AGRICULTURE

What makes you distinct from others?

What makes agriculture a specialized industry?

- It has a specific financial reporting standard applicable to it which is PAS 41.

PAS 41- Agriculture

Agriculture means farming or the process of producing crops and raising

livestock. PAS 41 prescribes the accounting and disclosures for agricultural and related
activity.

PAS 41 applies to the following when they are related to agricultural activity:

1. Biological assets, except bearer plants

2. Agricultural produce at the point of harvest; and
3. Unconditional government grants related to biological asset measured at its fair value
less costs to sell.

PAS 41 does not apply to the following:

1. Land related to agricultural activity (PAS 16 and PAS 40).

2. Bearer plants (PAS 16). However, PAS 41 applies to the produce on those
bearer plants.
3. Government grants related to bearer plants (PAS 20).
4. Intangible assets related to agricultural activity (PAS 38)

PAS 41 applies to agricultural activity at the point of harvest. After the harvest,
PAS 2 Inventories or other applicable standard is applied.

BIOLOGICAL ASSETS

Biological assets are living animals and living plants. It can be either be
consumable biological assets or bearer biological assets.

a) Consumable biological assets- those that are to be harvested as agricultural

produce or sold as biological assets.

Examples:

1. Livestock intended for the production of meat

 2. Livestock held for sale

3. Fish in farms

4. Crops such as maize and wheat

5. Produce on a bearer plant

6. Trees being grown for lumber

b) Bearer biological assets- those that are held to produce bear produce. Only the
produce is harvested while the bearer biological asset remains.

Examples:

1. Livestock from which milk is produced

2. Fruit trees from which fruit is harvested

 Living animals, whether consumable or bearer, are classified as biological assets

if they relate to agricultural activity. However, living plants are classified as
biological assets only if they are consumable. Bearer plants are classified as
PPE.

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 period; and

c) Has a remote likelihood of being sold as agricultural produce, except for incidental
scrap sales.

Bearer plants that may be sold as a scrap when no longer used are not necessarily
precluded from being classified as bearer plants.

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.

For example: Apple Tree

a) Apple tree – bearer plant, accounted under the PAS 16 PPE

b) Apple fruits growing on the tree – biological asset PAS 41

c) Harvested apple – agricultural produce PAS 41

d) Apple pie – subjected to processing PAS 2 Inventories

AGRICULTURAL ACTIVITY

Agriculture 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.

Examples:

a) Raising livestock
b) Forestry
c) Annual or perennial cropping
d) Cultivating orchards and plantations
e) Floriculture
f) Aquaculture (including fish farming)
The following are the common features of agricultural activities:

1. Capability to change- Living animals and plants are capable of biological

transformation.

2. Management of change- Management facilitates biological transformation by

enhancing, or at least stabilizing, conditions necessary for the process to takes place.
For example, harvesting from unmanaged resources (such as ocean fishing and
deforestation) is not agricultural activity.

3. Measurement of change- The change in quantity or quality brought about by

biological transformation or harvest is measured and monitored as a routine
management functions.

Biological Transformation

 Comprises the processes of growth, degeneration, production and procreation

that cause qualitative or qualitative changes in a biological asset.

Biological transformation results from the following types of outcome:

a) Asset changes through:

1. Growth- An increase in quantity or improvement in quality of an animal or

plant

2. Degeneration- A decrease in quantity or deterioration in quality of an animal

or plant
 3. Procreation- Creation of additional living animal or plant.

b) Production of agricultural produce

RECOGNITION
A biological asset or agricultural produce is recognized when it meets the asset
recognition criteria, including the reliable measurement of its fair value or cost.

2. Agricultural Produce

Agricultural produce shall be measured always at fair value cost to sell (cost
of disposal) at the point of harvest. The gain or loss arising from the initial measurement
is recognized in profit or loss.

Fair value- 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

Cost to sell (Cost of disposal)- the incremental costs directly attributable to the
disposal of an asset, excluding finance costs and income taxes

An entity uses PFRS 13 Fair Value Measurement when measuring the fair value
of biological assets and agricultural produce. Contract prices are not necessarily
relevant when measuring fair value because fair value is not adjusted by the existence
of the contract.

Cost may sometimes approximate fair value, particularly when:

1. little biological transformation has taken place since initial cost incurrence (e.g.,
seedlings planted immediately prior to the end of reporting period or newly
acquired livestock)

2. the impact of the biological transformation on price is not expected to be material

(e.g., the initial growth in a 30 year pine tree plantation production cycle)

Cash flows on finance costs, taxes, and cost of reestablishing biological assets after
harvest are not considered when measuring fair value.

Cost to sell (cost of disposal) include the following:

1. Commissions to brokers

2. Levies by regulatory agencies and commodity exchanges

3. Transfer duties and duties

 Costs to sell do not include transport costs, advertising costs, income taxes and
interest expense. If the location is a characteristic of the biological asset, the price in the
principal (or most advantageous) market shall be adjusted for the transport costs.

BIOLOGICAL ASSETS ATTACHED TO LAND

Biological assets attached to the land (example, trees in a plantation forest) may
not have a separate market but an active market may exist for the combined assets
(i.e., biological assets, raw land, and land improvements) as a package. In such case,
the fair value of the raw land and land improvements may be deducted from the fair
value of the combined assets to arrive at the fair value of the biological assets.

