Module 1

1.1 Specialized Industry

What is a specialized industry?

Perhaps it is easiest to start by explaining that a specialized industry is not necessarily rare or even unusual. Examples of
specialized industries include:

 airline
 banking and insurance
 agriculture, and
 oil extraction.

What makes these industries specialized is that they are likely either to have specific financial reporting standards
applicable to them, or to have distinct accounting policies which have been developed to account for specialized
transactions and balances which are based on the normally-applied financial reporting standards. For instance, IAS®
41, Agriculture is clearly relevant specifically to the agriculture sector and IFRS®, 7 Financial Instruments: Disclosure will
need specific application by companies operating in the banking sector.

1.1 Audit Considerations

Competence
When accepting an audit engagement involving a specialist industry, the audit firm needs to pay close attention to the
competence of the audit firm to provide the service. ISQC 1, Quality Control for Firms That Perform Audits and Reviews of
Financial Statements, and Other Assurance and Related Services Engagements  requires the audit firm to consider whether
the firm is competent to perform the engagement and has the capabilities, including time and resources, to do so. This
should include consideration of whether the audit firm personnel has knowledge of relevant industries and has experience
with relevant regulatory or reporting requirements, or the ability to gain the necessary skills and knowledge effectively.
Larger audit firms are likely to meet the competence requirement for almost any type of industry – they will either already
possess necessary skill and competence through having existing clients in the particular industry, or have the resource
available to bring in experts and/or provide any necessary staff training. Smaller firms may have to carefully consider their
competence to take on an audit client in a specialized industry if they have not previously worked with an audit client in the
same industry. However, regardless of size, audit firms may choose to specialize themselves in the audit of clients in a
particular market or sector, for example a smaller firm may specialize in the audit of clients in the farming sector, or in not-
for-profit organizations, so it should not be assumed that just because an audit firm is small, it would not meet the
competence requirement.
The audit firm should also ensure that there is adequate documentation to demonstrate that competence has been
considered, and the steps that have been taken to improve competence where necessary, for example through appropriate
staff training

Audit planning
Identification of the risk of material misstatement in a specialized industry should be approached in the same was as in any
other audit – by obtaining appropriate understanding of the business and its environment. Assuming that staff have the
necessary competence, as discussed above, this should not be problematical.
To assist audit team members assigned to a specialized industry client, the audit firm is likely to have additional resources
available. There may be briefing notes or internal technical guidance on how financial reporting standards should be applied
within the sector. For example, in the audit of banking sector clients, an audit firm may produce guidance on the specific
application of IFRS® Standards relating to the range of financial instruments typically held by banks. Audit staff can then
refer to this guidance when performing the audit, particularly when identifying risks of material misstatement.
It is also important to remember that while there may be specific risks of material misstatement relating to the industry-
specific balances and transactions, there must also be appropriate consideration of the “normal” balances and transactions.
For instance, in the audit of a bank, there will be plenty of risks to consider other than those relating to bank-specific
transactions and balances, for example the depreciation of properties, recognition of provisions and impairment of goodwill
would all still be relevant. These 'normal' types of risk must not be forgotten, just because the client operates in a
specialized industry.
Reliance on experts
Linked to the previous matters, competence, audit planning and the specialized nature of some transactions and balances,
the auditor may plan to use an auditor’s expert to obtain audit evidence. This is quite likely in a specialized industry as
despite being competent to perform the engagement, the audit firm may not have the necessary specific expertise in some
areas. For instance in the audit of a bank, specialists may be brought in to value complex financial instruments.
In this situation, the audit firm must adhere to the requirements and principles of ISA 620, Using the Work of an Auditor’s
Expert which deals with matters including the evaluation of the objectivity, competence and capabilities of the auditor’s
expert, determining and communicating the scope and objectives of their work, and assessing their findings. It is particularly
important that the auditor evaluates the relevance and adequacy of the expert’s findings or conclusions. There is a danger
of over-reliance on the expert’s work; the fact that the audit is of a specialized nature does not mean that the auditor can
pass all responsibility over to an expert. For instance, the auditor must consider whether the expert’s findings are consistent
with the auditor’s understanding of the client and with the conclusions of other audit procedures. Any inconsistencies must
be investigated.

1.2 Overview and Learning Objectives

TOPIC OVERVIEW:
This chapter discusses the accounting of biological assets, agriculture produce and government grant related to biological
assets under PAS 41 as well as accounting under the PFRS's for SMEs.

