Topic 7 Self Generating and Regenerating Assets

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Topic 7 Self Generating and Regenerating Assets

• SGARAS

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Recap

• How are assets defined?
• When should assets be recognised?
• How are they measured?

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Objectives

• understand measurement concepts involved in
  accounting for SGARAs
• practically demonstrate accounting techniques
  used for SGARAs
• evaluate the accounting and measurement
  techniques used in accounting for SGARAs.

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SGARAs (AADB1037)

• Definition
• non-human-related living assets unless held for
  the primary purpose of aesthetics, heritage,
  ecology, the environment, or recreation.
• eg. forests, livestock, ornamental trees, parks
  and gardens, biotechnological assets.
• Std not applicable to SGARAs held for primary
  purpose of aesthetics, heritage, ecology,
  environment or recreation

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Types of SGARAs

• Bearer - revenues are generated by producing
  output more than once.
• e.g. vines in vineyards, wool from sheep, but
  note that the vineyard and sheep are the SGARAs
  not the grapes or wool.
• Consumables (non-bearer) revenues are generated
  only once.
• e.g. lambs for slaughter

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Classifying SGARAs

• The new AASB 1040 Statement of Financial
  Position states that he current/non-current
  distinction has changed to allow including items
  with maturities greater than one year as
  current if there is a single identifiable
  operating cycle that exceeds one year (AASB
  1040.4.3 to 4.4), however, additional disclosures
  are then required.
• Bearer SGARAs are most likely non-current assets
• Consumable SGARAs can be either short or
  long-term, but under the new AASB 1040, it
  appears that even if the operating cycle is a
  number of years, the SGARA could still be
  classified as current.

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Classifying SGARAs

• Bearer SGARAs are most likely non-current assets
• Consumable SGARAs can be either short or
  long-term, but under the new AASB 1040, it
  appears that even if the operating cycle is a
  number of years, the SGARA could still be
  classified as current.

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Identification Issues

• Anything that is defined as a SGARA is accounted
  for in the same way. An argument has been put
  forward that different types of SGARAs should
  perhaps have different accounting treatments.

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Separate Identification?

• non-current productive assets - eg. Orange
  groves dairy herds
• non-current inventory - eg. trees for harvesting
  and selling.
• cattle sheep kept for breeding and selling -
  elements of both current (inventory) and
  non-current (producing future revenue)

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How to Record

• Recognise when probable future economic benefit
  (FEB) embodied in SGARA will eventuate
• When value can be measured reliably

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Measurement of SGARAs

• Cost methods
• ignores inputs
• ignores price changes
• time span issues
• decision making benefits

• Value methods
• NPV
• Net market value
• Replacement cost

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Net Market Value

• AASB 1037 requires that SGARAs be measured at
  their net market value at the end of each
  financial year (paragraph 5.2). Where active and
  liquid markets exist for SGARAs the current
  prices from these markets should be used with
  deductions made for any transaction costs such as
  transportation to point of sale or saleyard
  commissions.
• Q What about if there is no active market?

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Net Market Value Defined

• the amount which could be expected to be received
  from the disposal of an asset in an active and
  liquid market after deducting costs expected to
  be incurred in realising the proceeds of such a
  disposal
• Extracted from ASCPA Members' Handbook June 2000
  issue, AASB 1037.

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Recording changes in market values

• Increments/decrements to profit and loss in
  period change occurs
• Revenue recognition on an emerging basis
• e.g. A hazelnut tree generates revenues as it
  matures to its first season of fruit. The sheep
  station generates revenues as animal numbers are
  increased through its breeding program.

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Treatment of non living produce

• e.g. nuts from a hazlenut tree or meat from
  slaughtered lambs
• Difference between the NMV of non living produce
  and costs of extraction are revenues or expenses
  in period the product is extracted
• Non-living produce extracted from a SGARA is an
  asset and its NMV is deemed to be the non-living
  SGARSs cost and account for in accordance with
  AASB1002.

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AASB1037 Disclosure Requirements

• SGARAs to be presented separately in Statement of
  Financial Position
• Nature of the SGARAs with physical quantities
• NMV determination, assumptions and valuer (if
  other than active market)
• Net amt of revenues expenses arisingfrom change
  in NMV by sub-category
• Net amount of revenues expenses arising from
  difference between nmv of non-living SGARAs and
  cost of extraction by sub-category

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Lecture Illustrations

• Lecture Illustration 1 - Net market value
  compared to historical cost
• Lecture Illustration 2 - Example of non living
  produce

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Evaluation of AASB1037

• consistent with conceptual framework concepts
• better to record in a unique way than to not
  record at all or to allow recording without
  direction or regulation
• implies livestock or botany only has value in the
  market place no intrinsic or social benefits.

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Summary of AASB1037

• Use of net market value in an accounting standard
• Recognition of unrealised revenues in profits
• Valuation of inventories at net market values
• Redundancy of cost of goods sold?
• Do they depart from traditional accounting
  principles?
• Highlight the political nature of std setting