COURSE

MASTERS OF BUSINESS ADMINISTRATION

SUBJECT

ACCOUNTING IN DECISION MAKING GSM5301

LECTURER

PROF. MADYA HASHANAH ISMAIL

ASSINGMENT 2: LTT AQUACULTURE SDN. BHD. CASE STUDY

GROUP 1
MATRIC NO.
PBS1311209

LO NYOK MOOI

PBS1311222

PRIYA DARISINI A/P S. RAJA SINGGAM

GM05256

SUBMISSION
DATE :

19.2.2014

NAME

SITI NURHIDAYAH BINTI CHE RAHIM

QUESTIONS
1. How would you account for the farm land of 17.5 ha.?
LTT Aquaculture Sdn Bhd.s farm land should be accounted as non-current
assets under Property, Plant & Equipment. This farm land was acquired for
use over an extended period of time and considered as long term asset.
Long-term assets are ones the company reckons it will hold for at least one
year. There is usually no intent to sell assets of this type.
Land is non-depreciable non-current asset. Land (but not buildings and
improvements on the land) is not subject to the allowance for depreciation.
The value of land does not get depreciated by any of the causes because
land is assumed to have an unlimited useful life. When a business sells land,
it recovers the cost it paid at purchase. However, the land may subject to
impairment (revaluation) if there is an indication that the land has decreased
in economic value. Buildings or anything else built on or attached to land (real
property) are deem to depreciate.
The farm land covered 17.5 ha, but utilized only 4 ha. According to
Department of Land and Mines, Ministry of Resources and Environment
(MRNE) whether the land is utilized or not, it has land tax need to be paid.
2. How would you account for the concrete ponds?
The concrete ponds are non-current asset and classified as equipment to
breed the empuraus. Depreciation expense should be included as non-current
asset under Property, Plant & Equipment to be depreciated over its economic
useful life.
Installation and shakedown cost (costs associated with adjusting and
preparing the equipment to be used in production) should be capitalized as
equipment cost because they are directly related to assets that will be used by
the firm over several accounting periods and are not related only to current
period earnings.

3. How would you account for broodstocks? Is the accounting for

empuraus not for broodstocks similar?
Broodstock, or broodfish, are a group of mature individuals used in
aquaculture for breeding purposes.1 According to International Accounting
Standard 41 Agriculture (IAS 41) the empuraus in the concrete ponds are to
be classified as biological assets.
Broodstocks are biological asset and accounted as non-current asset
because these mature empuraus are used for breeding purposes and not
expected to be sold within the normal operating cycle of the company. These
broodstocks are used to produce empuraus for sale.
Empuraus not for broodstocks, are for sale and considered as fish inventory
under current asset, this is inclusive of fingerlings exported to other fish
breeders.
4. Applying the accrual accounting, how should expenditure on the land,
maintenance of the ponds and feeding empuraus be treated?
Expenditure on the land
The cost of land is based on its acquisition price. All costs associated with
acquiring land and putting it to use are included in the cost of land. 2
Land purchased by LTT Aquaculture Sdn Bhd should be accounted as noncurrent assets under Property, Plant & Equipment. Any expenses LTT
Aquaculture Sdn Bhd incurred by purchasing the land or by building any
additional fixtures to the land for the purpose of the business shall be
capitalized. By definition a capital expenditure is the purchase or upgrade of
an asset such as property, industrial building, equipment, or any other
purchase that is considered a long-term improvement for the business. These
capital expenditures qualify for income tax deductions for the business
owners.3
The farm land covered 17.5 ha, but utilized only 4 ha. According to
Department of Land and Mines, Ministry of Resources and Environment
(MRNE) whether the land is utilized or not, it has land tax need to be paid.

