A bearer plant is a living plant used for production or Agricultural product supply.
An example of this type of asset can be, for example, a plantation of trees that produces coffee beans.
This plantation should be recognized as property, plant, and equipment because its use is similar to using a machine by an entity.
That is, the machine’s function as such is the production of the goods, and in the same way, the producing plant’s function is the production of goods agricultural.
Therefore, the coffee beans produced by the plantation must be recognized as biological assets until the point of harvest; at that moment, these will become inventories.
For a plant to be within the scope of IAS 16, it must meet the following requirements :
The plant is expected to carry out agricultural products‘ production or supply process for more than one accounting period.
For example, an entity invests 200,000 dollars in a cucumber crop.
This plantation expects to produce goods after two months.
However, the company expects this planting to have a useful life of 10 months.
After this, the entity will use the land for another purpose.
In this example, the entity must recognize the disbursements should be recognized in profit and loss.
The second requirement is that this asset is unlikely to be sold as agricultural products.
For example, a company has a plantation of 30,000 trees that are expected to produce mandarins within 12 months.
After that, the plantation will be available for sale.
These trees do not meet the bearer plant definition because they are assets held to be sold in the normal course of the operation.
They must be recognized as inventories.
Accounting recognition of bearer plants
IAS 16 regulates the accounting recognition of bearer plants.
An asset with these characteristics must be measured at cost in the initial recognition.
This cost includes all those necessary disbursements to put the bearer plant in condition to produce agricultural products as established according to the entity’s management.
How do you know when a production plant is ready to start the production stage of agricultural products?
Paragraph BC82 of the basis for conclusions in IAS 16 states that a bearer plant will be in the location and condition necessary to operate in the manner intended by management when it is considered to have reached the maturity point.
This point is reached when the plantation achieves a slightly constant production over time.
Determining the maturity point is essential to know up to what point the costs associated with the construction of the asset must be capitalized.
For this, the entity manager must make a professional judgment to determine this point.
For example, an entity acquires land to plant 50,000 trees to produce plums.
This type of plantation begins to bear the first fruits after two years; however, it reaches its maturity point in year 7.
This means all the costs associated with the development of the asset must be capitalized until year 7.
At that moment, the asset reaches a relatively constant production degree.
After that, any disbursement associated with the asset must be recognized in profit or loss.
Subsequent measurement of a bearer plant
The subsequent measurement of a bearer plant is regulated in paragraphs 29 to 42 of IAS 16.
This means that in the same way as property, plant, and equipment, an entity will use the cost model or the revaluation model in the subsequent measurement of this type of asset.
If you want to know more information about the revaluation model, I leave the following post for you to read.
Example of bearer plant accounting.
An entity acquires land that amounts to 300,000 dollars.
Over this asset will carry out on a plantation of orange trees.
Management believes the trees will begin to bear fruit after three years.
However, the asset will only reach the maturity point at the end of year 7.
The entity incurs the following costs over the next seven years:
Preparation for sowing: 45,000
Other directly attributable costs: 210,000
To finance part of the project, the company acquires a 10-year loan for $400,000 with an interest rate of 10% per year.
What is the cost for which an entity must recognize the bearer plant in the financial statements?
The calculation of the interest on the loan is as follows:
This asset meets the qualifying asset definition according to IAS 23.
For this reason, it will need more than one accounting period to be in the conditions to operate set out by management.
Therefore, the company must capitalize interest for a value of 217,577, which is equivalent to the financial component of the bank loan until year 7.
Thus, the total cost of the asset on initial recognition is as follows:
Preparation for sowing: 45,000.
Other directly attributable
Financial costs: 217,57
Total asset: 772,577
The land cost should not be included in the cost of the plant and should not be depreciated.
On the other hand, since these assets have unique characteristics depending on the geographic area where they are located, their temperature, and other vital factors, the useful life determination of these assets is a task that the management entity has to do based on its judgment.
On the other side, the company will depreciate the asset under the depreciation methods set out in IAS 16.
Finally, it is essential to say the bearer plants are outside the scope of IAS 41 agriculture; however, the goods produced by this plant are biological assets that are within the scope of this standard.
A qualifying asset is one that necessarily requires more than one accounting period before being ready for use or sale.