INVENTORIES,

AGRICULTURAL ASSETS
AND IMPAIRMENT
Module No. 5

BATHEOAX
Conceptual Framework and Accounting Standards

LEARNING OUTCOMES RELEVANT STANDARDS

At the end of this module, you are expected to: The following standards are essential for this
1. Understand, explain and apply the module.
classification, measurements exclusion, 1. Inventories (PAS 2)
and net realizable value of Inventories; 2. Agricultural assets (PAS 41)
2. Understand, explain and apply the 3. Impairment of Assets (PAS 36)
recognition, measurement, gains and
losses of Agricultural assets and
government grants;
3. Identify the situations when impairment
loss is recognized or when can be reversed
and measure the recoverable amount of an
asset;
4. Understand and explain cash generating
unit.
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Pre-Activity
Try to answer the following questions.
1. Enumerate and explain the different cost formulas.
2. Differentiate biological asset from agricultural produce.
3. Explain what is an impairment loss.

The objective is to prescribe the accounting treatment for inventories, to provide guidance on the
determination of cost, cost formulas and its subsequent recognition as an expense, including any write
down to net realizable value.

INVENTORIES
Scope
PAS 2 generally applies to all inventory, except;

(a) Work In Progress arising under construction contracts, including directly related service
contracts (PAS 11 Construction Contracts).
(b) Financial instruments (PAS 32 Financial Instruments: Disclosure and Presentation and PFRS
9 Financial Instruments).
(c) Biological assets related to agricultural activity and agricultural produce at point of
harvest (PAS 41).
(d) Inventories of agricultural and forest products, mineral ores, and agricultural produce to
the extent that they are measured at net realizable value in accordance with the well-
established practices in certain industries. When such inventories are measured at NRV,
changes in that value are recognized in profit or loss in the period of change.
(e) Commodity broker who measure their inventories at fair value less cost to sell.

Definition of Inventories
Inventories are assets:

(a) held for sale in the ordinary course of business;

(b) in the process of production for such sale; or
(c) in the form of materials or supplies to be consumed in the production process or in the
rendering of services.

Measurement of Inventories
Inventories shall be measured at the lower of cost and net realizable value.

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Cost of inventories
The cost of inventories shall comprise all costs of purchase, costs of conversion and other costs
incurred in bringing the inventories to their present location and condition.

Cost Inclusions
Includes all the costs incurred in the initial acquisition of an inventory,
such as purchase price, shipping costs, and any import duties and
Costs of purchase
taxes less any trade discounts, rebates and other similar items in
determining the purchase price.
Include costs directly related to units of production, as well as a
Costs of conversion systematic allocation of fixed and variable overheads that are incurred
in converting material to finished goods.
Capitalized only to the extent that they are incurred in bringing the
inventories to their present location and condition.
Example:
 Cost of transporting a product from a factory to its retail
Other costs
location
 Borrowing Costs identifies limited circumstances where
borrowing costs are included in the cost of inventories (PAS
32)

Cost of Agricultural Produce Harvested from Biological Assets

In accordance with PAS 41 Agriculture inventories comprising agricultural produce that an
entity has harvested from its biological assets are measured on initial recognition at their fair
value less costs to sell at the point of harvest. This is the cost of the inventories at that date for
application of this Standard.

Measuring inventory depends on two factors:

 The technique used

 The cost formula applied

The nature of the inventory generally determines the technique and the formula used.

Techniques for the Measurement of Cost

Standard Method Cost
Standard costs take into account normal levels of materials and supplies, labor, efficiency and
capacity utilization. They are regularly reviewed and, if necessary, revised in the light of current
conditions.

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RETAIL METHOD
The retail method is used in retail industry to measure relatively homogenous inventories with
similar margins.

Cost Formulas
Once chosen, the cost formula should be applied consistently to all inventories that have a
similar nature and use.

Specific Identification
The cost of inventories of items that are not ordinarily interchangeable and goods or services
produced and segregated for specific projects shall be assigned by using specific identification
of their individual costs. Examples include rare jewelry and custom made equipment.

