Accounting for Plantation

Plantation operations refer to the

cultivation
and
management
of
perennial crops that have long
gestation periods and which typically
have long economic lives
Plantation crops in Malaysia
More common: oil palm, rubber and cocoa
Less common: sugar, tea and fruit crops

Stages from Inception to

Maturity
For a new plantation operation, the
stages involved from inception to
maturity are as follows
Acquisition
licences, etc

of

land,

permits,

 Development of land to the stage where

it is ready for planting
Land clearing (felling of trees, burning and
land levelling)
Land preparation (construction of planting
areas, contours
Construction of roads, rails, bunds, canals,
drains and irrigation

Construction of farm infrastructures

(estate buildings, factories)

 Setting up the nursery for seedling clones,

budgrafted and other planting materials
Planting of rootstocks, cover crops
Maintenance of the rootstocks in the
gestation period (weeding, fertilisation,
pest control, treatment for diseases,
pruning)
Commercial harvesting upon maturity of
the rootstocks

Gestation period
Period required for the rootstock to come to
maturity

Varies with the types of crops cultivated

Oil palm (2 2 1/2 years)
Rubber (6 7 years)
Durian (8 12 years)

Substantial
required

pre-cropping

expenditures

are

Costs that relate to land and land development are

incurred only at inception of the plantation operation
Costs that relate to maintenance are incurred each
year

Economic Lives
The period of commercial harvesting or
tapping is dependent on the economic lives
of the crops
Oil palm and rubber 25 to 30 years
Durian indefinite economic lives

At the end of the economic lives, it is

necessary to replant the trees
A new cycle begins and substantial precropping costs are again required

 However, some of the previously

incurred pre-cropping costs (land and
land developments) are usually retained
and thus not necessarily required in a
replanting
In large plantation operation, replanting
is usually spread out by fields, areas, or
regions, under a regular replanting
programme and replanting expenditures
are part of its yearly plantation activities

Statutes
No specific provisions in statutes or law that
regulate accounting for plantation operation
For plantation companies, the
would generally be applicable

following

Relevant MFRSs, Companies Act, SC guidelines (if

public
company),
Bursa
Malaysia
listing
requirements (if listed)
Public listed companies normally voluntarily
disclose their production statistics in the annual
financial statements as they are required to
disclose monthly production figures as part of its
interim reporting to Bursa Malaysia

MAS 8

MAS ED 8 (1993)
Reissued in 1996

Was not part of the 24 extant

accounting standards that was
adopted by MASB
To date MASB issued MFRS 141

Recognition and Measurement

Initial Carrying Amount of Plantation Asset
(Precropping costs)
Pre-cropping costs incurred under new
planting to be capitalised and shown as
fixed assets (PPE)
The costs capitalised should initially be
measured at cost

 Examples of costs
Costs of land and land development (including
roads, drains, irrigation)
Nursery costs (including seedlings and other
planting materials)
Maintenance costs (weeding, pest control,
disease control, pruning, fertilisation)
Direct labour

 Indirect labour (including sub-contractor costs

for work prior to maturity of crops)
Allocation of plantation overheads to the
extent that they relate to pre-cropping
activities in the gestation period

 Pre-cropping costs to be recognised under

various categories of fixed assets (PPE) such as
Freehold, long-term leasehold, short-term
leasehold (land and land development)
Plantation development
Plantation buildings
Plant and machinery
Affluent ponds, roads,bridges

 Other plantation overheads (such as

administrative and general overheads)
should not be capitalised in pre-cropping
costs but to be charged as expense when
incurred
Borrowing costs to the extent that they
relate to the new planting and are incurred
in the gestation period prior to maturity of
the rootstock may be capitalised as part of
the
pre-cropping
costs (MFRS 123
Borrowing Costs applies)

Expenditure Subsequent to the Maturity

of Rootstock
The capitalisation of pre-cropping costs
should cease as at maturity of the
rootstocks and upon commencement of
commercial harvesting
Expenditures incurred after maturity
and
upon
commencement
of
commercial
harvesting
should
be
charged to income

