Palm oil plantations

How are oil palms accounted for?

Oil palms are bearer plants: they are used only to produce fruit over many years, and the likelihood of selling the palms themselves as produce is remote. Under IAS 16, a new planting is accounted for like a self-built asset. Land clearing, nursery seedlings, planting, fertiliser, weeding and upkeep during the immature period, and directly attributable overheads, are capitalised as immature plantations. When the palms reach maturity, usually around three years after planting, they are transferred to mature plantations and depreciated, straight-line or by expected yield, over their productive life. See bearer plants.

Palm oil plantations: an estate from planting to production

A plantation company develops 1,000 hectares of new oil palms. Over the three immature years it spends US$ 4,500 a hectare on clearing, planting and upkeep, 4,500 thousand in all. The palms are expected to produce for 22 years.

Once mature, the cost of maintaining the palms is part of the cost of producing the fruit, not added to the palms. Infrastructure on the estate, such as roads, drainage and housing, is property, plant and equipment with its own useful lives.

How are fresh fruit bunches on the palms valued?

The bunches growing on the palms are produce growing on bearer plants, so they stay in IAS 41 and are measured at fair value less costs to sell at each reporting date. A bunch takes around five to six months to ripen, but most of its oil develops in the final weeks, so many plantation companies value only the bunches expected to be harvested within a short period after the year end, with earlier-stage fruit treated as having little value. Suppose the estate expects to harvest 1,200 tonnes in the weeks after the year end, at US$ 150 a tonne, with harvesting and transport costs of 25 a tonne.

The bunches are recognised at 150 thousand, with the change from the previous year end in profit or loss. Because the value depends on the price of crude palm oil, the fair value gain or loss on the fruit moves with commodity prices. See crops and the point of harvest.

How are harvested bunches and milling accounted for?

At harvest, the bunches are measured at fair value less costs to sell, their deemed cost as inventory. Groups with their own mills process them into crude palm oil and palm kernels, adding milling costs as conversion costs; bunches bought from outside growers are bought inventory. Crude palm oil and kernels are joint products, so conversion costs are allocated between them, usually on relative sales values. See agricultural produce after harvest.

How is replanting accounted for?

When palms reach the end of their economic life, typically at 25 years as yields fall and trees grow too tall to harvest, they are felled and replanted. The remaining carrying amount of the old palms is derecognised, and the costs of the new planting are capitalised as immature plantations again. Many companies replant in phases, so a share of each estate is always immature. Replanting cycles also drive impairment reviews, since yields decline before replanting.

How are land rights and smallholder schemes treated?

In Indonesia and Malaysia, plantation land is often held under long-term government land use rights or leases rather than freehold. These are usually right-of-use assets under IFRS 16, or prepaid land rights amortised over the term, depending on their terms. In Indonesia, plantation companies often develop plasma plantations for local smallholders, financing their planting and buying their fruit; the amounts advanced are receivables assessed for expected credit losses, and the arrangements need analysis of who controls the plantations. See agricultural land.

When are plantations impaired, and what else matters?

A fall in crude palm oil prices, disease, poor yields or new restrictions on sales, such as rules on deforestation-free supply chains, are impairment indicators. Estates and their mills are usually tested together, as a cash-generating unit. Sustainability certification costs are generally expensed, unless they form part of the cost of an asset. Under US GAAP, ASC 905 also capitalises the cost of developing plantations until they produce, so the treatment of the palms is similar; the fruit on the palms is carried at cost rather than fair value. See agriculture accounting.

This guide is general information. It is not tax or legal advice for your situation.