First In, First Out (Fifo)

The FIFO formula assumes that the items of inventory that were purchased or produced first
are sold first, and consequently the items remaining in inventory at the end of the period are
those most recently purchased or produced.

Weighted Average
Under the weighted average cost formula, the cost of each item is determined from the
weighted average of the cost of similar items at the beginning of a period and the cost of similar
items purchased or produced during the period.

NET REALIZABLE VALUE

PAS 2 states that an inventory should be measured at the lower of Cost and Net Realizable
Value. Net Realizable Value is the estimated selling price in the ordinary course of business less
the estimated costs of completion and the estimated costs necessary to make the sale.

An asset should not be carried at an amount more than its recoverable amount. NRV estimates
are made at the end of each period to determine whether a write-down for any item of the
inventory should be recognized or reversed.

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Assessing NRV
Circumstances Treatment
If circumstances cause the cost of inventory to be unrecoverable (e.g.
Unrecoverable due to damage or obsolescence), a write-down of the inventory to
NRV is recognized as an expense.
If the circumstances that caused the write-down no longer exist or if
there has been a positive change in circumstances, the previous write-
down is reversed.
Reversals

The new carrying amount is the lower of cost and the revised net
realizable value.
For production materials and supplies, if the NRV is below cost, it
Sold above and may not be necessary to write them down if the finished product in
below cost which they will be incorporated is expected to be sold at or above its
cost.

Estimates of net realizable value are based on the most reliable evidence available at the time
the estimates are made, of the amount the inventories are expected to realize. These estimates
take into consideration fluctuations of price or cost directly relating to events occurring after the
end of the period to the extent that such events confirm conditions existing at the end of the
period.

Recognition as an Expense
When inventories are sold, the carrying amount of those inventories shall be recognized as an
expense in the period in which the related revenue is recognized. The amount of any
write‑down of inventories to net realizable value and all losses of inventories shall be
recognized as an expense in the period the write‑down or loss occurs. The amount of any
reversal of any write‑down of inventories, arising from an increase in net realizable value, shall
be recognized as a reduction in the amount of inventories recognized as an expense in the
period in which the reversal occurs.

Disclosures
The financial statements shall disclose:

a. the accounting policies adopted in measuring inventories, including the cost formula
used;
b. the total carrying amount of inventories and the carrying amount in classifications
appropriate to the entity;

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c. the carrying amount of inventories carried at fair value less costs to sell;
d. the amount of inventories recognized as an expense during the period;
e. the amount of any write‑down of inventories recognized as an expense in the period;
f. the amount of any reversal of any write‑down that is recognized as a reduction in the
amount of inventories recognized as expense in the period;
g. the circumstances or events that led to the reversal of a write‑down of inventories;
h. the carrying amount of inventories pledged as security for liabilities

The objective is to prescribe the accounting treatment and disclosures related to agricultural activity.

AGRICULTURE
Scope
This Standard shall be applied to account for the following when they relate to agricultural
activity:

(a) biological assets, except for bearer plants;

(b) agricultural produce at the point of harvest; and
(c) government grants related to biological assets.

PAS 41 does not apply:

(a) land related to agricultural activity (PAS 16 Property, Plant and Equipment and PAS 40
Investment Property).
(b) bearer plants related to agricultural activity (PAS 16). However, this Standard applies to
the produce on those bearer plants.
(c) government grants related to bearer plants (PAS 20 Accounting for Government Grants and
Disclosure of Government Assistance).
(d) intangible assets related to agricultural activity (PAS 38 Intangible Assets).
(e) right-of-use assets arising from a lease of land related to agricultural activity (PFRS 16
Leases).

Point of Harvest
This Standard is applied to agricultural produce, which is the harvested produce of the entity’s
biological assets, at the point of harvest.

Thereafter, PAS 2 Inventories or another applicable Standard is applied. Accordingly, this

Standard does not deal with the processing of agricultural produce after harvest; for example,
the processing of grapes into wine by a vintner who has grown the grapes.

