THE MALAYSIAN ASSOCIATION OF CERTIFIED PUBLIC ACCOUNTANTS
(Persatuan Akauntan Awam Bertauliah Malaysia)
MALAYSIAN ACCOUNTING STANDARD
Accounting for Pre-cropping Costs
The Standard, which has been set in bold type, should be read in the context of the background material and implementation guidance.
Introduction
1. This Standard deals with costs relating to plantation operations incurred in the period prior to the produce or crop being harvested or otherwise
derived. These costs are referred to as pre-cropping costs in this Standard. The objective of this Standard is to ensure uniformity of treatment and
reporting of pre-cropping costs in Malaysian plantation operations.
Scope
2. This Standard should be applied in accounting for all pre-cropping costs incurred as part of plantation operations.
3. Plantation operations covered by this Standard include, but arc not restricted to the cultivation of oil palm, rubber, cocoa, sugar, tea, fruit crops and
other perennial rootstocks with useful lives spanning more than one accounting period but do not apply to:
a. forests and forestry products
b. cultivation of cash crops
c. subsistence farming
4. It is not intended that this Standard be in conflict with International Accounting Standards but that it be complementary. The International Accounting
Standards that are of particular relevance to pre-cropping costs in plantation operations are:
IAS 4 - Depreciation Accounting
IAS 16 - Accounting for Property. Plant and Equipment
Definitions
5. The following terms are used in this Standard with the meanings specified:
Rootstock refers to a perennial crop bearing tree, shrub or plant from which produce is harvested on a regular basis.
Pre-cropping costs are expenditure on new planting or replanting of root-stock prior to their maturity including expenditure on land preparation, roads,
drains, plants, planting, fertilisation, irrigation and labour. Such expenditure would also include general overhead expenditure which can be directly
attributed to the development of the rootstock
Plantation operations refer to cultivation and management of rootstock which typically have a long useful life in an estate as a business or part of a
business.
Maturity is that time when the rootstock is deemed to have come into bearing and is thus suitable for commercial harvesting. Scout harvesting is
regarded as cropping prior to maturity.
Croprefers to produce harvested regularly from a rootstock.
Useful life is the period from maturity until the rootstock is no longer capable of producing substantially the yield of a mature rootstock.
New planting costs are pre-cropping costs which are incurred in planting in an area not previously cultivated as a plantation or in replanting an area
previously cultivated as a plantation with different rootstocks.
Replanting costs are pre-cropping costs which are incurred in replanting an area previously cultivated as a plantation with the same rootstock.
Recoverable amountis that part of the net carrying amount of pre- cropping costs that the enterprise can recover from the future benefits to be derived
from the rootstock including any net realisable value on disposal.
Depreciable amount is historical cost or other amount substituted for historical cost of the depreciable asset as stated in the financial statements
less the estimated residual value if any.
Accounting Treatment
6. There are several methods used by plantation enterprises to account for and report pre-cropping costs. The two most common methods are:
i. The amortisation method
ii. The capital maintenance method
The amortisation method essentially prescribes that both new planting and replanting costs be capitalised and the costs amortised on a systematic
basis over the useful life of the rootstock. The capital maintenance method involves the capitalisation of only new planting costs which are not
amortised. Replanting costs are written off to income when incurred. The main difference between the two methods is that income is being matched
with historical costs in the amortisation method whereas, in the capital maintenance method, income is being matched with replacement costs.
Between the two methods, the amortisation method is the one that is in conformity with the principles of IAS 16 and is likely to reflect more accurately
the matching of costs with income especially if viewed from the historical cost convention. However, IAS 16 allows for depreciation to he based on a
revalued amount where assets are revalued and in such instances, the depreciation charge would be equivalent to charging replanting costs under
the capital maintenance method, provided it can be demonstrated that the plantation asset is being effectively maintained through regular and
systematic replanting such that the extent of replanting in an accounting period gives rise to expenditure that would approximate the depreciation that
would have been charged under the amortisation method. Therefore, the benchmark treatment in this Standard requires that pre-cropping costs be
accounted for using the amortisation method and the capital maintenance method is an allowed alternative treatment where it can be demonstrated
that income is being matched with replacement costs.
Benchmark Treatment - Amortisation Method
7. Pre-cropping costs incurred under new planting and replanting of rootstocks in plantation operations should be capitalised and shown in the
financial statements under fixed assets. New planting and replanting costs capitalised should be amortised to income over the useful lives of
the rootstocks or in the case of non-renewable leaseholds, over the period of the lease, if shorter.
