SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

12 Months Ended

Jun. 30, 2012

Significant Accounting Policies [Text Block]

3.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of presentation

The accompanying consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America.

Use of estimates

In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the dates of the financial statements, as well as the reported amounts of revenues and expenses during the reporting periods. These accounts and estimates include, but are not limited to, the valuation of trade receivables, other receivables, deferred inventory costs, inventories, and the estimation on useful lives of property, plant and equipment. Actual results could differ from these estimates.

Principles of consolidation

The consolidated financial statements include the financial statements of the Company and its subsidiaries. All significant inter-company balances and transactions within the Company have been eliminated upon consolidation.

Cash and cash equivalents

Cash and cash equivalents are carried at cost and represent cash on hand, demand deposits placed with banks or other financial institutions and all highly liquid investments with an original maturity of three months or less as of the purchase date of such investments. Included in cash and cash equivalents and as of June 30, 2012 and 2011, the Company maintains major foreign currency balances of RMB89,272,224 ($14,114,409) and RMB45,823,506 ($7,080,707), respectively.

Accounts receivable

Accounts receivable are stated at estimated net realizable value. Accounts receivable are comprised of balances due from customers net of estimated allowances for uncollectible accounts. In determining the collectability of the account, historical trends are evaluated and specific customer issues are reviewed to arrive at appropriate allowances.

Allowance for doubtful accounts

The Company establishes an allowance for doubtful accounts based on management’s assessment of the collectability of trade receivables. A considerable amount of judgment is required in assessing the amount of the allowance. The Company considers the historical level of credit losses and applies percentages to aged receivables categories. The Company makes judgments about the creditworthiness of each customer based on ongoing credit evaluations, and monitors current economic trends that might impact the level of credit losses in the future. If the financial condition of the customers were to deteriorate, resulting in their inability to make payments, a larger allowance may be required.

Based on the above assessment, during the reporting periods, the management established the general allowance as follows: 0.5% of the gross amount of trade receivables due in less than 1 year, 5% of the gross amount of trade receivables due from 1 to 2 years, and 10% of the gross amount of trade receivables due from 2 to 3 years. The management completely writes off the gross amount of trade receivables due over 3 years. An additional specific provision is made against trade receivables to the extent to which they are considered to be doubtful.

Bad debts are written off when identified. The Company does not accrue interest on trade receivables.

Historically, losses from uncollectible accounts have not significantly deviated from the general allowance estimated by the management and no significant additional bad debts have been written off directly to the profit and loss. This general provisioning policy has not changed since its establishment and the management considers the aforementioned general provisioning policy to be adequate and not too excessive and does not expect to change this established policy in the near future.

Deferred inventory cost

In accordance with Accounting Standards Codification (“ASC’’) 905 “Agriculture’’ costs of growing crops shall be accumulated until the time of harvest. Growing crops shall be reported at the lower of cost or market.

Inventories

Inventories are stated at the lower of cost or market. Cost is determined on a first in first out basis and includes all expenditures incurred in bringing the goods to the point of sale and putting them in a saleable condition. In case of manufacturing inventories, cost includes an appropriate share of production overheads based on normal operating capacity. In assessing the ultimate realization of inventories, the management makes judgments as to future demand requirements compared to current or committed inventory levels. The Company estimates the demand requirements based on market conditions, forecasts prepared by its customers, sales contracts and orders in hand.

In addition, the Company estimates net realizable value based on intended use, current market value and inventory aging analyses. The Company writes down the inventories for estimated obsolescence or unmarketable inventories equal to the difference between the cost of inventories and the estimated market value based upon assumptions about future demand and market conditions.

Property, plant and equipment

Property, plant and equipment are stated at cost less accumulated depreciation. Cost represents the purchase price of the asset and other costs incurred to bring the asset into its existing use.

Depreciation is calculated on the straight-line basis over the following expected useful lives from the date on which they become fully operational and after taking into account their estimated residual values:

Equipment

Straight-line for 5 to 20 years with a 3% salvage value

Buildings

Straight-line for 20 years with a 5% salvage value

Maintenance or repairs are charged to expense as incurred. Upon sale or disposition, the applicable amounts of asset cost and accumulated depreciation are removed from the accounts and the net amount less proceeds from disposal is charged or credited to income.