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The table below provides examples of biological assets, agricultural produce, and products that
are the result of processing after harvest:

Biological assets Agricultural produce Products that are the result

of processing after harvest
Sheep Wool Yarn, carpet
Trees in a timber plantation Felled trees Logs, lumber
Dairy cattle Milk Cheese
Pigs Carcass Sausages, cured hams
Cotton plants Harvested cotton Thread, clothing
Sugarcane Harvested cane Sugar
Tobacco plants Picked leaves Cured tobacco
Tea bushes Picked leaves Tea
Grape vines Picked grapes Wine
Fruit trees Picked fruit Processed fruit
Oil palms Picked fruit Palm oil
Rubber trees Harvested latex Rubber products

Some plants, for example, tea bushes, grape vines, oil palms and rubber trees, usually meet the
definition of a bearer plant and are within the scope of PAS 16. However, the produce growing
on bearer plants, for example, tea leaves, grapes, oil palm fruit and latex, is within the scope of
PAS 41.

Agriculture-Related Definitions
Agricultural Activity
Agricultural activity is the management by an entity of the biological transformation and
harvest of biological assets for sale or for conversion into agricultural produce or into additional
biological assets.

Agricultural activity covers a diverse range of activities. Certain common features exist within
this diversity:

(a) Capability to change. Living animals and plants are capable of biological
transformation;
(b) Management of change. Management facilitates biological transformation by
enhancing, or at least stabilizing, conditions necessary for the process to take place (for
example, nutrient levels, moisture, temperature, fertility, and light). Such management
distinguishes agricultural activity from other activities. For example, harvesting from

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unmanaged sources (such as ocean fishing and deforestation) is not agricultural activity;
and
(c) Measurement of change. The change in quality (for example, genetic merit, density,
ripeness, fat cover, protein content, and fiber strength) or quantity (for example,
progeny, weight, cubic meters, fiber length or diameter, and number of buds) brought
about by biological transformation or harvest is measured and monitored as a routine
management function.

Biological Transformation
Biological transformation comprises the processes of growth, degeneration, production, and
procreation that cause qualitative or quantitative changes in a biological asset.

Biological Asset
A biological asset is a living animal or plant.

Agriculture Produce
This is the harvested produce of the entity’s biological assets.

Harvest
Harvest is the detachment of produce from a biological asset or the cessation of a biological
asset’s life processes.

Bearer Plant
A bearer plant is a living plant that:

(a) is used in the production or supply of agricultural produce;

(b) is expected to bear produce for more than one period; and
(c) has a remote likelihood of being sold as agricultural produce, except for incidental scrap
sales.

The following are not bearer plants:

(a) plants cultivated to be harvested as agricultural produce (for example, trees grown for
use as lumber);
(b) plants cultivated to produce agricultural produce when there is more than a remote
likelihood that the entity will also harvest and sell the plant as agricultural produce,
other than as incidental scrap sales (for example, trees that are cultivated both for their
fruit and their lumber); and
(c) annual crops (for example, maize and wheat).

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Recognition and Measurement

Recognition Criteria
An entity shall recognize a biological asset or agricultural produce when, and only when:

(a) the entity controls the asset as a result of past events;

(b) it is probable that future economic benefits associated with the asset will flow to the
entity; and
(c) the fair value or cost of the asset can be measured reliably.

In agricultural activity, control may be evidenced by, for example, legal ownership of cattle and
the branding or otherwise marking of the cattle on acquisition, birth, or weaning. The future
benefits are normally assessed by measuring the significant physical attributes.

Measurement Criteria
A biological asset shall be measured on initial recognition and at the end of each reporting
period at its fair value less costs to sell.

Agricultural produce harvested from an entity’s biological assets shall be measured at its fair
value less costs to sell at the point of harvest. Such measurement is the cost at that date when
applying PAS 2 Inventories or another applicable Standard.

Fair Value
It is the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date (PFRS 13 Fair Value
Measurement).

Cost to Sell
These are the incremental costs directly attributable to the disposal of the asset, excluding finance
costs and income taxes.

