CASE PEACH TREE PROJECT
During May 2014 Farmfresh Ltd purchased peach tree rootstock from a supplier and planted a large orchard of 6 000 peach trees. The Company’s Accounting Policy Manual does not explain how to account for peach trees because this Farmfresh Ltd has not previously planted trees. The Chief Accountant thought AASB 141 Agriculture would be an appropriate source of guidance but also remembered hearing about a change to the Standard, while attending an accounting conference for professional development.
The Chief Accountant decided to ask the assistant accountants to analyse the alternatives and make a recommendation to the Company about how to account for the peach trees. The following additional information was provided at the Peach Tree Project briefing:
- The peach trees cost of $100 000 for “one-year old” rootstock and $20 000 labour costs for planting during 2014
- Cost of $10,000 were incurred on spraying the orchard with insecticide which is done annually to control pests
- Cost of $24,000 were incurred on fertiliser to enhance the growth of the trees
- The peach trees takes four years to mature and then begin bearing fruit
- After maturity, peach trees have a useful life of 8 years and no residual value
- Peaches are harvested in late Summer so there won’t be any peaches (produce) on the peach trees at the Company’s reporting date of 31 March
- “2-year old” peach tree rootstock cost 50% more than “1-year old” rootstock
- Sales of planted peach trees are rare
- Peach trees can be valued using a discounted cash flow model based on estimated cash flows over the remaining life of the trees, using estimates based on long-term average trends in prices and district-specific long term average yields for peach trees
- A variation on the previously mentioned discounted cash flow valuation method is to use a discounted cash flow model based on management’s estimated yields for the specific orchard
- Farmfresh Ltd can continue with the current version of AASB 141 or be an early adopter of the new version of IAS 41
- Farmfresh Ltd relies on the qualitative characteristics specified in the Framework to guide choice when permitted within Accounting Standards
The assistant accountants couldn’t agree. Some decided to write an individual response while others chose collaborate in groups of two or three and write a group response. For team responses, a brief account must be provided of the contribution of each member of the team (part f) below).
a) Identify the key accounting policy issue(s) of the peach tree project. (10%)
(HINT: Accounting Policy include: Definition, Recognition, Measurement, and Disclosure)
b) Describe a total of two principles that are relevant to the accounting policy issue(s). (15%)
(HINT: Identify: Based on AASB and Describe)
c) Describe two comprehensive policies to account for the peach trees. Label each policy clearly (e.g., i) Current AASB 141 policy and ii) Revised IAS 41/AASB 116 policy. The first policy must comply with the current version of AASB 141. The second policy must comply with the 2014 revisions to IAS 41. In answering part c) you should describe the policy in words. Please do NOT attempt to justify the policy or write about how it complies with Standards in your answer to part c) because that discussion belongs in part (d). (20% marks)
d) Evaluate each policy in terms of its consistency with the principles that you identified in part b). You may also refer to other principles if applicable. Please clearly label each evaluation, using the same labels that you used in part c) and state any assumptions that you consider necessary. (35%)
e) Using the information provided in the case above, and the following additional information, if applicable, complete the table below to summarise the financial statement effect of your recommendation for the year ended 31 March 2015. (20%)
Additional information for use in part e) only
Assume that at 31 March 2015 Farmfresh Ltd still has 6 000 peach trees
The most recent sale of established peach trees in the area is $1 per tree when a local fruit grower closed down.
Farmfresh Ltd estimated that if its trees could be valued at $200 000 using a discounted cash flow model based on estimated cash flows over the remaining life of the trees, using estimates based on long-term average trends in prices and district-specific long term average yields for peach trees.
Farmfresh Ltd also estimated that if its trees could be valued at $225 000 using a discounted cash flow model based on estimated cash flows over the remaining life of the trees, using estimates based on long-term average trends in prices.
AASB 2009, AASB 116 Property, Plant and Equipment, Financial Reporting Handbook 2014, Wiley, Australia or http://www.aasb.gov.au
AASB CF 2013-1 Amendments to the Australian Conceptual Framework, Appendix.
AASB 2013, AASB 141 Agriculture, Financial Reporting Handbook 2014, Wiley, Australia or http://www.aasb.gov.au
EY 2014, IFRS Developments: Bearer Plants – the new requirements, EY http://www.ey.com/Publication/vwLUAssets/IFRS_Developments_Issue_84:_Bearer_plants_-_the_new_requirements/$File/Devel84-Agriculture-July2014.pdf
Rankin, S., Stanton, P., McGowan, S., Ferlauto, K. and Tilling, M. 2012, Contemporary Issues in Accounting, Chapter 10, pp. 275-306, Wiley, Australia.
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