Summary
In an agricultural company that has biological assets with transformation capacity, given its transformative nature, events related to changes or the creation of assets are identified, opposed by nature but not mutually exclusive. This article addresses the main problems of agricultural accounting, such as the timing and requirements for recognition of assets and their changes, determination of the chargeable cost, selection of the accounting treatment and determination of increases or reductions of the chargeable cost, as well as the presentation of assets and their changes in the financial statements.Its fundamental contribution lies in the fact that it provides all the theoretical - practical foundation considering the importance in the financial statements of measuring the present value of the future benefits that these assets will generate at the time of accounting closing.
Abstract
In an agricultural company that possesses active biological with transformation capacity, given its changing nature, are identified events related with changes or creation of assets, opposed by nature but not excluding to each other. the main problems of the agricultural accounting are approached, as they are it the moment and requirements of recognition of the assets and their changes, determination of the cost activable, selection of the countable treatment and determination of the increases or reductions of the cost activable, as well as the presentation of the assets and their changes in the countable states.Their fundamental contribution resides in that offers the whole theoretical base - practical whereas clause the importance in the financial statements of measuring the current value of the future benefits that these goods will generate to the moment of closing accountant.
Introduction
The International Accounting Standards known as IAS are the response to a globalized economy, as a need to unify accounting information in order to make it more understandable for everyone. Its proper implementation generates changes in two areas:
- The accounting process Presentation in the financial statements
Particularly in the Cuban economy (from the changes in the economic policy supported by the Guidelines of the Economic and Social Policy) a change of scenario has occurred in the companies, which is decisive to assume the changes in the accounting management that They are presented with IAS and International Financial Reporting Standards (IFRS). Basically, IAS 41, Standards for Agriculture, aims to answer three fundamental questions in relation to biological assets and agricultural products:
- When should they be recognized or incorporated in the financial statements? What value should they be assigned at the time of their recognition? How should the differences in value that may arise when they are appraised on two dates be treated? successive?
In the current conditions of globalization of the economy and therefore highly competitive, companies that do not organize and work well go bankrupt and disappear. The causes of business failures can be grouped into two types of factors: internal and external.
Organizational deficiencies can occur in Internal Factors, such as: lack of strategic diagnosis and poor preparation of personnel. The operational deficiencies include: contraction of sales, deterioration of costs and expenses and reduced profit margins. In the administration of resources and debts, there are limitations such as excess of current and fixed assets, excess of debts and inadequate financial structure. In external factors, negative causes may arise, such as: economic crisis, lack of business competitiveness, delays in technological innovations in customer insolvency, high interest rates and others.
The technical accounting standards in Cuba do not adequately contemplate the determination and presentation of the results of all agricultural activity, which limits the generation of income of the main element generating the result: the production achieved. The objective of this work is to propose procedures for the timely and truthful registration of biological assets and the exposure of the accounting information issued in the agricultural sector in Cuba.
Development
The Standard develops a series of terms specifying the meaning it gives to each one of them, of which the following stand out:
Agricultural Activity: Represents the administration and transformation of biological assets into agricultural products for sale, processing, or consumption in small and medium-sized companies, where, basically, annual crops are carried out continuously without following pre-established rotations schemes.
Biological assets: Includes living plants and animals used in agriculture. They are recognized as biological assets: fruit trees, vines (grape trees), trees whose wood is used for firewood, etc. They can be growing, in production or finished
- In growth: Those that have not completed the biological development process of growth (immature fruits, sowings, fruit trees, forests, etc.) In production: Those that have completed their development process and are in a position to produce their fruits (plants destined to reproductive functions, fruit and flower trees in production, etc.) Finished: Those that have completed their biological development process and are able to:
- Be sold Transformed into agricultural products Used in other production processes.
Agricultural products: They are the fruits obtained from biological assets or from the completion of the biological process. These will be taken into account until their disposal or until they are used as input for another production process.
