FINANCIAL REPORTING STANDARDS IMPLEMENTATION COMMITTEE

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1 FINANCIAL REPORTING STANDARDS IMPLEMENTATION COMMITTEE FRSIC Consensus 30 Determining the Commencement of Depreciation or Amortisation of Bearer Plants Oil Palm Trees Preamble FRSIC Consensus 30 Determining the Commencement of Depreciation or Amortisation of Bearer Plants Oil Palm Trees was developed by the Financial Reporting Standards Implementation Committee ( FRSIC ) and issued by the Malaysian Institute of Accountants ( MIA or Institute ) on 27 December The Consensus contained herein is issued as part of the Institute s initiatives to promote best practices in compliance with the highest standards in financial accounting. Malaysian Institute of Accountants

2 FRSIC CONSENSUS 30 DETERMINING THE COMMENCEMENT OF DEPRECIATION OR AMORTISATION OF BEARER PLANTS OIL PALM TREES FRSIC Consensus is a guidance issued by MIA and shall be regarded as best practice. It should be read in conjunction with the respective applicable accounting standards. Members of MIA are expected to observe compliance with the consensus issued. In exceptional circumstances where departure is necessary, members shall be prepared to justify the departure. FRSIC Consensus needs not be applied to immaterial items. Nothing in the FRSIC Consensus is to be construed as amending or overriding the accounting standards or other statements adopted or issued by the Malaysian Accounting Standards Board ( MASB ) and other relevant laws. Background 1 Entities other than private entities are required to prepare its financial statements in accordance with the Malaysian Financial Reporting Standards ( MFRS ) framework for annual periods beginning on or after 1 January 2012, with the exception of Transitioning Entities ( TE ). TE are those entities that are subject to the application of MFRS 141 Agriculture and/or IC Interpretation 15 Agreements for the Construction of Real Estate. Hence, the current financial statements of plantation companies in Malaysia may be prepared under Financial Reporting Standards ( FRS ) framework because plantation companies normally fall within the definition of TE. 2 It is noted that the FRS framework does not have a specific standard to deal with accounting treatment for biological assets. However, it is a generally accepted industry practice to account for plantation development expenditures incurred in the period prior to the produce or crop being harvested or otherwise derived, using either: i. cost amortisation method, or ii. capital maintenance method. 3 Under the cost amortisation method, both new planting and replanting costs are capitalised and subsequently, the costs are amortised over the useful life of the rootstocks. Whereas, under the capital maintenance method, an entity capitalises new planting costs which are not amortised while replanting costs are expensed to profit or loss as and when incurred. 2 of 5

3 4 Based on a notice issued by the Malaysian Accounting Standards Board on 28 October 2015, plantation companies (being TE) in Malaysia are required to prepare its financial statements using the MFRS framework beginning on or after 1 January In accordance with the MFRS framework, plantation companies are required to account for bearer plants as property, plant and equipment in accordance with MFRS 116. Scope 5 This Consensus applies to oil palm plantation only. The Issue 6 It is noted that there has been divergence in practice amongst plantation companies in Malaysia (for those that are adopting the cost amortisation method) in relation to the commencement of depreciation or amortisation of oil palm trees. In some cases, oil palm plantation companies commence the depreciation after certain period of planting while others commence the depreciation when the oil palm trees achieve the intended yields, or combination of both. 7 The divergence in practice amongst plantation companies may be due to insufficient guidance to determine when an oil palm tree is in the location and condition necessary for it to be capable of operating in the manner intended by management. Accordingly, different policies are adopted by plantation companies. 8 As oil palm plantation companies are required to comply with the MFRS framework beginning on or after 1 January 2018, the impact of divergence may become more significant as those plantation companies that are currently under capital maintenance method will also be required to depreciate or amortise the bearer plants in accordance with MFRS 116. Consensus and Basis of Consensus Capable of operating in the manner intended by management 9 Paragraph 55 of MFRS 116 states that depreciation of an asset begins when it is available for use, i.e., when it is in the location and condition necessary for it to be capable of operating in the manner intended by management. Depreciation of an asset ceases at the earlier of the date that the asset is classified as held for sale (or included in a disposal group that is classified as held for sale) in accordance with MFRS 5 and the date that the asset is derecognised. Therefore, 3 of 5

4 depreciation does not cease when the asset becomes idle or is retired from active use unless the asset is fully depreciated. However, under usage methods of depreciation the depreciation charge can be zero while there is no production. 10 It is further noted that Basis for Conclusion ( BC ) 66 of MFRS 116 Amendments states that bearer plants meet the definition of property, plant and equipment. The use of mature bearer plants to produce agricultural produce is similar to the use of machinery to manufacture goods. The manner in which an entity derives economic benefits from bearer plants and a production plant is similar and that manner differs from biological assets that are harvested for sale. The progressive decline in the future earning potential of a bearer plant over its life is also similar to other depreciable assets, for example, plant and machinery. 11 Accordingly, FRSIC agreed that the location and condition necessary for it to be capable of operating in the manner intended by management is reflected by the maturity of the oil palm trees. 12 It is important to note that in order to assess whether the bearer plant is capable of operating in the manner intended by management, i.e., functioning properly, an entity shall only assess the technical and physical performance of the bearer plant and not the financial performance of the bearer plant, such as assessing whether the bearer plant can achieve the level of operating margin or quantity of the output ultimately intended by management. Point of maturity 13 FRSIC acknowledged the practical difficulties to determine the point of maturity of the oil palm trees. The point of maturity of the oil palm trees vary from one to another, depending on agricultural inputs and stress factors such as nutrient, moisture, frond retention, soil fertility, texture and structure, and root condition. 14 Nevertheless, FRSIC observed that oil palm plantations generally determine the point of maturity in the following manners: a) Census or survey activity Certain plantation companies conduct a Black Bunch Census ( BBC ) activity before the plot of oil palm trees are declared matured. Crop or yield forecasting on a matured plot of oil palm trees serves as guidance in budget estimation, logistic scheduling and manpower planning. Certain plantation companies also conduct a general survey of the condition of the oil palm trees. During the survey, some of the characteristics that the planters would normally look for 4 of 5

5 are palm appearance, crown disease, dead palm, average bunch weight as well as uniformity of fruits. Once the entity declares the plot of palm trees as matured, planters would normally stop or reduce the upkeep activities conducted when trees are at immature stage. b) Significant change of programmes Upon reaching the point of maturity, plantation companies would normally change the agronomy practices significantly. These may include significant change in the water management, type and dosage of fertilizer application, number and type of pest and disease programme, basal pruning activity and bunch sanitation (also known as ablation) activity. There are also activities which may only take place during matured phase such as frond stacking, bund heightening, programmed loose fruit collection and road side pruning. 15 Based on general observation and scientific researches, an oil palm tree normally reaches its maturity by the age of 36 months. However, the maturity age may be less than 36 months or extended up to 48 months in certain circumstances. For example, oil palm trees may reach maturity in less than 36 months due to new planting materials applied to oil palm trees. 16 Accordingly, determining the point of maturity of oil palm trees requires judgement and an entity shall consider the indicators above to determine the point of maturity of the oil palm trees. Depreciation or amortisation of oil palm trees commences upon the bearer plants reaching the point of maturity. Issuance date of this Consensus 17 This Consensus is issued on 27 December Effective date of this Consensus 18 This Consensus is effective for the period beginning on or after 1 January References MFRS 116 Property, Plant and Equipment MFRS 116 Amendments Agriculture: Bearer Plants (Amendments to MFRS 116 and MFRS 141) 5 of 5