ENCOURAGED DISCLOSURES
Disclosure of the following information is encouraged but not required:

1. Disclosure of consumable and bearer biological assets.

2. Disclosure of mature and immature biological assets

Mature biological assets

-Those that have attained harvestable specifications (for consumable

biological assets) or are able to sustain regular harvests (for bearer biological
assets)

3. Disclosure of breakdown of total gain or loss from changes in fair value less cost
to sell during the period of physical change and price change.

Price Change

Difference between prices at the beginning and end of the period without
considering changes in price due to physical growth of biological assets. Age of
biological asset at the end of the period is ignored.

Physical Change

Difference between prices at the end of the period considering the price due to
physical growth FVLCS at the beginning of the period is ignored.

An Overview of the Audit of Inventories

Audit objectives include

a) obtaining reasonable assurance that inventory quantities represent all agricultural

products and animals belonging to the producer and
 b) determining that an acceptable valuation method has been properly and
consistently applied.

Specific Accounting Principles and Auditing Procedures

 Field and Row Crops

 Orchards and Vineyards

 Intermediate-Life Plants

 Breeding and Production Animals

 Animals Held for Sale

Field and Row Crops

These crops include wheat, barley, milo, corn, soybeans, sugar beets, tobacco, cotton,
crops raised for seed, tomatoes, lettuce, beans, cabbages, and melons.

Accounting Principles

Costs of growing crops should be accumulated until the time of harvest, subject
to fair value less cost to sell adjustments. Harvested crops held for sale should be
reported at fair value less cost to sell or in accordance with established industry practice
at market if certain conditions exist.

Auditing Considerations

The auditor should consider performing the following audit procedures for
harvested and growing field and row crops:

1. Physically observing and reviewing crop maturity and quality

2. Confirming the existence of harvested crops stored in outside warehouses

3. Reviewing and testing the capitalized costs of growing and harvested crops for
reasonableness

4. Determining that capitalized costs of crops do not exceed market

 Orchards & Vineyards

Orchards and groves produce such commodities as citrus, walnuts, almonds, pecans,
peaches, pears, apples, apricots, cherries, and avocados.

Audit Consideration:

Audit procedures for orchards and vineyards are similar to those performed for
other types of property, plant, and equipment and may include—

1. Considering the relative health and conditions of the trees or vines.

2. Reviewing the estimated remaining productive lives of the trees or vines. This
may require an annual inspection of the orchard or vineyard, and, when
questions arise, the auditor may need to consult a specialist.

3. Testing total capitalized costs of orchards and vineyards to determine whether

such costs are recoverable

The auditor may perform the following audit procedures:

1. Testing the accumulation of costs of growing crops for accuracy of classification.

2. Comparing accumulated costs with market prices and estimated disposition

costs.

3. Considering the physical condition of the inventory in reviewing its net realizable
value. The use of a specialist may be advisable.

Intermediate Life Plants

Intermediate-life plants include perennial plants and vines that have growth cycles of
more than one year. Such plants include artichokes, asparagus, various types of bush
berries, kiwifruit, alfalfa, and grazing grasses.

Audit Consideration:

Audit procedures for intermediate-life plants are similar to those performed

for other types of property, plant, and equipment, and may include—

1. Physically observing the condition of the plants.

2. Testing accumulated costs for properly capitalized amounts.

3. Comparing accumulated costs to prevailing costs for similar plants.

4. Testing accumulated costs for recoverability.

 5. Testing the useful lives or depreciation rates used in accounting for the plants.
Actual or anticipated production declines may lead to a revision of useful lives or
depreciation rates.

Breeding & Production Animals

Breeding herds consist of mature and immature male and female animals, either of
registered or commercial grade, that are maintained for their progeny.

Audit Consideration for breeding Animals

Major audit objectives for breeding animals include establishing the

existence and proper valuation of the animals. The auditor may choose to perform audit
procedures such as:

1. Physically observing the animals.

2. Reviewing and testing the applicable acquisition and accounting records.

3. Reviewing the reasonableness of the useful lives of the animals, the depreciation
rates, and salvage values.

4. Observing and performing counts of animals.

5. Considering the use of a specialist where it is necessary (a) to identify breeds; (b) to
read brands, tattoos, ear tags, earmarks, and other special identification marks; or (c) to
evaluate the quality of the animals.

Auditing Considerations for Production Animals

Audit procedures for production animals with extended productive lives are
similar to those for breeding animals and other fixed assets. They include

A.

1. Testing capitalized costs.

2. Reviewing the reasonableness of depreciation policies, including lives,

depreciation rates, and salvage values.

B.

1. Testing depreciation calculations.

2. Applying other procedures described in the sections of this guide dealing with
auditing considerations applicable to breeding animals and animals held for sale.
 Animals Held for Sale

Animals held for sale include all the progeny of the breeding herds except those
retained for the expansion or replacement of existing herds.

Accounting Principles

Animals held for sale are inventories of the producer and should be accounted
for at fair value less cost to sell, or under certain circumstances at sales price less
estimated cost of disposal.

Auditing Considerations

the auditor should review the adequacy of the accounting system and
related internal controls, and consider performing the following audit procedures:

1. Observing test counts or total counts of animals held for sale, depending on the
adequacy of controls.

2. Testing the costs capitalized for the animals.

3. Obtaining reliable estimates of the weight and quantity of the animals for
valuation purposes.

4. Testing the net realizable value of the animals by reference to quoted market
prices. Consideration should be given to local market prices that may differ from
regional prices.