PAS 41 - Agriculture

INTRODUCTION
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 assets 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 standards are applied.

BIOLOGICAL ASSETS
Biological assets are living animals and living plants. It can be either 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

NOTE: 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:

 ● Is used in the production or supply of agricultural produce
● Is expected to bear produce for more than period; and
● Has a remote likelihood of being sold as agricultural produce, except for
incidental scrap sales.

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

PAS 41
● Bearer and consumable animals
● Consumable plants
● Produce growing on bearer plants
PAS 16
● 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:
1. Raising livestock
2. Forestry
3. Annual or perennial cropping
 4. Cultivating orchards and plantations
5. Floriculture
6. 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 function.

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:

1. Asset changes through:
a. Growth
● An increase in quantity or improvement in quality of an
animal or plant
b. Degeneration
● A decrease in quantity or deterioration in quality of an
animal or plant
c. Procreation
● Creation of additional living animals or plants.
2. 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.

MEASUREMENT
1. Biological Assets
Biological assets are initially and subsequently measured at fair value
less cost to sell (cost of disposal). The gain or loss arising from initial
measurement and subsequent changes in fair value less cost to sell (cost of
disposal) are recognized in profit or loss.

A gain may arise on the initial recognition of a biological asset, for

example, when a calf is born. A loss may arise on the initial recognition of a
biological asset because costs to sell (cost of disposal) are deducted from fair
value.
 Biological assets whose fair value cannot be reliably determined on
initial recognition are initially measured at cost and subsequently measured at
cost less accumulated depreciation and accumulated impairment losses.
Once the fair value becomes reliably measurable, the biological asset is
measured at its fair value less cost to sell (cost of disposal).

A biological asset that is previously measured at fair value less cost to

sell is continued to be measured at fair value less cost to sell (cost of
disposal) until it is disposed of.

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

Cost to sell does 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
cases, 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.

GOVERNMENT GRANTS
Only government grants related to biological assets measured at fair value less
cost to sell are accounted for under PAS 41. Those that are related to biological
assets measured at cost less accumulated depreciation and accumulated
impairment losses are accounted for PAS 20

Accounting for Government Grants and Disclosure of Government Assistance.

Under the PAS 41, if the grant is:
A. Unconditional – the grant is recognized in profit or loss when it becomes
receivable
B. Conditional – the grant is recognized in profit or loss when the attached
conditions are met
C. 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 grant is recognized in profit or
loss as time passes

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.
 PAS 19 - Employee Benefits
PAS 19
Philippine Accounting Standard (PAS) 19 applies to all types of employee
benefits, although it is in the area of accounting for defined benefit pension plans that
PAS 19 results in most complexity.
PAS 12 - Income Tax
 COMPLETING THE AUDIT
COMPLETION STAGE
The completion stage of the audit is of crucial importance. It is during the completion
stage that the auditor reviews the evidence obtained during the audit together with
the final version of the financial statements with the objective of forming the auditor’s
opinion.

REVIEW OF AUDIT FILES AND EVALUATION OF MISSTATEMENTS

● PSA 220, Quality Control for an Audit of Financial Statements

● PSA 230, Audit Documentation
● PSA 450, Evaluation of Misstatements Identified during the Audit
 CLASS REPORTING
HUMAN RESOURCES & PAYROLL CYCLE
Human Resource
● Finding, screening, recruiting, training of employees, as well as administering
employee-benefit programs
● Business activities associated with effectively managing the employee
workforce

Human Resource Management

Activities include:
1. Recruitment and Hiring
2. Training
3. Job Assignment
4. Compensation/Payroll Cycle (Controller manages the payroll system)
5. Performance Evaluation
6. Employee Discharge

NOTE: Activities 2-5 are recurring activities.

Provides information about hirings, termination, and pay-rate changes.

How to ensure that a job applicant has not been involved in financial issues or
scandals?
● Regular Applicant
○ NBI Clearance
○ Clearance or recommendation from previous employer
● Fresh Graduate
○ NBI Clearance
How to identify Politically-exposed persons (PEPs)?
● Valid ID
● Birth Certificate
● Sanction List

What is the risk of the onboarding process?

