS 16 is the new reporting standard which will replace the IAS 17 Leases, with effect from 1 January 2019. Under this new standard, the companies are been obliged to follow a single lessee model, which requires the recognition of assets and liabilities for all the leases except the one which has the term period of less than 12 months or the value of underlying asset is very low. This means that the Lessee cannot classify the leases as operating and financial. They are required to report all the leases on the balance sheet. In case of AAC, the company needs to report its off-balance sheet leases having a time period of more than 1 year, on the balance sheet. This will surely affect the value of its assets and liabilities. In 2017, it has two non-cancellable operating leases amounted to $4,545,000 and $202,000 which are been recorded under notes to financial statements. Once the IFRS 16 becomes effective, ACC has to record these two lease payments on its balance sheet. It will eventually increase its liabilities and affect its financial position. Net profit can also get affected. However, the companies who has applied for IFRS 15 Revenue from Contract with Customers can apply IFRS 16 to their business before its effective date. In addition to this, other future lease payments for motor vehicle and equipment finance which are not recognized also has to be reported on the balance sheet.
Other commitments and contingencies include the information about the commitments made by AAC and the contingencies that have been occurred in 2017. As per note E1, AAC has a purchase contract of $14,065,000 of grain commodities and $42,801,000 of cattle as on 31stMarch 2017. The time period of the contract is 12 months from the balance date. A capital expenditure related to the property, plant and equipment is also contracted.
Note number E2 represents the contingency which is about the native title claims put on some of the AAC’s cattle properties. Discussions with the stakeholders are been there regarding the same and company claims that there is no native title rights found to co-exist with their rights. Also it is expected that it would not have any impact on the business and its growth.
References
Bazley, Mike, Phil Hancock and Peter Robinson, Contemporary Accounting. (Cengage Learning, 2014).
AACo, Annual Reports (2017) <https://aaco.com.au/investors-media/annual-reports>.
Aasb.gov.au, Agriculture (2015) <https://www.aasb.gov.au/admin/file/content105/c9/AASB141_08-15.pdf>.
Aasb.gov.au, Fair Value Measurement (2015) <https://www.aasb.gov.au/admin/file/content105/c9/AASB13_08-15.pdf>.
Aasb.gov.au, Non-current Assets Held for Sale and Discontinued Operations (2015) <https://www.aasb.gov.au/admin/file/content105/c9/AASB5_08-15.pdf>.
Iasplus.com, IFRS 16 — Leases (2018) <https://www.iasplus.com/en/standards/ifrs/ifrs-16>.
Pwc.com, IFRS 16: The leases standard is changing. Are you ready? (2016) <https://www.pwc.com/gx/en/services/audit-assurance/assets/ifrs-16-new-leases.pdf>
Order an Essay Now & Get These Features For Free:
Turnitin Report
Formatting
Title Page
Citation
Outline