Assets under construction are not depreciated until amounts are transferred to property and put into use.

Impairment of long-lived assets

In accordance with ASC 360 "Property, Plant, and Equipment", the Company evaluates its long-lived assets to determine whether later events and circumstances warrant revised estimates of useful lives or a reduction in carrying value due to impairment. If indicators of impairment exist and if the value of the assets is impaired, an impairment loss would be recognized.

Recoverability of asset groups to be held and used in measured by a comparison of the carrying amount of an asset group to estimated undiscounted future cash flows expected to be generated by the asset group. If the carrying amount exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of an asset group exceeds the fair value of the asset group. The Company evaluated its long-lived assets and no impairment charges were recorded for any of the periods presented.

Convertible notes

According to ASC “470-20, Debt with conversion and other options’’, the Company records the convertible debt and accrued interest as conventional convertible debt at the carrying amounts without bifurcation.

Revenue recognition

Revenue from sales of the Company’s products, including fresh frozen produce and processed produce, is recognized upon customer acceptance, which occurs at the time of delivery to customer, provided persuasive evidence of an arrangement exists, such as signed sales contract, the significant risks and rewards of ownership have been transferred to the buyer at the time when the products are delivered to its customers with no significant post-delivery obligation on the Company’s part, the sales price is fixed or determinable and collection is reasonably assured. The Company does not provide customers with contractual rights of return and post-delivery discount for any of the Company’s products, including fresh frozen produce and processed produce. When any significant post-delivery performance obligation exists, revenue is recognized only after such obligation is fulfilled. The Company evaluates the terms of sales agreement with the Company’s customers for fresh frozen produce and processed produce in order to determine whether any significant post-delivery performance obligations exist. Currently, the sales under fresh frozen produce and processed produce segments do not include any terms which may impose any significant post-delivery performance obligations.

Sales revenue represents the invoiced value of goods, net of a value-added tax (“VAT”). All of the Company’s products that are sold in the PRC are subject to a Chinese value-added tax at a rate of 13% of the gross sales price or at a rate approved by the Chinese local government. This VAT may be offset by the VAT paid by the Company on raw materials and other materials included in the cost of producing their finished product. Starting from March 2012, the Company’s products are exempted from VAT.

Cost of sales

Cost of sales consists primarily of material costs, direct labor, depreciation and overhead, which are directly attributable to the products.

General and administrative expenses

General and administrative expenses consist of office rent, office expenses, entertainment, depreciation, staff welfare, utilities, labor protection and salaries which are incurred at the administrative level.

Selling expenses

Selling expenses mainly consist of testing costs, shipping and handling costs and traveling expenses which are incurred during the selling activities.

Shipping and handling fees

Shipping costs are recorded in selling expenses. Shipping costs for years ended June 30, 2012 and 2011 were $2,171,745 (RMB13,776,958) and $2,875,983 (RMB19,065,876), respectively.

Non-operating income

For the years ended June 30, 2012 and 2011, included in non-operating income was the unconditional grant of $112,079 (RMB711,000) and $184,030 (RMB 1,220,000), respectively from the PRC government for the promotion of sales of agricultural products.

Stock-based compensation

The Company measures compensation expenses for its non-employee stock-based compensation under FASB ASC 718. The fair value of the stock issued was used to measure the compensation, as this is more reliable than the fair value of the services received. Fair value is measured using the bid price as the value of the Company’s common stock on the measurement date as bid price is more stable during the year and previous years and is more representative.

