PLANTATION DEVELOPMENT and REPLANTING EXPENDITURE

Plantation expenditure incurred on land clearing, upkeep of immature oil palms, administrative expenses and interest incurred during the pre-cropping period are capitalised under plantation expenditure and is not amortised. Upon maturity, all subsequent maintenance expenditure is charged to the income statement. Replanting expenditure incurred on similar crops on formerly developed areas is chargeable to the income statement in the financial year in which it is incurred.

New Planting and Replanting Expenditure
New planting expenditure, which represents total cost incurred from land clearing to the point of harvesting, is capitalised under plantation development expenditure and is not amortised. Replanting expenditure, which represents cost incurred in replanting old planted areas, is charged to the income statement in the financial year it is incurred.

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New Planting, Replanting and Deferred Nursery Expenditure
New planting expenditure incurred on land clearing and upkeep of trees to maturity is capitalised under plantation development expenditure and is not amortised.

Replanting expenditure is charged to the income statement in the financial period/ year in which the expenditure is incurred.

Deferred nursery expenditure is capitalised under plantation development expenditure at cost and charged to the income statement on replanting of crops.

*why replanting?
exclude the revise of accounting policy effect from 2007 , i believe planters abandon some low-productive tree, to be phased out by clonal palm.
a decade ago,many planter is inevitable in cutting down of tree to replant, but in recent replating is minimised by year.

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DEFERRED TAX ON PLANTATION DEVELOPMENT EXPENDITURE

Issue:
How does an entity computes deferred tax on plantation development expenditure.

Current practice:
Diverse

Reasons for the FRSIC to address the issue:
The amortization method and the capital maintenance method of accounting for plantation development expenditure are peculiar to the plantation industry in Malaysia. Malaysia needs guidance as to what tax rate to use in the computation of deferred tax on plantation development expenditure.

Proposed Consensus:

ACCOUNTING FOR DEFERRED TAX ON PLANTATION DEVELOPMENT EXPENDITURE

Tax treatment

PDE claimed as Agriculture Allowance over 2 years. Allowed PDE expenses exclude costs relating to upkeep to maturity. The claw-back period is 6 years.

What is considered PDE? These are capital expenditure in relation to initial planting and includes initial planting; clearing land cutting & preparation costs ( not replanting - which are allowed on a current year basis ).

Replanting expenditure is allowed as a deductible expense during the period when incurred [ie replanting expenditure is not entitled to Agriculture Allowance].

Upon sale of land and PDE, the taxable gains or losses is computed based on the sales proceed less the sum total of cost of land and PDE [even though the entity could have already claim the AA].

How should deferred tax on PDE be accounted for?
[Note: PDE amount is excluding expenses relating to upkeep up to maturity]

Based on the tentative clarification of IASB, the “tax base of an asset is determined by the amount deductible by the entity if it sold or otherwise disposed of the asset for its carrying amount at the balance sheet date”.


Assuming no firm commitment to sell scenarios
(a) Initial new planting cost (excluding expenses relating to upkeep till maturity)

.................................TD............%
Freehold
- amortization..................yes...........26%
- capital maintenance...........no............0%*

Leasehold
- amortization.................. yes.........26%
- capital maintenance............yes.........26%**

*[SIC 21 applies here. Recoverable of the asset will be through sale. Carrying amount is equal to the tax base. Hence, there is no temporary difference.]
**[SIC 21 applies to non-depreciable assets.

PDE on a leasehold land is not a non-depreciable asset because of the finite life of the land. At the end of the lease term, the PDE will have to be removed [through impairment] from the books of the company – and this “charge/impairment” will have to flow through the accounting income statement; thereby increasing the taxable income during that year. This increased taxable income attracts 26% tax charge.

Should the tax base be the tax written value or the original cost of the land and PDE? The original cost of the land and the PDE can only be the tax base if the entity intends to sell the land and PDE, otherwise, the tax base of the asset is the tax written down value of the asset.

(b)Revaluation surplus on the new planting cost

...............................TD......%
Freehold land
- amortisation................yes.....26%
- capital maintenance.........yes......0% [capital gains tax rate].

Leasehold land
- amortisation................yes......26%
- capital maintenance.........yes......N/A*

*[the accounting entries to record the revaluation surplus will be:
Dr. PDE
Cr. Revaluation surplus

Because the PDE sits on a leasehold land, at the end of its finite life, the revaluation surplus on the PDE will be removed [ impaired] from the books of the company – and this “impairment” charge does NOT go through the income statement. The accounting entries for the impairment would be:
Dr. Revaluation surplus
Cr. PDE

Because the “impairment” charge does not pass through the income statement, there is therefore no tax consequence on revaluation surplus of PDE that sits on leasehold land - even though there is a temporary difference.