Question

In 2013, Fabulous Fruit expanded its operations in Georgia to includegrowing peaches for commercial canning companies. Land was prepared, irrigation systems installed and 3,000 “whips” (baby trees)were planted. It is expected that the trees will be ready for commercial production by 2016. At that time, Fabulous will begin selling the entire crop for canning. The trees will not produce a large enough crop for commercial canning before 2016. In 2014 and 2015,small quantities of fruit will be harvested and sold at local farmers’markets. Fabulous wants to know how to properly account for thosesales.

Required: Use FASB. Submit only one paragraph containing your recommendation (no excerpts). Include in-text citation.

Answer 1

As per IAS 16 – When an entity enters into incidental operations not intended by the management to bring the asset into the location and condition necessary to bring it to operating condition, the associated revenue or expenses should be treated as income or expenses on the income statement and not capitalized and adjusted against the cost of the asset.

In the instant case, Fabulous Fruit’s main operations were growing peaches for commercial canning companies that would begin commercially in 2016. Moreover, in 2014 and 2015, selling small quantities of fruits to local farmer markets were merely incidental to the main operations. As a result, the treatment should be in line with the standard. As a result, any incidental revenues not intended to exist in the first place as thought by the management should be treated as income and associated expenses as costs on the income statement.

Reference:

http://www.ey.com/Publication/vwLUAssets/Refining_IFRS_Delivering_capital_projects_May_2012/$FILE/Refining_IFRS_Projec_%20risk_May_2012pdf.pdf