Contract Price
Entities often enter into contracts to sell their biological assets or agricultural produce at a future
date. Contract prices are not necessarily relevant in measuring fair value, because fair value
reflects the current market conditions in which market participant buyers and sellers would enter
into a transaction. As a result, the fair value of a biological asset or agricultural produce is not
adjusted because of the existence of a contract. In some cases, a contract for the sale of a biological
asset or agricultural produce may be an onerous contract, as defined in PAS 37 Provisions,
Contingent Liabilities and Contingent Assets. PAS 37 applies to onerous contracts.

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Gains and Losses

Biological Asset
A gain or loss arising on initial recognition of a biological asset at fair value less costs to sell and
from a change in fair value less costs to sell of a biological asset shall be included in profit or
loss for the period in which it arises.

A loss may arise on initial recognition of a biological asset, because costs to sell are deducted in
determining fair value less costs to sell of a biological asset. A gain may arise on initial
recognition of a biological asset, such as when a calf is born.

Agriculture Produce
A gain or loss arising on initial recognition of agricultural produce at fair value less costs to sell
shall be included in profit or loss for the period in which it arises.

A gain or loss may arise on initial recognition of agricultural produce as a result of harvesting.

Inability to Measure Fair Value Reliably

There is a presumption that fair value can be measured reliably for a biological asset.

However, that presumption can be rebutted only on initial recognition for a biological asset for
which:

 Quoted market prices are not available and

 Alternative fair value measurements are determined to be clearly unreliable

In such a case, that biological asset shall be measured at its cost less any accumulated
depreciation and any accumulated impairment losses.

In determining cost, accumulated depreciation and accumulated impairment losses, an entity

considers PAS 2, PAS 16 and PAS 36 Impairment of Assets.

Once the fair value of such a biological asset becomes reliably measurable, an entity shall
measure it at its fair value less costs to sell.

In all cases, an entity measures agricultural produce at the point of harvest at its fair value less
costs to sell. This Standard reflects the view that the fair value of agricultural produce at the
point of harvest can always be measured reliably.

Government Grants
There are two basic types of government grants, conditional and unconditional.

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Unconditional
An unconditional government grant related to a biological asset measured at its fair value less
costs to sell shall be recognized in profit or loss when, and only when, the government grant
becomes receivable.

Conditional
If a government grant related to a biological asset measured at its fair value less costs to sell is
conditional, including when a government grant requires an entity not to engage in specified
agricultural activity, an entity shall recognize the government grant in profit or loss when, and
only when, the conditions attaching to the government grant are met.

Terms and conditions of government grants vary. For example, a grant may require an entity to
farm in a particular location for five years and require the entity to return all of the grant if it
farms for a period shorter than five years. In this case, the grant is not recognised in profit or
loss until the five years have passed. However, if the terms of the grant allow part of it to be
retained according to the time that has elapsed, the entity recognises that part in profit or loss as
time passes.

Under certain circumstances, government grants do not fall under the remit of PAS 41.

If a government grant relates to a biological asset measured at its cost less any accumulated
depreciation and any accumulated impairment losses, PAS 20 Accounting for Government
Grants is applied.

Disclosure
General
A. An entity shall disclose the aggregate gain or loss arising during the current period on
initial recognition of biological assets and agricultural produce and from the change in
fair value less costs to sell of biological assets.
B. An entity shall provide a description of each group of biological assets.
C. If not disclosed elsewhere in information published with the financial statements, an
entity shall describe:
a) the nature of its activities involving each group of biological assets; and
b) non‑financial measures or estimates of the physical quantities of:
(i) each group of the entity’s biological assets at the end of the period; and
(ii) output of agricultural produce during the period.