LEARNING OBJECTIVES:
After studying this chapter, you should be able to:
1. Enumerate the scope of PAS 41 Agriculture.
2. Describe the features of agricultural activity.
3. Describe the initial recognition, initial measurement, subsequent measurement, derecognition and financial statement
presentation of biological assets and agricultural produce.
4. Account properly government grants related to biological assets.
5. Describe the difference between full PFRS and PFRS for SMEs for agriculture. 
  

1.2.1 Agriculture

AGRICULTURE 
Agriculture is the cultivation and breeding of animals, plants and fungi for food, fiber, biofuel, medicinal plants and other
products used to sustain and enhance life. [Wikipedia] PAS 41 prescribes the accounting and disclosure requirement when
it is related to agricultural activity. 

AGRICULTURAL ACTIVITY
Agricultural activity is the management by an entity of the biological transformation of biological assets for sale into
agricultural produce or additional biological assets. Agricultural activity covers a diverse range of activities; for example
a. raising livestock
b. cultivating orchards and plantations
c. forestry
d. floriculture
e. annual or perennial cropping
f. aquaculture (including fish farming) 

Common features which exist within this diversity include the following :
(a) Capability to change. Living animals and plants are capable of biological transformation
(b) Management of change. Management facilitates biological transformation by enhancing, or at least stabilizing conditions
necessary for the process to take place (for example, nutrient levels, moisture, temperature, fertility, and light). Such
management distinguishes agricultural activity from other activities. For example from unmanaged sources (such as ocean
fishing and harvesting deforestation) is not agricultural activity; and
(c) Measurement of change. The change in quality (for example, genetic merit, density, ripeness, fat cover, protein content,
and fiber strength) or quantity (for example, progeny, weight, cubic meters, fiber length or diameter, and number of buds)
brought about by biological transformation or harvest is measured and monitored as a routine management function. 

Biological transformation results in the following types of outcomes:

(a) Asset changes through
(i) growth (an increase in quantity or improvement in quality of an animal or plant),
(ii) degeneration (a decrease in the quantity or deterioration in quality of an animal or plant), or (iii) procreation (creation of
additional living animals or plants); or
(b) Production of agricultural produce such as latex, tea leaf, wool, and milk. 

PAS 11 Agriculture
The standard applicable to agriculture is PAS 41 which prescribes the accounting treatment, financial statement
presentation, and disclosures related to most agricultural activity.

Applicability of PAS 41
PAS 41 shall be applied to account for the following when they relate to agricultural activity:
(a) biological assets;
(b) agricultural produce at the point of harvest; and
(c) government grants related to biological assets measured at fair value less costs to sell.

Inapplicability of PAS 41
(a) Agricultural produce after the point of harvest (PAS 02 Inventories)
(b) Land related to agricultural activity (see PAS 16 Property, Plant and Equipment, PAS 17/PFRS 16 Leases and PAS 40
investment Property); and
(c) Intangible assets related to agricultural activity (see PAS 38 Intangible Assets).
(d) Cultural activity that is not managed such as ocean fishing and deforestation  
  

1.2.2 Biological Assets

BIOLOGICAL ASSET
A biological asset is a living animal or plant Examples include apple tree, mango tree mother pig for breeding, coconut tree
and the likes.
AGRICULTURAL PRODUCE
Agricultural produce is the harvested product of the entity's biological assets. Harvest is defined as the detachment of
produce from a biological asset or the cessation of a biological asset's life processes. Examples fruit of pineapple, tomato,
mango and coconut.
Other examples of biological assets, agricultural produce, and products that are the result of processing after harvest is
shown in

CONSUMABLE VS. BEARER BIOLOGICAL ASSETS

Consumable biological assets (CBA) are those that are to be harvested as agricultural produce or sold as biological assets.
Examples biological assets are:
1. livestock intended for the production of meat,
2. livestock held for sale,
3. fish in farms,
4. crops such as corn, cabbage and carrots, and lumber. trees being grown for lumber.
Bearer biological assets (BBA) are matured biological assets held for more than one financial period capable for bearing
consumable biological assets to be harvested as agriculture produce. BBA are held for generation income from sale of
produce; for example,
1. livestock from which milk is produced,
2. grape vines,
3. oil palm and rubber trees
4, fruit trees, and
5. trees from which firewood is harvested while the tree remains.

Bearer biological assets are not agricultural produce but, rather, are self-generating. Bearer plant asset are accounted as
PPE under PAS 16 provided it will meet the criteria in the said standard, while bearer animals are accounted as biological
asset under PAS 41. Produce growing on bearer plants is a biological asset.

