PAS 41 Agriculture

Auditing for Specialized Industry

By: Remark M. Montalban

Holy Name University

College of Business and Accountancy
Department of Accountancy
Learning Objectives

• Understand the nature and concepts of biological assets and

agricultural produce.
• Differentiate biological assets, bearer plants, agricultural
produce and inventory
• Apply the recognition, measurement and disclosure criteria of
PAS 41 Agriculture
• Account for government grants that are within the scope of PAS
41.
• Know auditing issues that must be considered in auditing
agricultural activities.

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Introduction
• Agriculture means farming or the process of
producing crops and raising livestock.

• PAS 41 (revised) applies to:

a) Biological assets except for bearer plant;

b) Agricultural produce at the point of harvest; and
c) Government grants covered by Paragraphs 34 and
35.

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Introduction
• PAS 41 (revised) does not apply to:

a) Land related to agricultural activity (PAS 16 / 40)

b) Bearer plants (PAS 16)
c) Government grants related to bearer plants (PAS 20)
d) Intangible assets related to agricultural activity (PAS
38)

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1. Biological Assets
• Biological asset is a “living plant or animal.”

a) Consumable Biological Assets – to be harvested

as agricultural produce or sold as biological asset.
Ex:
• Livestock intended to produce meat or held for sale
• Fish in farms
• Crops
• Fruits on a fruit tree
• Trees being grown for lumber

b) Bearer Biological Assets – held to bear produce.

Ex:
• Livestock from which milk is produced
• Fruit trees from which fruit is harvested

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Bearer Plant
• Bearer Plant is a “living plant” that:
a) Is used in the production or supply of agricultural produce.
b) Is expected to bear produce for more than one period; and
c) Has a remote likelihood of being sold as agricultural produce
except for incidental scrap sales.

• The following are not bearer plants:

a. plants cultivated to be harvested as agricultural produce (e.g.
trees grown for use as lumber);
b. plants cultivated to produce agricultural produce when there
is more than a remote likelihood that the entity will also
harvest and sell the plant as agricultural produce, other than
as incidental scrap sales (e.g. trees that are cultivated both for
their fruit and their lumber);
c. annual crops (for example, paddy and wheat).
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Remember…

Bearer and Consumable Animals PAS 41

Consumable plants PAS 41
Bearer Plants PAS 16
Produce growing on bearer
PAS 41
plants

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2. Agricultural Produce
• Agricultural produce is the “harvested produce
of the entity’s biological assets.”

• Harvest is the “detachment” of produce from a

biological asset or the cessation of a biological
asset’s life processes.

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 Examples…
Products arise
Bearer Agricultural
Biological asset due to
Plants (PAS produce (PAS
(PAS 41) processing after
16) 41)
harvest (PAS 2)
Sheep Wool Yarn, Carpet
Dairy cattle Milk Cheese
Trees in a timber
Felled Trees Logs, Lumber
plantation
Pigs Carcass Sausages, hams
Tobacco plant Leaf Crude tobacco
Fruit trees Picked fruit Processed Fruit
Oil palms Picked fruit Palm oil
Grape vines Picked grapes Wine
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Agricultural Activity
• Biological assets and agricultural produce are accounted
for under PAS 41 only when they relate to agricultural
activity.
• Agricultural activity is the “management by an entity
of the biological transformation and harvest of biological
assets for sale or for conversion into agricultural produce
or into additional biological assets.”
• Biological transformation comprises the processes of
growth, degeneration, production and procreation that
cause qualitative or quantitative changes in a
biological asset.
• Harvest is the detachment of produce from a biological
asset or cessation of the biological asset’s life
processes (production of agricultural produce).

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Agricultural Activity

• Covers a diverse range of activities

• Common features exist within this diversity:
• Capability to change (living animals and plants are capable of
biological transformation.)
• Management of change (enhancing or stabilizing conditions
necessary for the process to take place)
• Measurement of change (change in quality or quantity brought
about by biological transformation or harvest)

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Recognition

• An entity shall recognize a biological

asset or agricultural produce when and
only when:
a) The entity controls the asset as a result of past events;
b) It is probable that future economic benefits associated
with the asset will flow to the entity; and
c) The fair value or cost of the asset can be measured
reliably.

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Measurement

Biological
Agricultural Fair value less
Asset Fair value less produce costs to sell at the
costs to sell on point of harvest.
initial recognition Subsequently
and at the end of covered by PAS 2 –
each reporting, Inventory
except where fair (measured at
value can not LCNRV). Any gain
measured reliably. or loss from initial
Any changes in measurement is
recognized in profit
FVLCTS is
or loss, on the
recognized in profit period in which it
or loss. arises.