● Employee number confusion

How to catch Ghost Employees?

● Ghost employees are made-up employees by the company in order to create
a payroll record so that they can keep the money.
● Payroll Master Database - manually inputed status and existence of
employees by HR (easily manipulated)
● Vouching of time cards and 201 File
Payroll Cycle
● Obtaining and accounting for services from employees
● Payment to (1) the employees for the services rendered and (2) the
government and other institutions for withheld and accrued employee
benefits.
● Normally occurs periodically (updated in a timely manner)

Cycle Steps
1. Maintain and Update Payroll Master Database
● Internal changes (Person Assigned: HR Dept.)
○ New and terminated employees
○ Promotions
○ Pay raises
● External changes (Person Assigned: Payroll Dept.)
○ Change in tax rate
○ Other deductions
2. Validate Employee Time and Attendance Data
3. Payroll Preparation
● Payroll data is edited, validated, and sorted (Payroll Transaction File)
4. Payroll Disbursement
● Accounts Payable Department reviews and approves the payroll
register.
5. Remittance of Payroll Taxes and Other Deductions
● Mandatory and voluntary deductions shall be paid accurately and in a
timely manner to avoid employee complaints and violations.

Benefits of Payroll Audit

● Eliminate ghost employees or mismarked time cards
● Spot calculation mistakes if doing payroll by hand
● Remove terminated employees from your payroll
● Verify tax withholdings are accurate

How is it in the case of Retirement?

● HR Dept. provides Payroll Dept. the benefits that a retiring employee should
receive.
● Payroll Dept. computes the benefit
● Data
○ Payroll Register
○ Headcount
● Retirement Liability
○ Actuarial Valuation Report (AVR)
■ Data: Past Service Cost
■ Used to check the accrual of retirement liability
 ■ Not all companies are required of AVR, but it is advisable

Audit of the Payroll Cycle

Audit time is usually significantly less than other cycles

Substantive tests are usually not extensive, unless anomalies are detected.
Extensive tests are done in cases of:
● Sarbanes-Oxley (SOX) audit

1. Risk Assessment
● Understand the client and its environment (inherent risk)
● Understand the client’s internal control (control risk)
2. Test of Controls
● Operating effectiveness of controls
3. Substantive Procedures
● Obtaining of direct financial assertions

Relevant Assertions
1. Existence
2. Occurrence of Payroll Expense
 FINANCING CYCLE
Lending Process
1. Finding Customer
2. Evaluate Customer’s Character
3. Evaluate Customer’s Credit Score
4. Evaluate Customer’s Financial Condition
5. Assessing Possible Loan Collateral & SIgning Loan Agreement
6. Monitoring Compliance

Credit Process
Assessment of:
● Current and expected financial condition
● Ability to withstand adverse conditions or “stress”
● Credit history and a positive correlation between historical and projected
repayment capacity.
NOTE: Blacklisted are those with negative credit reputation.

Credit Initiation and Analysis Process

1. Screen
2. Collect
3. Analyze
4. Structure
5. Prepare
Analysis of Risk
● Industry
● Management Quality
● Security Realization

Financing Cycle
2 Major Transaction Classes
1. Long-term Debt Transactions
2. Shareholders’ Equity Transactions

Relevant Assertions
1. Existence or Occurrence
2. Rights and Obligation

Share Capital Movement Assertions

● One method of raising finance to issuance capital
1. Occurrence
2. Completeness
3. Accuracy, Cut-off, & Classification
4. Disclosure
Debentures Movement Assertions
● Marketable security
● Type of investment issued by business to to raise money for long-term
activities
1. Occurrence
2. Completeness
3. Accuracy, Cut-off, & Classification
4. Disclosure

Long-term Loans Assertions

● 3-30 years
1. Completeness

Classification of Financing
1. Bank Loans
2. Government Loans
3. Private Company Loans

Types of Financing
● There are 18 types including:
○ Bank term loans,
○ Equipment loans,
○ SSS loans, etc.
Anti-Money Laundering (AML)
● the activities financial institutions perform to achieve compliance with legal
requirements to actively monitor for and report suspicious activities.

INVESTMENT CYCLE
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