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D. An entity shall disclose:

a) the existence and carrying amounts of biological assets whose title is restricted,
and the carrying amounts of biological assets pledged as security for liabilities;
b) the amount of commitments for the development or acquisition of biological
assets; and
c) financial risk management strategies related to agricultural activity.
E. An entity shall present a reconciliation of changes in the carrying amount of biological
assets between the beginning and the end of the current period. The reconciliation shall
include:
a) the gain or loss arising from changes in fair value less costs to sell;
b) increases due to purchases;
c) decreases attributable to sales and biological assets classified as held for sale (or
included in a disposal group that is classified as held for sale) in accordance with
PFRS 5;
d) decreases due to harvest;
e) increases resulting from business combinations;
f) net exchange differences arising on the translation of financial statements into a
different presentation currency, and on the translation of a foreign operation into
the presentation currency of the reporting entity; and
g) other changes.

Additional disclosures for biological assets where fair value cannot be measured reliably
A. If an entity measures biological assets at their cost less any accumulated depreciation
and any accumulated impairment losses at the end of the period, the entity shall disclose
for such biological assets:
a) a description of the biological assets;
b) an explanation of why fair value cannot be measured reliably;
c) if possible, the range of estimates within which fair value is highly likely to lie;
d) the depreciation method used;
e) the useful lives or the depreciation rates used; and
f) the gross carrying amount and the accumulated depreciation (aggregated with
accumulated impairment losses) at the beginning and end of the period.
B. If, during the current period, an entity measures biological assets at their cost less any
accumulated depreciation and any accumulated impairment losses, an entity shall
disclose any gain or loss recognized on disposal of such biological assets and the
reconciliation required by paragraph 50 shall disclose amounts related to such biological
assets separately. In addition, the reconciliation shall include the following amounts
included in profit or loss related to those biological assets:

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a) impairment losses;
b) (b) reversals of impairment losses; and
c) depreciation.
C. If the fair value of biological assets previously measured at their cost less any
accumulated depreciation and any accumulated impairment losses becomes reliably
measurable during the current period, an entity shall disclose for those biological assets:
a) a description of the biological assets;
b) an explanation of why fair value has become reliably measurable; and
c) the effect of the change.

Government Grants
An entity shall disclose the following related to agricultural activity covered by this Standard:

a) the nature and extent of government grants recognized in the financial statements;
b) unfulfilled conditions and other contingencies attaching to government grants;
and
c) significant decreases expected in the level of government grants.

The objective is to prescribe the procedures that an entity applies to ensure that its assets are carried at
no more than their recoverable amount.

IMPAIRMENT OF ASSETS
An asset is carried at more than its recoverable amount if its carrying amount exceeds the
amount to be recovered through use or sale of the asset. If this is the case, the asset is described
as impaired and the Standard requires the entity to recognize an impairment loss. The Standard
also specifies when an entity should reverse an impairment loss and prescribes disclosures.

Scope
PAS 36 applies to all assets except for:

a) inventories (PAS 2 Inventories);

b) contract assets and assets arising from costs to obtain or fulfil a contract that are
recognized in accordance with PFRS 15 Revenue from Contracts with Customers;
c) deferred tax assets (PAS 12 Income Taxes);
d) assets arising from employee benefits (PAS 19 Employee Benefits);
e) financial assets that are within the scope of PFRS 9 Financial Instruments;
f) investment property that is measured at fair value (PAS 40 Investment Property);
g) biological assets related to agricultural activity within the scope of PAS 41;

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h) Agriculture that are measured at fair value less costs to sell;

i) deferred acquisition costs, and intangible assets, arising from an insurer’s contractual
rights under insurance contracts within the scope of PFRS 4 Insurance Contracts; and
j) non‑current assets (or disposal groups) classified as held for sale in accordance with
PFRS 5 Non‑current Assets Held for Sale and Discontinued Operations.

Therefore, PAS 36 applies to (among other assets):

a) Financial assets classified as:

(i) subsidiaries, as defined in PFRS 10 Consolidated Financial Statements;
(ii) associates, as defined in PAS 28 Investments in Associates and Joint Ventures;
and
(iii) joint ventures, as defined in PFRS 11 Joint Arrangements
b) PAS 16 Property, Plant and Equipment
c) PAS 38 Intangible Assets

Indication of Possible Impairment

An asset is impaired when its carrying amount exceeds its recoverable amount.