8. The application of this method in a replanting situation would involve:
a. writing off the balance of the expenditure previously capitalised which is no longer represented by an asset;
b. capitalising the cost of clearing and preparing the ground and planting the new rootstock, and the cost of additional roads, drains, bunds, etc.
and any other expenditure that relates to establishing the new rootstock;.
c. retaining where relevant the previously capitalised value of the original land including roads, drains, bunds, etc. which will continue in use as
they represent a valuable asset regardless of the crop being produced;
d. amortising the expenditure capitalised in (b) and (c) above which are represented by depreciable assets over the useful life of the new
rootstock.
9. The residual value of the rootstock is often insignificant and can be ignored in the calculation of the depreciable amount. If the residual value is likely
to he significant, it is estimated at maturity and taken into account in arriving at the depreciable amount.
Allowed Alternative Treatment Capital Maintenance Method
10. Pre-cropping costs incurred under new planting of rootstocks in plantation operations should be capitalised and shown in the financial
statements under fixed assets. Where it can be demonstrated that income is being matched with replacement costs, replanting costs may be
charged to income in the period in which the expenditure is incurred and new planting costs capitalised need not be amortised.
11. New planting costs capitalised are not amortised or depreciated as the useful life of the capital asset is effectively maintained through a regular and
systematic programme of replanting which results in replanting costs in an accounting period approximating the depreciation that would have been
charged under the amortisation method, based upon revalued pre-cropping costs. Replanting costs are thus regarded as substitutes for
amortisation and are taken to represent the costs of a continuous rejuvenation process for the plantation asset. In order to ensure that income is
being matched with replacement costs, the following criteria are required to be met before this method can be adopted:
a. the replanting expenditure charged to income as a percentage of the capitalised value of the plantation asset (including land) in any one year
is normally not significant arid remains relatively constant;
b. replanting is carried out regularly such that the average proportion per annum of the area commenced to be replanted to total planted area by
rootstock for say, the last five years is not less than the proportion that one year hears to the total life span of the relevant rootstock;
c. there is a planned replanting programme in existence which is designed to systematically cover the entire planted area and in the case of
leaseholds, the remaining period of the lease is in excess of one full planting cycle; and
d. the plantation operations are managed essentially as one asset and where the plantation operations concerned are held under several
corporations or legal entities, the companies should adopt the same method of accounting for pre-cropping costs and an appropriate portion
of the group’s annual replanting expenditure should be borne by each company and reflected in their separate financial statements.
Newly established plantation operations are unlikely to be able to demonstrate that income is being matched with replacement costs and would,
therefore, be required to adopt the amortisation method of accounting for pre-cropping costs.
Components of Pre-cropping Costs
12. Pre-cropping costs should include all expenditure that can be directly attributed to the new planting or replanting of a rootstock prior to its
maturity and should initially be measured at cost.
13. Examples of directly attributable costs arc:
a. land preparation including roads, drains and irrigation;
b. seedlings, nursery costs and other planting materials;
c. maintenance costs such as weeding, pest control, treatment for diseases, pruning and fertilisation;
d. labour.
14. Administration and other general overhead expenses are not included in pre-cropping costs unless they can he directly attributed to the bringing of
the rootstock to maturity. Financing costs that are attributable to new planting or replanting and that are incurred prior to maturity are sometimes also
included in pre-cropping costs. The inclusion of financing costs in pre-cropping costs should be guided by International Accounting Standard 23,
Capitalisation of Borrowing Costs.
15. Subsequent expenditure relating to the plantation asset should be added to the carrying amount of the asset to the extent that the expenditure
increases the future economic benefits that an enterprise can expect from the originally assessed standard of performance of the existing
asset. All other subsequent expenditure should be recognised as expenses and charged to income in the period in which they are incurred.
16. Expenditure incurred on plantation operations subsequent to maturity and the commencement of commercial harvesting should normally be
charged to income. Only subsequent expenditure that increases the future benefits from the existing asset beyond its previous level may be included
in the gross carrying value of the plantation asset. Examples of future benefits include:
a. an extension in the useful life of the rootstock;
b. an increase in productive capacity or yield;
c. an improvement in the quality of the harvest.
Annual maintenance and repair expenses incurred subsequent to maturity and the commencement of commercial harvesting should normally form
part of the expenditure charged to income for the current year.
Accounting for Tax Effects
17. The tax effects of timing differences arising from pre-cropping costs should be accounted for using a tax effect accounting method.