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Measurement

• Fair value as the “price that would be received to sell an

asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date.”
• Particular asset or liability
• Orderly transaction (not a forced sale)
• Market participants (market-based view)
• Price (exit price)
• Cost to sell are the incremental costs directly attributable to the
disposal of an asset such as commissions to brokers, levies by
regulatory agencies and commodity exchanges, transfer taxes and
duties. It excludes transport costs, advertising costs, finance costs
and income taxes.

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Inability to Measure Fair
Value Reliably
• Presumption - fair value can be measured reliably for a
biological asset.

• If fair value of a biological asset cannot measured reliably

- measure at cost less accumulated depreciation and
accumulated impairment losses. (Paragraph 30)
• Little biological transformation or the impact of biological
transformation is not material to the price.

• The presumption in Paragraph 30 can be rebutted only at

initial recognition.

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Fair value

• PFRS 13 Fair Value Measurement is used when measuring

the fair value of biological assets and agricultural produce.

• Fair value may be facilitated by (in the following order):

1) Price in the principal market
2) Most advantageous market price

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Sample Problem 1
Information on a biological asset of ABC Solution 1: Active Market 1 is the
Co. with a historical cost of P100 and principal market.
contract price of P90, is shown below: Price in active market 1 130
Transport Cost (10)
Active Active
Market 1 Market 2 Fair value 120
Market price 130 125 Cost to sell 15
Fair value less cost to sell 105
Commission to broker 10 3

Transfer taxes and duties 5 2

Solution 2: Most advantageous Market
Advertising costs 2 1 Price in active market 1 125
Transport Costs 10 10 Transport Cost (10)
Fair value 115
Cost to sell 5
Fair value less cost to sell 110

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Sample Problem 2
1. On January 1, 2021, ABC Co. acquired a Biological Asset 9,500
biological asset at its fair value of P10,000. Loss on change in FVLCS 2,500
Necessary costs incurred on the purchase
totaled P2,000. It was estimated that if the Cash 12,000
biological asset is to be sold currently, costs
to sell would amount to P500.

2. On August 1, 2021, a diary cattle of ABC Co.

gave birth to a calf. The fair value less cost Biological Asset 5,000
to sell of a newly born calf as of August 1,
2021 is P5,000. Costs incurred to induce Gain on change in FVLCS 5,000
procreation such as costs of artificial
insemination, costs of labor and cesarean
birth totaled P3,000.

3. On April 1, 2021, ABC Co. harvested ripe Inventory 50,000

mangoes. The harvested mangoes have fair
value less cost to sell of P50,000 on April 1, FVLCS of agricultural produce 50,000
2021. Labor costs incurred in the harvest
totaled P5,000.

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Sample Problem 3
On January 1, 2021, the biological assets of ABC Biological Asset 10,800
Co. consist of ten 2-year old animals with fair Cash 10,800
value less cost to sell of P10,000 each for a total
of P100,000. Transactions during the year are as Biological Asset 7,000
follows:
Gain on change in FVLCS 7,000
• One animal aged 2.5 years was purchased on
July 1, 2021 for P10,800. Biological Asset 22,200

• One animal was born on July 1, 2021. Gain on change in FVLCS 22,200

• No animals were sold or disposed of during th

period. Solution:
10 animals now 3-years old (10x12k) 120,000

1 animal purchased 7/1 now 3-year old 12,000

Per unit FVLCS are as follows:
1 new born 7/1, now 0.5 year old 8,000
Newborn animal, 7/1/2021 7,000
FVLCS. - 12/31/2021 140,000
2.5 year old animal, 7/1/2021 10,800 Less: Carrying amount before adjustment
Newborn animal, 12/31/2021 7,200 10 animals, 1/1/2021 100,000

0.5 year old animal, 12/31/2021 8,000 1 animal purchased, 7/1 10,800

2 year old animal, 12/31/2021 10,500 1 new born, 7/1 7,000 117,800

Additional gain on change on FVCLS 22,200

2.5 year old animal, 12/31/2021 11,100
3 year old animal, 12/31/2021 12,000

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Biological Assets Attached to
Land
• Biological assets attached to land (e.g., trees in a
plantation forest) may not have a separate market but an
active market may exist for the combined assets as a
package.

• In this case, the fair value of the land and land

improvements may be deducted from the value of the
combined assets to arrive at the fair value of the biological
assets.

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Sample Problem 4
ABC Co. has the following assets as of Combined market value 500,000
December 31, 2021: Fair value of land & land improvement 320,000
Land held as plantation 300,000 Fair value attributable to trees 180,000
Trees (planted on the land) 120,000

The combined market value of the assets

is P500,000 while the market value of the
land is P320,000, 10% of which is
attributable to improvements on the land.