An entity shall assess at the end of each reporting period whether there is any indication that an
asset may be impaired. If any such indication exists, the entity shall estimate the recoverable
amount of the asset.

Irrespective of whether there is any indication of impairment, an entity shall also:

a. test an intangible asset with an indefinite useful life or an intangible asset not yet
available for use for impairment annually by comparing its carrying amount with its
recoverable amount. This impairment test may be performed at any time during an
annual period, provided it is performed at the same time every year. Different intangible
assets may be tested for impairment at different times. However, if such an intangible
asset was initially recognized during the current annual period, that intangible asset shall
be tested for impairment before the end of the current annual period.
b. test goodwill acquired in a business combination for impairment annually.

In assessing whether there is any indication that an asset may be impaired, an entity shall
consider, as a minimum, the indications from both external and internal sources of
information.

External Source of Information

i) there are observable indications that the asset’s value has declined during the period
significantly more than would be expected as a result of the passage of time or normal
use.

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ii) Negative changes in technology, market, economic or legal environment in which the
entity operates or in the market to which an asset is dedicated.
iii) Increases in market interest rates
iv) the carrying amount of the net assets of the entity is more than its market capitalization.

Internal Source of Information

v) obsolescence or physical damage of an asset
vi) asset is part of a restructuring or held for disposal
vii) worse economic performance of an asset

Dividend from a Subsidiary, Joint Venture or Associate

The investor recognizes a dividend from the investment and evidence is available that:

(i) the carrying amount of the investment in the separate financial statements exceeds the
carrying amounts in the consolidated financial statements of the investee’s net assets,
including associated goodwill; or
(ii) the dividend exceeds the total comprehensive income of the subsidiary, joint venture or
associate in the period the dividend is declared.

Measurement of Recoverable Amount

Under PAS 36, the recoverable amount as the higher of an asset’s or cash‑generating unit’s fair
value less costs of disposal and its value in use.

Fair Value less Costs of Disposal

Costs of disposal includes legal costs, stamp duty and similar transaction taxes, costs of
removing the asset, and direct incremental costs to bring an asset into condition for its sale.

Value In Use (Discounted Future Cash Flows)

In measuring value in use an entity shall:

a) Cash flow projections shall be based on reasonable and supportable assumptions.

b) Projections shall be based on the recent financial budgets/forecasts approved by
management which shall cover a maximum period of five years, unless a longer period
can be justified.
c) Projections beyond the period covered by the most recent budgets/forecasts shall
estimate cash flow projections by extrapolating the projections based on the
budgets/forecasts using a steady or declining growth rate for subsequent years, unless
an increasing rate can be justified.

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Composition of estimates of future cash flows

Estimates of future cash flows shall include:
a. projections of cash inflows from the continuing use of the asset;
b. projections of cash outflows that are necessarily incurred to generate the cash
inflows from continuing use of the asset (including cash outflows to prepare the
asset for use) and can be directly attributed, or allocated on a reasonable and
consistent basis, to the asset; and
c. net cash flows, if any, to be received (or paid) for the disposal of the asset at the
end of its useful life.
Estimates of future cash flows shall not include estimated future cash inflows or outflows
that are expected to arise from:
a) a future restructuring to which an entity is not yet committed;
b) improving or enhancing the asset’s performance;
c) cash inflows or outflows from financing activities; or
d) income tax receipts or payments.

The estimate of net cash flows to be received (or paid) for the disposal of an asset at the
end of its useful life shall be the amount that an entity expects to obtain from the disposal
of the asset in an arm’s length transaction between knowledgeable, willing parties, after
deducting the estimated costs of disposal.

Recognition of an Impairment Loss

If, and only if, the recoverable amount of an asset is less than its carrying amount, the carrying
amount of the asset shall be reduced to its recoverable amount. That reduction is an impairment
loss.