Results from agricultural activity: It is the separation of the fruits of a biological asset or the cessation of its vital process. In the different agricultural activities it adopts the specific name of harvest, collection, etc. (eg, citrus picking, removal of a living plant from agricultural land for sale, and re-planting (horticulture, cutting trees).
Consumable Biological Assets: They are biological assets that must be collected because they are, in themselves, the primary agricultural product. Examples include: annual crops such as corn, rice, barley, and trees grown for lumber or pulp.
Going deeper on these definitions, we find that the biological transformation process in the agricultural company gives rise to the following results:
Changes in biological assets, through:
- Growth (increase in the quantity or an improvement in the quality of a certain animal or plant, for example weight gain or growth of a crop) Degradation (decrease in the quantity or a deterioration in the quality of the animal or plant, for example effects of diseases in animals or crops) Procreation (obtaining additional animals or plants) Obtaining agricultural products, understood as obtaining the separation of the products of a biological asset or the cessation of its vital process. By products we mean the result of such a process.
The Standard describes the accounting treatment to be carried out on biological assets throughout the aforementioned periods of growth, degradation and procreation, as well as the initial measurement of agricultural or agricultural products.
By delimiting the scope of agricultural activity, IAS 41 emphasizes the biological transformation that underlies any agricultural production process, giving it the character of a differentiating element compared to other economic activities.
According to this approach, managing the development of the life cycle of living organisms, either with a view to their sale or subsequent consumption on the farm itself, or to obtain agricultural products, constitutes the primary task of agricultural activity at the level technical. Thus, it is understood that the proper interpretation and treatment of the economic effects that arise from the qualitative and quantitative changes caused by the biological transformation represent, to a large extent, the most relevant peculiar problem that must be faced in the accounting field within this sector of exercise.
It is important to note that agricultural products are the products obtained from the biological assets of the company up to the point of their harvest or collection. IAS 41 excludes from its scope of application all those complementary economic activities aimed at the processing of agricultural products after their collection or harvest, even when they are carried out within the farm itself from products harvested in the same and involve the development of a biological transformation process as occurs, for example, with the transformation of milk into cheese or orange into juices or concentrates. In these cases, the provisions of IAS 2 -Inventories- or other applicable standards must be used.
Companies in the agricultural sector are aware that the continuity of their operations is affected not only by the behavior of the prices of the products they sell, but also by how they manage the transformation of biological assets (live animals and plants). That is, they know that the biological asset, like all living beings, will have a process of consolidation, growth (procreation) and degradation and that the company can intervene at each stage of the process, for example, seeking to be more productive (more tons per hectare) and managing the improvement of genetic change (create other varieties or improve the current one).
Thus, the agricultural activity for the registration of its operations requires an accounting model different from the historical cost, because a biological asset undergoes transformations that alter its characteristics throughout its life, and reporting these changes under the model in question it would not reflect this transformation in the company's financial statements. IAS 41 “Agriculture” is the standard that regulates the accounting treatment of this type of operations and makes the financial information consider such biological changes, incorporating the concept of fair value.
In updating the Cuban economic model, it is recognized that the socialist state enterprise will continue to be the main form of the national economy. Hence, change is an urgent need in the country's business system to adapt to the different economic, technological, commercial, and labor scenarios in which companies move today to guarantee not only their survival, but also to develop and conquer new markets.
In the current conditions of Cuba it is necessary to particularize in some definitions associated with IAS 41 Agriculture:
- Permanent agricultural plantations, that is, those whose estimated production period is greater than one year and as such will be treated as Tangible Fixed Assets, amortizing them as established. The promotion for the replacement and increase of permanent agricultural plantation areas will be considered in the Plan for Financing Investments. The registration of permanent plantations as Tangible Fixed Assets will be carried out at the planned cost, according to the cost sheets. The excess of real cost with respect to the cost consigned in the sheets affects the result of the company. The agricultural plantations under development are controlled by ages and areas taking into account the characteristics of the plantation, until they reach their productive cycle at which time they become part of the tangible fixed assets,in the case of citrus, this period is five years, however, the accounting does not record the age separation of the developments.