http://en.wikipedia.org/wiki/Broodstock

https://www.boundless.com/accounting/controlling-and-reporting-of-real-assetsproperty-plant-equipment-and-natural-resources/components-of-asset-cost/cost-of-land/
3

http://www.ehow.com/list_7532694_list-qualified-capital-expenditure.html

Maintenance of the ponds

Revenue expenditure incurred on fixed assets includes costs that are aimed
at 'maintaining' rather than enhancing the earning capacity of the assets.
These are costs that are incurred on a regular basis and the benefit from
these costs is obtained over a relatively short period of time. 4
Thus, the expenditure for maintaining the concrete ponds are treated as
revenue expenditure. Whereas the initial purchase and installation costs for
the ponds would be classified as capital expenditure, any subsequent repair
and maintenance charges incurred in the future will be classified as revenue
expenditure. This is so because repair and maintenance costs do not increase
the earning capacity of the equipment but only maintains it.
Feeding the empurau
Feeding of empuraus are capitalized because they provide economic benefit
to the production of empuraus. This is clearly stated in IAS 41,
Many agricultural businesses had a policy of capitalizing some of
these costs, particularly those relating to the development of immature
plants or livestock up to the point they were productive.

http://accounting-simplified.com/financial/fixed-assets/capital-and-revenueexpenditure.html

5. How is the RM 1.5million grant from the government treated?

Part 1: Type of Grant
The general definition of a grant is, transfer of money from one organization to
another. In the case of local governments, grants can be one of two types:
conditional or unconditional. Conditional grants are monies transferred for a
specific purpose that may not be used for any other project. Unconditional
grants, on the other hand, can be used for any purpose the recipient sees fit. 5
Definition according to IAS 41, If a government grant is conditional, including
when a government grant requires an entity not to engage in specified
agricultural activity, an entity should recognise the government grant in profit
or loss when, and only when, the conditions attaching to the government grant
are met.
So, based on the above mentioned definitions, Ministry of Science,
Technology and Innovation (MOSTI) funded RM 1.5 million for research
activities and to enhance the production of fishes. The farm was required to
contribute 300,000 tails of fingerlings and 100 tails of broodstocks to MOSTI
under the programme. Thus, one could conclude this is a conditional grant.
Part 2: Accounting Treatment of Government Grants
Quoting Accounting Standard 12: Accounting for Government Grants (AS 12).
Two broad approaches may be followed for the accounting treatment of
government grants:
a) capital approach, under which a grant is treated as part of
shareholders funds.
The capital approach states that, government grants are in the nature
of promoters contribution, i.e., they are given with reference to the total
investment in an undertaking or by way of contribution towards its total
capital outlay and no repayment is ordinarily expected in the case of
such grants. These should, therefore, be credited directly to
shareholders funds. Besides is inappropriate to recognise government
grants in the profit and loss statement, since they are not earned but
represent an incentive provided by government without related costs.
b) income approach, under which a grant is taken to income over one or
more periods.
The income approach states that, government grants are rarely
gratuitous. The enterprise earns them through compliance with
their conditions and meeting the envisaged obligations. They
5

http://www.cscd.gov.bc.ca/lgd/finance/grants.htm

should therefore be taken to income and matched with the

associated costs which the grant is intended to compensate. As
income tax and other taxes are charges against income, it is logical to
deal also with government grants, which are an extension of fiscal
policies, in the profit and loss statement. In case grants are credited to
shareholders funds, no correlation is done between the accounting
treatment of the grant and the accounting treatment of the expenditure
to which the grant relates.
Therefore, based on the explanation given in the AS 12, one could infer that
the capital approach is applicable for conditional grant and income approach
is for unconditional grant.
Based on the current scenario, the RM1.5 million grant by MOSTI have been
classified as unconditional grant and applying the income approach, the
amount shall be treated as an income. Grants relating to income shall be,
received in income statement, either separately or under a general heading
such as Other Income, as stated in IAS 20 Accounting for Government
Grants and Disclosure of Government Assistance.
6. Is this business a successful business?
The value of a successful business increases over time, as measure by
increasing net worth from year to year. LTT Aquaculture Sdn Bhd has been
showing an incredible growth and a steady increase in revenues in relation to
expenses. Currently the business is planning to expand its production of three
times of a current productivity. It has secured solid export markets and
received grant from a government as the business was recognized and
believed to be sustainable.