An impairment loss shall be recognized immediately in profit or loss, unless the asset is carried
at revalued amount in accordance with another Standard (for example, in accordance with the
revaluation model in PAS 16). Any impairment loss of a revalued asset shall be treated as a
revaluation decrease in accordance with that other Standard.

Cash Generating Units

Identifying the cash‑generating unit to which an asset belongs
An asset’s cash‑generating unit is the smallest group of assets that includes the asset and
generates cash inflows that are largely independent of the cash inflows from other assets or
groups of assets.

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If there is any indication that an asset may be impaired, recoverable amount shall be estimated
for the individual asset. If it is not possible to estimate the recoverable amount of the individual
asset, an entity shall determine the recoverable amount of the cash‑generating unit to which the
asset belongs.

Cash‑generating units shall be identified consistently from period to period for the same asset
or types of assets, unless a change is justified.

Recoverable amount and carrying amount of a cash‑generating unit

The carrying amount of a cash‑generating unit shall be determined on a basis consistent with
the way the recoverable amount of the cash‑generating unit is determined.

The carrying amount of a cash-generating unit:

a. includes the carrying amount of only those assets that can be attributed directly,
or allocated on a reasonable and consistent basis, to the cash-generating unit and
will generate the future cash inflows used in determining the cash-generating
unit’s value in use; and
b. does not include the carrying amount of any recognized liability, unless the
recoverable amount of the cash-generating unit cannot be determined without
consideration of this liability.

Goodwill
For the purpose of impairment testing, goodwill acquired in a business combination shall, from
the acquisition date, be allocated to each of the acquirer’s cash‑generating units, or groups of
cash‑generating units, that is expected to benefit from the synergies of the combination,
irrespective of whether other assets or liabilities of the acquiree are assigned to those units or
groups of units.

If the initial allocation of goodwill acquired in a business combination cannot be completed

before the end of the annual period in which the business combination is effected, that initial
allocation shall be completed before the end of the first annual period beginning after the
acquisition date.

Testing cash‑generating units with goodwill for impairment

When goodwill relates to a cash‑generating unit but has not been allocated to that unit, the unit
shall be tested for impairment, whenever there is an indication that the unit may be impaired.

A cash‑generating unit to which goodwill has been allocated shall be tested for impairment
annually, and whenever there is an indication that the unit may be impaired.

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Impairment loss for a cash‑generating unit

An impairment loss shall be recognized for a cash‑generating unit (the smallest group of
cash‑generating units to which goodwill or a corporate asset has been allocated) if, and only if,
the recoverable amount of the unit (group of units) is less than the carrying amount of the unit
(group of units). The impairment loss shall be allocated to reduce the carrying amount of the
assets of the unit (group of units) in the following order:

a. first, to reduce the carrying amount of any goodwill allocated to the

cash‑generating unit (group of units); and
b. then, to the other assets of the unit (group of units) pro rata on the basis of the
carrying amount of each asset in the unit (group of units).

In allocating an impairment, an entity shall not reduce the carrying amount of an asset below
the highest of:

a. its fair value less costs of disposal (if measurable);

b. its value in use (if determinable); and
c. zero.

The amount of the impairment loss that would otherwise have been allocated to the asset shall
be allocated pro rata to the other assets of the unit (group of units).

Reversal of Impairment Loss

An entity shall assess at the end of each reporting period whether there is any indication that an
impairment loss recognized in prior periods for an asset other than goodwill may no longer
exist or may have decreased. If any such indication exists, the entity shall estimate the
recoverable amount of that asset.

An impairment loss recognized in prior periods for an asset other than goodwill shall be
reversed if, and only if, there has been a change in the estimates used to determine the asset’s
recoverable amount since the last impairment loss was recognized. If this is the case, the
carrying amount of the asset shall be increased to its recoverable amount. That increase is a
reversal of an impairment loss.

Reversing an impairment loss for an individual asset

The increased carrying amount of an asset other than goodwill attributable to a reversal of an
impairment loss shall not exceed the carrying amount that would have been determined (net of
amortization or depreciation) had no impairment loss been recognized for the asset in prior
years.