The requirements for its application include the follow-up of certain mandatory steps for the registration, measurement and exposure of biological assets in certain areas of the agricultural sector:
- Classify assets for agricultural activity according to their destination Select the active market Classify assets according to the market Determine the cost of biological assets Particularize in their registration and control Present in the Financial Statements
For the first step, it is considered that the omission of the probable destination of the biological assets in IAS 41 and the use of the concept of Fair Value for these resources without this distinction is not precise, so it is proposed to present the biological assets within the State of Situation classifying them initially according to their destination, that is, if they are going to be destined for sale or if they are going to be used as a factor of production in the normal course of agricultural activity, according to the following characteristics:
As Current Assets if:
- They can be exchanged for cash or cancel an obligation They are goods intended for sale in the normal course of activity They are goods that are in the process of production for sale or that are generally consumed in the production of goods or services that are intended for the sale.
These assets go through different phases in their development, so they undergo a transformation process, hence the following should be taken into account in the analysis:
- Growing biological assets: promotion Finished Biological Assets, intended for sale: breeding, fruits, etc. Agricultural products intended for sale: cereals, fruits, wood Goods to be used as a factor of production: seeds, seedlings.
As tangible fixed assets if:
1. They can be employed in some income-producing activity: permanent grasslands, fruit trees, forests.
Assets for sale would be classified and measured as follows:
1. Assets intended for sale and that have an active market in their current condition.
Fair Value = Market Value - Direct Marketing Expenses.
Where, the Fair Value is the amount for which an asset can be exchanged or a liability settled, between two duly informed parties that carry out a free transaction. The contractual relationships between two entities are not considered.
2. Assets for which there is no active market in their current condition, but there is for similar assets with a more advanced or completed development process.
In this case, biological development must be taken into account, therefore if they are in the initial stage of their development, they would be measured at the replacement cost of goods and services used to obtain a similar good on the accounting closing date (12/31), since at this time it is not possible to determine the yield of the crop. If found after the initial stage, they would be measured at the discounted net present value of the cash flow receivable (NPV).
To determine the NPV, the following aspects must be estimated in a reliable and verifiable manner:
a) Expected selling price
b) Additional disbursements until the sale, not yet accrued at the closing date of the period.
c) Risks associated with the culmination of the development process (Prices, biological development, climatic effects, etc.)
d) Discount rate to be used (in this case it is proposed to use the long-term interest rate for investments in agriculture as the discount rate, as it is more reliable in the agricultural sector in Cuba)
Assets that are going to be used for production in the normal course of agricultural activity are based on the replacement cost method as the basic measurement criterion, since in this case biological transformation is not recognized.
Replacement cost = Sum of goods and services used to obtain a similar good (on the measurement date, usually at the end of the period)
Based on this criterion, it is necessary to establish whether there is an active market. In the case of permanent plantations, there is no active market in their current condition; for a correct measurement it is prudent to separate its development by stages with its corresponding measurement as shown below:
1. From the beginning until the end of the growth or development process
Measurement: At the replacement cost of the goods and services necessary to obtain a similar good. Example: Fruit trees before producing
2. From the start of production until a production in volumes and commercial quality is achieved
Measurement: At the replacement cost of the goods and services necessary to obtain a similar good less the net amount obtained from the realization of the products obtained. Example: Fruit trees at the beginning of production
3. From the moment a production in volumes and commercial quality is achieved until the end of the biological development process
Measurement: At the replacement cost of the goods and services necessary to obtain a similar good plus the costs attributable to the maintenance of the biological asset in production less accumulated depreciation.
The remaining costs must be assigned to obtaining the biological asset under development for sale (production) Example: Fruit trees in growth and production stage
4. From the end of the biological development process until the end of the useful life of the good
Measurement: At the replacement cost of the goods and services considered in the previous stage, computing the changes in their prices, less accumulated depreciation.
The calculation of accumulated depreciation begins from the third stage, that is, when the development process ends and the value of the plantations is transferred to the tangible fixed assets account
In Cuba, a depreciation rate of 15% per year is established for these plantations, taking into account that the historical cost method is used for the valuation of these assets.