18. Under current Malaysian tax legislation, replanting costs arc normally allowed as a deduction from taxable profits in the year in which they are
incurred and there will be a timing difference arising between the taxable income and accounting income for a period due to the difference in the
replanting costs allowed for tax and the amortisation charge to income. In the case of new planting, there would also be a timing difference arising
from the charge to income on new planting costs and the capital allowances granted for tax purposes. These timing differences are reversible and
should be accounted for using a tax effect accounting method as prescribed under International Accounting Standard 12, Accounting for Taxes on
Income.
Revaluations
19. Pre-cropping costs capitalised may be revalued and included in the financial statements at valuation.
20. Pre-cropping costs accounted for under the amortisation and capital maintenance methods may be revalued and included in fixed assets at
valuation. The capital maintenance method of accounting for pre-cropping costs would in fact be particularly appropriate for an enterprise that, in
addition to meeting the criteria set out in paragraph 12, revalues its pre-cropping costs on a regular basis. Where pre-cropping costs are revalued,
the principles of International Accounting Standard 16 on the revaluation of fixed assets and the treatment of revaluation surpluses or deficits would
he applicable.
Recovery of the Carrying Amount
21. The carrying amount of pre-cropping costs in the financial statements should be reviewed periodically in order to assess whether the
recoverable amount has declined below the carrying amount.
22. The gross carrying amount of pre-cropping costs is normally recovered on a systematic basis over the useful life of the rootstock. If the usefulness or
economic value of the rootstock is permanently impaired e.g. by disease or crop obsolescence, the recoverable amount may become less than the
net carrying amount. In these circumstances, the net carrying amount of pre-cropping costs is reduced to the recoverable amount and the difference
is charged to income immediately, unless it reverses a previous revaluation, in which case it is charged to equity to the extent of the previous
revaluation surplus. A subsequent increase in the recoverable amount should be recognised as income, to the extent of the previous decline
charged to income.
23. Partial replanting occurs for a variety of reasons including crop disease, pests and climatic conditions. If the partial replanting expenses are
considered normal and not excessive and when combined with the existing capitalised pre-cropping costs, do not exceed the recoverable amount,
they can be included as part of pre-cropping costs and capitalised.
Retirements and Disposals
24. Pre-cropping costs capitalised should be eliminated from the financial statements on disposal of the rootstock or when no further benefit is
expected from the use and disposal of the rootstock. Gains or losses arising from the retirement or disposal of the rootstock should be
recognised in the income statement.
25. Pre-cropping costs on rootstocks which are no longer actively harvested and are held for disposal or alternative uses, should be stated at the lower
of their net carrying amount and net realisable value. Any expected loss is charged immediately to income. On retirement or disposal of a previously
revalued pre-cropping cost, the difference between the net disposal proceeds and the net carrying amount is normally charged or credited to income.
The amount standing in revaluation surplus following the retirement or disposal of the rootstock may be transferred to retained earnings.
Disclosure
26. In addition to the specific disclosures required by International Accounting Standards 4, 5 and 16, the following further disclosures should be
made in the financial statements:
a. basis or bases used in determining the gross carrying amounts of pre-cropping costs.
b. expected useful lives of the various rootstock and their normal periods to maturity.
c. a reconciliation of the gross amounts of pre-cropping costs at the beginning and end of an accounting period showing additions, disposals
and other movements. Pre-cropping costs should also be analysed, where possible, by type of rootstock and according to those relating to
matured rootstock and those relating to rootstock which have yet to mature.
d. replanting expenditure charged to income.
27. Enterprises which adopt the capital maintenance method should also provide statistics for at least the last five years on replanting expenses
charged to income, analysed by rootstock, and matured and immatured planted areas analysed by rootstock. Enterprises are also encouraged
to disclose the amount of expenditure that would have been capitalised to fixed assets and the amount of amortisation that would have been charged
to income had the amortisation method been used, and the resulting net effect on income for the accounting period.
28. Where pre-cropping expenses are stated at revalued amounts, the following should be disclosed:
a. the basis used to revalue the assets;
b. the effective date of the revaluation;
c. whether an independent valuer was involved;
d. the revaluation surplus, indicating the movements for the period.
Transitional Provisions
29. Plantation enterprises are allowed a transition period of up to five years from the time this Standard comes into force in which to comply with
the requirements of this Standard.
30. A change in accounting policy to account for pre-cropping costs in compliance with this Standard should be accounted for and disclosed in
accordance with International Accounting Standard 8, Unusual and Prior Period Items and Changes in Accounting Policies.
Effective date
31. This Standard will be mandatory for all members to observe in respect of financial statements of plantation enterprises relating to accounting
periods commencing on or after the date stated in the "Contents" page of the Approved Accounting Standard section of the members'
handbook.
The Malaysian Association of Certified Public Accountants
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