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Government Grants

• Only government grants that are related to biological

assets measured at fair value less cost to sell are
accounted for under PAS 41.

• Those government grants that are related to biological

assets measured at cost less accumulated depreciation
and accumulated impairment losses are accounted for
under PAS 20.

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Government Grants

Under PAS 41,

1. Unconditional government grants are recognized in the
profit or loss when it becomes receivable.
2. For conditional grants, conditions must be met before the
recognition of the grant in the profit or loss.
3. Conditional but the terms of the grant allow part of it to
be retained according to the time that has elapsed, a
portion of the grants is recognized in profit or loss as time
passes.

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Encouraged Disclosures

• Disclosure of consumable and bearer biological assets.

• Disclosure of mature and immature biological assets.
• Disclosure of breakdown of total “Gain (loss) from changes in
FVLCS” during the period attributable to price change and
physical change.

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Sample Problem 3
On January 1, 2021, the biological assets of ABC Biological Asset 10,800
Co. consist of ten 2-year old animals with fair Cash 10,800
value less cost to sell of P10,000 each for a total
of P100,000. Transactions during the year are as Biological Asset 7,000
follows:
Gain on change in FVLCS 7,000
• One animal aged 2.5 years was purchased on
July 1, 2021 for P10,800. Biological Asset 22,200

• One animal was born on July 1, 2021. Gain on change in FVLCS 22,200

• No animals were sold or disposed of during th

period. Solution:
10 animals now 3-years old (10x12k) 120,000

1 animal purchased 7/1 now 3-year old 12,000

Per unit FVLCS are as follows:
1 new born 7/1, now 0.5 year old 8,000
Newborn animal, 7/1/2021 7,000
FVLCS. - 12/31/2021 140,000
2.5 year old animal, 7/1/2021 10,800 Less: Carrying amount before adjustment
Newborn animal, 12/31/2021 7,200 10 animals, 1/1/2021 100,000

0.5 year old animal, 12/31/2021 8,000 1 animal purchased, 7/1 10,800

2 year old animal, 12/31/2021 10,500 1 new born, 7/1 7,000 117,800

Additional gain on change on FVCLS 22,200

2.5 year old animal, 12/31/2021 11,100
3 year old animal, 12/31/2021 12,000

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Sample Problem 3 – Cont…
On January 1, 2021, the biological assets of ABC Price Change:
Co. consist of ten 2-year old animals with fair 10 animals ((10,500 – 10,000) x 10) 5,000
value less cost to sell of P10,000 each for a total
of P100,000. Transactions during the year are as 1 animal purchased ((11,100 – 10,800) x 1) 300
follows: 1 animal new born ((7,200 – 7,000) x 1) 200
• One animal aged 2.5 years was purchased on Change in FVLCS due to price change 5,500
July 1, 2021 for P10,800.
• One animal was born on July 1, 2021.
Physical Change:
• No animals were sold or disposed of during the
10 animals ((12,000 – 10,500) x 10) 15,000
period.
1 animal purchased ((12,000 – 11,100) x 1) 900
1 animal new born ((8,000 – 7,200) x 1) 800
Per unit FVLCS are as follows:
FVCLS of new born – date of birth 7,000
Newborn animal, 7/1/2021 7,000
Change in FVLCS due to price change 23,700
2.5 year old animal, 7/1/2021 10,800
Newborn animal, 12/31/2021 7,200
0.5 year old animal, 12/31/2021 8,000
2 year old animal, 12/31/2021 10,500
2.5 year old animal, 12/31/2021 11,100
3 year old animal, 12/31/2021 12,000

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Financial Statement
Presentation
• Biological assets are aggregated and presented in the
statement of financial position under the line item,
“Biological Assets.”
• Biological assets are normally classified as noncurrent assets.
The breakdown is disclosed in the notes.
• After the point of harvest, agricultural produce are
presented under “inventories” and are classified as current
assets.
• An entity discloses the aggregate gain or loss arising on
initial recognition of biological assets and agricultural
produce and from the change in fair value less costs to sell of
biological assets.
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Special Audit Considerations

• The sale of biological assets are covered by other PFRSs. The

same principle is applied also to expenses as that of the
normal standard.
• The measurement basis used for biological assets and
agricultural produce, especially on the reasonableness of the
fair value less cost to sell (or whenever appropriate, costs
less cost accumulated depreciation and accumulated
impairment).
• The proper classification of assets as biological assets in the
statement of financial position.
• Disclosures complied.

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PAS 41 Agriculture
Auditing for Specialized Industry
By: Remark M. Montalban

Holy Name University

College of Business and Accountancy
Department of Accountancy