 Examples of such costs

Subsequent annual maintenance costs
(fertilisation, weeding, labour, pest
and disease control costs)
Repairs and expenses to maintain
plantation roads, canals, bridges and
other farm infrastructure

 However,
if
the
subsequent
expenditure
increase
the
future
benefits of the plantation asset beyond
its previously assessed standard of
performance, then the costs should be
capitalised
Include expenditures that
Extend the useful life of the rootstock
Increase its productive capacity or yield
Improve the quality of the harvest

Accounting Treatment for Pre-Cropping

Costs
3 methods
Amortisation method
Capital maintenance method
Reserve equalisation method

MAS 8 Requirements
Benchmark treatment
The amortisation method

Allowed alternative
Capital maintenance method

The reserve equalisation method is

not permitted

Amortisation Method
All pre-cropping costs incurred on new
plantings (first planting) and on replanting
(subsequent replanting with the same or
different rootstock) are capitalised and
amortised over the useful lives of the
crops
This method treats replanting costs as a
capital expenditure (replanting has the
effect of extending the useful lives of the
crops into another productive cycle

 To capitalise
Dr Fixed Assets (PPE)
Cr Cash/Creditors
(will continue from inception till maturity of
rootstock)

To amortise capitalised costs

Dr Amortisation expense (income statement)
Cr Accumulated amortisation/depreciation
(will continue till the end of the crops useful
life)

 In the case of a non-renewable leasehold, the

costs should be amortised over the period of
the lease, if shorter
Costs which relate to land and land
developments, and if the land is freehold,
should not be amortised because they are not
considered to be depreciable
The depreciable amount should relate to
those
pre-cropping
costs
which
are
attributable to crops and crops developments

Provisions of MAS 8
Writing off the balance of the expenditure
previously capitalised which is no longer
represented by an asset
Capitalising the cost of clearing and
preparing the ground and planting the new
rootstock, and the cost of additional roads,
drains, bunds and any other expenditure
that relates to establishing the new
rootstock

 Retaining where relevant the previously

capitalised value of the original land
including roads, drains, bunds which will
continue in use as they represent a
valuable asset regardless of the crop
being produced
Amortising the expenditure capitalised
which are represented by depreciable
assets over the useful life of the new
rootstock

 MAS 8 does not prescribe the basis of

amortisation
However,
a
conceptually
more
accurate basis, in terms of the
matching concept is the expected
yield basis

Capital Maintenance Method

Only new planting costs are capitalised and held
as a permanent item without amortisation
Replanting costs are viewed as a substitute for
amortisation and are charged to income as
incurred
The method treats replanting costs as a revenue
expenditure, which are considered as necessary
yearly expenditures to constantly maintain the
plantation assets in their productive capacity

 To capitalise pre-cropping costs of new

planting
Dr Fixed Assets (PPE)
Cr Cash/Creditors
(will continue each year in the gestation
period of the new planting)
The capitalised cost of the first planting is
then held as a permanent item without
any gradual amortisation
The useful life of the plantation asset is
effectively maintained through a regular
and systematic programme of replanting

 To recognise yearly replanting expenditure

Dr Replanting expenditure (income
statement)
Cr Cash/Creditors
(will be made each year to recognise the
replanting expenditure incurred as an expense)
Replanting costs are considered as substitutes
for amortisation and are taken to represent the
costs of a continuous rejuvenation process for
the plantation assets
For larger plantation companies, the replanting
costs in an accounting period will usually
approximate the depreciation that would have
been charged under the amortisation method

 MAS 8 specifies that to ensure

income is properly matched with
replacement costs, the following
criteria must be met before this
method can be applied
The replanting expenditure charged to
income as a % of the capitalised value of
the plantation asset (including land) in
any one year is normally not significant
and remains relatively constant