Income taxes

The Company accounts for income tax using ASC 740 “Accounting for Income Taxes”, which requires the asset and liability approach for financial accounting and reporting for income taxes. Under this approach, deferred income taxes are provided for the estimated future tax effects attributable to temporary differences between financial statement carrying amounts of assets and liabilities and their respective tax bases, and for the expected future tax benefits from loss carryforwards and provisions, if any. Deferred tax assets and liabilities are measured using the enacted tax rates expected in the years of recovery or reversal and the effect from a change in tax rates is recognized in the statement of operations and comprehensive income in the period of enactment. A valuation allowance is provided to reduce the amount of deferred tax assets if it is considered more likely than not that some portion of, or all of the deferred tax assets will not be realized.

ASC 740 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements and it prescribes a recognition threshold and measurement attributable for the financial statements recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC 740 also provides guidance on derecognizing, classification, interest and penalties, accounting in interim periods, disclosures and transitions. Interest and penalties from tax assessments, if any, are included in general and administrative expenses in the consolidated statements of operations.

The Company recognizes that virtually all tax positions in the PRC are not free of some degree of uncertainty due to tax law and policy changes by the PRC government. However, the Company cannot reasonably quantify political risk factors and thus must depend on guidance issued by current PRC government officials.

Concentrations of credit risk

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and cash equivalents, accounts receivable and other receivables. As of June 30, 2012 and 2011, substantially all of the Company’s cash and cash equivalents were held by major financial institutions located in the PRC, which management believes are of high credit quality. With respect to accounts receivable, the Company extends credit based on an evaluation of the customer’s financial condition. The Company generally does not require collateral for accounts receivable and maintains an allowance for doubtful accounts receivable and other receivables.

Foreign currencies translation

The reporting currency of the Company is the United States dollar (‘’U.S. dollars’’). The Company’s operating subsidiary maintains its books and records in its local currency, the Renminbi Yuan (“RMB”), which is the functional currency as it is the primary currency of the economic environment in which the subsidiary’s operations are conducted. In general, for consolidation purposes, the Company translates the subsidiary’s assets and liabilities into U.S. dollars using the applicable exchange rates prevailing at the balance sheet date, and the statement of operations is translated at average exchange rates during the reporting period. Adjustments resulting from the translation of the subsidiary’s financial statements are recorded as accumulated other comprehensive income. Transaction gains and losses that arise from exchange rate fluctuations from transactions denominated in a currency other than the RMB are included in the results of operations as incurred. These amounts are not material to the consolidated financial statements for the years ended June 30, 2012 and 2011.

The PRC government imposes significant exchange restrictions on fund transfers out of the PRC that are not related to business operations. These restrictions have not had a material impact on the Company because it has not engaged in any significant transactions that are subject to the restrictions.

Comprehensive income

ASC 220, “Reporting Comprehensive Income”, establishes standards for reporting and display of comprehensive income, its components and accumulated balances. Comprehensive income as defined includes all changes in equity during the year from non-owner sources. Accumulated comprehensive income, as presented in the accompanying statement of stockholders’ equity consists of changes in unrealized gains and losses on foreign currency translation. This comprehensive income is not included in the computation of income tax expense or benefit.

Segment reporting

ASC 280 “Disclosures about Segments of an Enterprise and Related Information” establishes standards for reporting information about operating segments on a basis consistent with the Company’s internal organization structure as well as information about geographical areas, business segments and major customers in the financial statements. The Company operates in one reportable segment. Geographical information of our customers are detailed in note 18.

Fair value of financial instruments

The Company values its financial instruments as required by ASC 825, “Disclosures about Fair Value of Financial Instruments”. The estimated fair value amounts have been determined by the Company, using available market information and appropriate valuation methodologies.

The estimates presented herein are not necessarily indicative of amounts that the Company could realize in a current market exchange.

The Company’s financial instruments primarily include cash and cash equivalents, accounts receivable, other receivables, deferred inventory costs, accounts payable, other payables and accrued liabilities, short-term borrowings and convertible notes. The carrying value of the convertible note approximates its fair value based on interest rate currently available to the Company.

As of the balance sheet date, the estimated fair values of financial instruments were not materially different from their carrying values as presented due to short maturities of these instruments.

- Definition

The entire disclosure for all significant accounting policies of the reporting entity.

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MAN SHING AGRICULTURAL HOLDINGS, INC 10-K