A reversal of an impairment loss for an asset other than goodwill shall be recognized
immediately in profit or loss, unless the asset is carried at revalued amount in accordance with

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another PFRS (for example, the revaluation model in PAS 16). Any reversal of an impairment
loss of a revalued asset shall be treated as a revaluation increase in accordance with that other
PFRS.

Reversing an impairment loss for a cash generating unit

A reversal of an impairment loss for a cash‑generating unit shall be allocated to the assets of the
unit, except for goodwill, pro rata with the carrying amounts of those assets.

In allocating a reversal of an impairment loss for a cash‑generating unit, the carrying amount of
an asset shall not be increased above the lower of:

a. its recoverable amount (if determinable); and

b. the carrying amount that would have been determined (net of amortization or
depreciation) had no impairment loss been recognized for the asset in prior
periods.

Reversing an impairment loss for goodwill

An impairment loss recognized for goodwill shall not be reversed in a subsequent period. PAS
38 Intangible Assets prohibits the recognition of internally generated goodwill.

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Self-Check
Basing on your readings, answer the following questions.
1. What are the techniques used in the measurement of inventory cost?
2. What are the different cost formulas used in the measurement of inventory cost?
3. Enumerate the scope of PAS 41.
4. Give examples for each: Biological asset, Agricultural produce and Products
processed after harvest.
5. Give at least 3 indications that an asset may be impaired.

Exercise 1.1 TRUE OR FALSE

Determine whether the following statements are true or false.
___________1. The fair value of a biological asset or agricultural produce should be adjusted
because of the existence of a contract.
___________2. Agricultural produce harvested from an entity’s biological assets shall be
measured at its fair value including costs to sell at the point of harvest.
___________3. Agricultural produce must always be measured at fair value less costs to sell.
___________4. If circumstances cause the cost of inventory to be unrecoverable, a write-down
of the inventory to NRV is recognized as an expense.
___________5. There is an impairment loss when the carrying amount of an asset is greater
than its recoverable amount.
___________6. A reversal of an impairment loss for an asset that is carried at revalued
amount in accordance with PAS 16 shall be recognized immediately in profit
or loss.
___________7. An asset’s cash‑generating unit is the smallest group of assets that includes
the asset and generates cash inflows that are largely dependent of the cash
inflows from other assets or groups of assets.
___________8. PAS 36 applies to financial assets classified as subsidiaries, associates and
joint ventures.
___________9. A reversal of an impairment loss for a cash‑generating unit shall be allocated
to the assets of the unit, except for goodwill, pro rata with the carrying
amounts of those assets.
___________10. Once a cost formula is chosen, it should be applied consistently to all
inventories that have a similar nature and use.

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Exercise 1.2 IDENTIFICATION

Identify the terminologies best described by the following statements.
___________1. It comprises the processes of growth, degeneration, production, and
procreation that cause qualitative or quantitative changes in a biological asset.
___________2. It is the estimated selling price in the ordinary course of business less the
estimated costs of completion and the estimated costs necessary to make the
sale.
___________3. It assumes that the items of inventory that were purchased or produced first
are sold first, and consequently the items remaining in inventory at the end of
the period are those most recently purchased or produced.
___________4. It includes costs directly related to units of production, as well as a systematic
allocation of fixed and variable overheads that are incurred in converting
material to finished goods.
___________5. It is the detachment of produce from a biological asset or the cessation of a
biological asset’s life processes
___________6. These are assets that are held for sale in the ordinary course of business, in the
process of production for sale or in the form of materials and supplies to be
consumed in the production process.
___________7. It is the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the
measurement date
___________8. This is a type government grant related to a biological asset measured at its
fair value less costs to sell that is recognized in profit or loss when, and only
when, the government grant becomes receivable.
___________9. This refers to a common feature of an agricultural activity in which living
animals and plants are capable of biological transformation.
___________10. This cost formula is used for inventories that are not routinely mass-produced
or ordinarily interchangeable.

INVENTORIES, AGRICULTURAL ASSETS AND IMPAIRMENT| Module No. 5