The author of the research proposes that the calculation be carried out according to the method of production units:
Original value - Residual value / Total estimated production x Production obtained in the period
The next three steps are closely related so your explanation was previously implicit.
In step five it is considered:
For the opening in books, the classification of assets in current and fixed. In the first case, it is debited to the Agricultural production in process account and it is credited to the State Investment for the fruits in production, in the second case it is charged to Temporary Investments and it is paid to the State Investment, for plantations under development and for plantations in production are considered tangible fixed assets considering accumulated depreciation according to the method explained above.
For the recording of costs and expenses accrued and paid, the costs incurred in the accounting period according to the previous classification and the expenses associated with the harvest, mainly salary. The asset is debited increasing its value and salary expenses, it is credited to Cash in Bank.
For the revaluation of biological assets on the date of harvest, the results for possession excluding the depreciation corresponding to the exercise of the assets in production. If the result is positive, it is debited to the Agricultural production in process account and the Utilities account is credited, otherwise, it is debited to the Losses account and credited to assets.
For the registration of the finished Production, it is debited to the Inventory account that increases with the value of the harvest expenses and is credited by the Agricultural Production in process and the salary expenses associated with the harvest.
For the recording of the sale, the fair value is determined as stated above, to determine the cost of sales it is necessary to take into account the result for possession, which is the result of the difference between the cost of production or fair value at cost (in date of harvest) and fair value at the date of sale. It is charged to Cash in bank, cost of sales and Distribution and sales expenses; is credited to Sales Revenue and Inventory. Consequently, if the result is positive, it is recorded to the Profits account, if it is negative, to the Loss account.
At the end of the accounting period, according to the proposed procedures, it is necessary to record the revaluation of these assets at their replacement cost. In this way, the results for possession of biological assets will be counted according to their classification. For plantations that are under development, the Investments in Process account is charged and the Utilities account is credited; for plantations that are in production, it is debited to the Tangible Fixed Assets account and credited to the Accumulated Depreciation and Profits accounts respectively; for fruits that are in process at the end of the period, it is charged to the account Agricultural production in process and it is credited to Utilities, if the result is negative, the process is contrary to that described above for all cases.
When the plantations reach the end of their biological development after five years, they are transferred from the Agricultural production in process account to the Tangible fixed assets account. The accumulated depreciation of these fixed assets during the accounting year is fully charged to the cost of production of the harvested fruits and is calculated on the basis of the production already obtained during the period, at the cost of production of the growing fruits at the end of the year will be charged the depreciation corresponding to the period in which those fruits will be harvested.
In the Exposition of the results for any type of activity, the results from sales are usually presented, specifically for agricultural activity and according to the following proposal two other aspects must be included: the result of production and the result of possession of biological assets, which marks the novelty of the issue addressed in the current conditions of Cuba and is shown in a condensed way in the following figure:
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- Condensed income statement for agricultural activity
Figure 1. Condensed income statement for agricultural activity
Conclusions
1. The divorce between the International Accounting Standards and the Cuban Financial Reporting Standards in the field of Agriculture limits the evaluation of Heritage in Cuban agricultural companies.
2. The regulatory ignorance of the characteristics of biological assets impacts on the recording, measurement and analysis as well as on the presentation of the results.
3. Changes in fair value less costs to sell will significantly affect the variability of the results of the companies since they originate gains and losses that must be recorded year by year and regardless of the situation of the assets to those it affects.
Bibliography
- Meigs and Meigs. Accounting base for the taking of Managerial Decisions. Eighth edition. Finance and Prices Department. Havana city. 1996 Bujanda, F. et al. »Application of current values in agribusiness». CPCECF-Accounting Research Area, 1994. International Accounting Standard No. 41 issued by the International Accounting Standards Committee, 2001. Maldonado R., Study of general accounting. Edition Félix Varela, Havana, 2006 Works- Agricultural Accounting