 Replanting is carried out regularly such that

the average proportion per annum of the
area commenced to be replanted to total
planted area by rootstock (for eg last 5
years) is not less than the proportion that
one year bears to the total life span of the
relevant rootstock
There is a planned replanting programme
in existence which is designed to
systematically cover the entire planted
area and in the case of leaseholds, the
remaining period of the lease is in excess
of one full planting cycle

 The plantation operations are managed

essentially as one asset and where the
plantation operations concerned are
held under several corporations or legal
entities, the companies should adopt the
same method of accounting for precropping costs and an appropriate
portion of the groups annual replanting
expenditure should be borne by each
company and reflected in their separate
financial statements

 The method can only be used if the

above criterias are satisfied and is
generally not available for newly
established plantation operation

Reserve Equalisation Method

Only pre-cropping costs
planting are capitalised
permanent item

incurred on new
and held as a

Upon
maturity
and
commencement
of
commercial harvesting, a charge is made in the
income statement for the expected replanting
expenditure that will have to be incurred when
existing crops reach the end of their useful
lives, and the corresponding credit goes to a
replanting Reserve Equalisation account

 When replanting commences, the

pre-cropping costs incurred in the
replanting are charged against the
Reserve Equalisation account
To match the estimated current cost
of
replanting
with
the
crop
revenues

 To capitalise pre-cropping costs of new

planting only
Dr Fixed Assets (PPE)
Cr Cash/Creditors
To recognise the yearly planting charge
Dr Replanting charge (income
statement)
Cr Replanting Reserve
Equalisation account
(entry made each year based on
estimated replanting
costs)

 To recognise the subsequent

replanting expenditure
Dr Replanting Reserve
Equalisation
account
Cr Cash/Creditors
(entry made each year during the
gestation period of the replanting)

 Subsequent to initial recognition, the

plantation asset may be revalued
Capitalised pre-cropping costs may
become permanently impaired (due
to diseases, crop obsolescence,
occasional floods) then the net
carrying amount of the pre-cropping
costs should be written down to the
recoverable amount

Partial Replanting
Partial replanting may be necessary
because of crop failures due to diseases,
pests, climatic conditions
Where
partial
replanting
costs
are
considered normal and not excessive and
when combined with the existing capitalised
pre-cropping costs, do not exceed the
recoverable amount
The partial replanting costs can be included
as part of pre-cropping costs and capitalised

Disclosure Requirements
The basis or bases used in determining the
gross carrying amounts of pre-cropping costs
Expected useful lives of the various
rootstocks and their normal periods to
maturity
A reconciliation of the gross amounts of precropping costs at the beginning and end of
an accounting showing additions, disposals
and other movements

 An analysis of pre-cropping (where

possible) by type of rootstock and
according to those relating to
mature
rootstock
and
those
relating to rootstock which have
yet to mature
Replanting expenditure charged to
income

 If use capital maintenance method, provide

statistics (at least for last 5 years)
Replanting expenses
(analysed by rootstock)

charged

to

income

Mature and immature planted areas (analysed

by rootstock)
Encouraged to disclose the amount of
expenditure that would have been capitalised to
fixed assets and the amout of amortisation that
would have been charged to income had the
amortisation method been used and the
resulting net effect on income for the
accounting period

 Where pre-cropping expenses are

stated
at
revalued
amounts,
disclose the following
The basis used to revalue the assets
The effective date of the revaluation
Whether an independent valuer was
involved
The revaluation surplus, indicating
movements for the period

Accounting for Tax Effects of Capitalised

Pre-Cropping Costs

Replanting
costs
are
normally
allowed for claims as tax deductions
in the year in which they are incurred
For accounting purposes if the
replanting
costs
have
been
capitalised and amortised, timing
difference will arise

Amortisation method
A timing difference will arise for new planting
due to the capital allowance granted for tax
purposes
Capital maintenance method
No timing difference for replanting costs as
these are charged to both accounting and
taxable income in the year in which they are
incurred
For first planting costs, there will be a
permanent difference tax expense will be
low for the period or periods in which there
are significant new plantings

THE END