Mature Biological Assets

Biological assets may be classified either as mature biological assets or immature biological assets. Mature biological
assets are those that have attained harvestable specifications (for consumable biological assets) or are able to sustain
regular harvests (for bearer biological assets).

1.2.2.1 Recognition and Measurement

INITIAL RECOGNITION
An entity shall recognize a biological asset or agriculture 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 will flow to the enterprise; and
c) the fair value or cost of the asset can be measured reliably. In agricultural activity, control may be evidenced by, for
example,
  i. legal ownership of cattle
  ii. branding or otherwise marking of the cattle on acquisition, birth, or weaning.

The future benefits are normally assessed by measuring the significant Physical attributes.

INITIAL AND SUBSEQUENT MEASUREMENT

1. Biological asset
Initial recognition and subsequent reporting date – shall be measured at its fair value less costs to sell (FVLCTS) except
when the fair value cannot be measured reliably. Fair value less costs to sell is determined as follows:

MEASUREMENT OF FAIR VALUE

Fair value is 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. An entity would need to consider the requirements of PFRS 13 Fair Value
Measurement in order to determine the fair value.
Cost approximates fair value
Cost may sometimes approximate fair value, particularly when:
a. little biological transformation has taken place since initial cost incurrence (for example, for fruit tree seedlings planted
immediately prior to the end of a reporting period); or
b. the impact of the biological transformation on price is not expected to be material (for example, for the initial growth in a
30-year pine plantation production cycle).

Inability to measure fair value reliably

There is a presumption that fair value can be measured reliably for a biological asset. However, that presumption can be
rebutted only on initial recognition for a biological asset for which quoted market prices are not available or alternative fair
value measurements are determined to be clearly unreliable. In such a case, that biological asset shall be measured as
follows after consideration of PAS 2, PAS 16 and PAS36:

                Cost                                                                                                                                    XXX

                Less: Accumulated depreciation and impairment losses                                               XXX
                Carrying amount                                                                                                               XXX

The presumption only exists for biological asset and not on agricultural entity produce because harvested produce is a
marketable commodity. An entity that has previously measured as a biological asset at its fair value less costs to sell shall
continue to measure the biological asset at its fair value less costs sell until disposal.
Fair value becomes reliably measurable:
When the fair value becomes reliably measurable, the entity shall measure it at its fair value less costs to sell.

COSTS TO SELL
Costs to sell are incremental costs directly attributable to the disposal of an asset.
Inclusions
a. Commissions to brokers and
b. Levies by regulatory agencies and commodity exchanges
c. Transfer taxes and duties 

Exclusions
a. Finance costs dealers
b. Income taxes
c. Transport and other costs necessary to get assets to a market
COSTS INCURRED AFTER HARVEST
Cost incurred after harvest shall be recognized as expense when incurred. An entity does not include any cash flows for
financing the assets, taxation, or re-establishing biological assets after harvest (for example, the cost of replanting trees in a
plantation forest after harvest).

BIOLOGICAL ASSETS ATTACHED TO LAND

Biological assets are often physically attached to land (for example, trees in a plantation forest). The land and biological
assets should be accounted separately. In case there is no available separate market for biological assets:
 
                Combined market price                                                                                                 XXX
                Less: Fair value of the raw land and land improvements                                           XXX
                Fair value of biological assets                                                                                      XXX

The land is accounted either as a PPE under PAS 16 or investment property under PAS 40.
GAINS AND LOSSES
A. Initial recognition
Gains or losses on initial recognition are recognized in profit or loss in the period in which they arise. Biological assets
> A loss may arise on initial recognition of a biological asset, because costs to sell are deducted in determining fair value
less costs to sell of a biological asset.    
A gain may arise on initial recognition of a biological asset Stich at when a calf is born.
Agricultural produce
> A gain or loss may arise on initial recognition of agricultural produce as a result of harvesting.

B. Subsequent reporting date

Gains or losses from changes in fair value less costs to sell of biological assets shall be included in profit or loss for the
period in which it arises.
  

1.2.2.2 Changes in Fair Value

Changes in fair value less costs to sell costs of a biological asset

The change in fair value of biological assets is part physical change (growth, etc.) and part unit price change. Separate
disclosure of the two components is encouraged, but not required. The change in fair value due to physical and price
change may be computed as follows: 
1.1 Illustrative Problems