Auditing and Assurance Services: Theory and Practice [for MODAUD1] (Tugas & Bendo)

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AUDIT OF BIOLOGICAL ASSETS AND

AGRICULTURAL PRODUCE

COLLABORATIVE AUDIT WORKING PAPER ON BIOLOGICAL ASSETS AND

AGRICULTURAL PRODUCE

CASE A: PRELIMINARIES (GUIDE QUESTIONS)

(1) What audit procedures address the existence and rights and obligations assertions of
biological assets?
(2) What audit procedures address the valuation assertion of biological assets?
(3) What is an agricultural activity under IAS 41? What is meant by biological
transformation and harvest under IAS 41?
(4) Distinguish between bearer and consumable biological assets.

CASE A: PRESENTATION

You were part of the assurance technical team handling the final review of financial
statements. Your assistance was sought in determining the appropriate valuation of
biological assets on various audit clients

Client A: Forest plantation and farm business.

Freestanding trees 3,000,000
Land under trees 900,000
Bearer plants - mature 1,000,000
Bearer plants - immature 500,000
Roads in the forest 500,000
Animals related to recreational activities 2,000,000
Bearer animals – mature 1,000,000
Bearer animals – immature 2,500,000

How much should be reported as biological assets? How do we classify the items
excluded from the biological assets?

Client B: As of December 31, 2021, the books of Hope Company showed the following:

Carrying Fair value (cost to

amount sell are not
significant)
Freestanding trees P1,700,000 P1,900,000
Land under trees 200,000 350,000
Roads in forest 100,000 175,000

The freestanding trees will be harvested and converted into logs once they reach
maturity. These logs were originally valued at P1,500,000. The entity uses the
revaluation model for all of its property, plant and equipment.

Required:

How much is the (a) biological assets as of December 31, 2021? and (b) the net effect of
the above information on the 2021 income statement? How do we classify the items
excluded from the biological assets?

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Copyright © 2020 Tugas & Bendo. All rights reserved.
No part of this learner’s material may be reproduced, stored, or transmitted in any form or by any means – electronic,
mechanical, or otherwise – without the written consent of the authors.
Auditing and Assurance Services: Theory and Practice [for MODAUD1] (Tugas & Bendo)
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CASE B: PRELIMINARIES (GUIDE QUESTIONS)

(1) How do we measure (initially and subsequently) biological assets?

(2) How do we measure (initially and subsequently) agricultural produce?
(3) What is the impact of contract prices and transport cost on the computation of fair
value?
(4) What are the typical examples of cost to sell?

CASE B: MEASUREMENT (HARVEST AND INVENTORY)

Client A:

Fair value based on quoted price in an active market for similar

asset P 5,100
Fair value base on quoted price in an active market for identical
asset 5,000
Fair value base on unobservable inputs for the asset 4,900
Selling price in a binding contract to sell 5,200
Estimated commissions to brokers and dealers 500
Estimated transport and other costs necessary to get the asset to
the market 300

Required: How much is the entity’s biological assets?

Client B:

A Cup In Hand Company is a producer of coffee. The entity is considering the valuation
of its coffee beans. There is an active market for coffee and the fair value of the coffee
beans is readily determinable. During March 2021, the entity harvested 100,000
kilograms of coffee with a fair value less cost to sell of P6,000,000 at the point of harvest.
It will take about a month or two to process the harvested coffee beans to powder form.
The entity has a remaining 20,000 kilograms of processed coffee as of this date valued
at P55 per kilo.

During the year, the entity sold 80% of the total inventory available for sale at P65 per
kilo. As of year-end, the processed harvested coffee beans’ net realizable value was at
P1,000,000 and fair value less costs of disposals of P1,100,000. On the same date, there
were coffee beans growing on the coffee bearer plants with a fair value less cost to sell
of P2,000,000. These are expected to be harvested on March 2022.

The company follows the first-in, first-out (FIFO) method in determining the cost of its
ending inventory.

Required: Prepare a working paper showing computations for (a) cost of sales and (b)
total value of inventory.

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Copyright © 2020 Tugas & Bendo. All rights reserved.
No part of this learner’s material may be reproduced, stored, or transmitted in any form or by any means – electronic,
mechanical, or otherwise – without the written consent of the authors.
Auditing and Assurance Services: Theory and Practice [for MODAUD1] (Tugas & Bendo)
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CASE C: PRELIMINARIES (GUIDE QUESTIONS)

(1) Discuss the differences between price change and physical change.
(2) Discuss the disclosure requirements under IAS 41.

CASE C: BEARER ANIMALS

Client A:

Faith Company produces milk for sale to local and national ice cream producers. The
entity began operation on January 1, 2021 by purchasing 650 milk cows for P8,000,000.
The entity had the following information available at year-end relating to the cows:

Acquisition cost, January 1, 2021 P8,000,000

Change in fair value due to growth and price
changes 2,500,000
Decrease in fair value due to harvest 250,000
Milk harvested during 2021 but not yet sold 400,000

Required: At year-end, compute for the (a) value of the milking cows and (b) gain (loss)
on change in fair value less cost to sell.

Client B:

Pampanga Co. provided you with the following information pertaining to its biological
assets for 2021. A herd of 100, 2-year old animals was held at January 1, 2021. Ten
animals aged 2.5 years were purchased on July 1, 2021 for P5,400 each, and ten animals
were born on the same day. No animals were sold or disposed of during the period. Per
unit fair values less estimated point-of-sale costs were presented in the next page:

2 year old animal at January 1, 2021 P5,000

Newborn animal at July 1, 2021 3,500
2.5 year old animal at July 1, 2021 5,400
Newborn animal at December 31, 2021 3,600
0.5 year old animal at December 31, 2021 4,000
2 year old animal at December 31, 2021 5,250
2.5 year old animal at December 31, 2021 5,550
3 year old animal at December 31, 2021 6,000

Required: At year-end, compute for (a) biological assets, (b) increase in fair value less
cost to sell due to price change and (c) increase in fair value of biological assets due to
physical change

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Copyright © 2020 Tugas & Bendo. All rights reserved.
No part of this learner’s material may be reproduced, stored, or transmitted in any form or by any means – electronic,
mechanical, or otherwise – without the written consent of the authors.
Auditing and Assurance Services: Theory and Practice [for MODAUD1] (Tugas & Bendo)
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CASE D: PRELIMINARIES (GUIDE QUESTIONS)

(1) How do we define bearer plants and how do we account for it?
(2) Distinguish between mature and immature biological assets.
(3) How do we account for immature biological assets and immature bearer plants?

CASE D: BEARER PLANT

Benguet Co. ventured out into a plantation of coffee beans as early as January of 2018.
It has several coffee trees which started bearing fruits in October 1, 2020. The coffee
beans were harvested in June and were placed under extreme sunlight to make it dry.
The following information were presented as of December 31, 2020:

Coffee beans – growing (BA) P 400,000

Mature coffee trees (PPE) 5,000,000
Accumulated depreciation – mature coffee (125,000)
trees
Immature coffee trees (PPE) 2,000,000

The coffee beans – growing represents agricultural produce on mature coffee trees. The
coffee trees were estimated to be productive for the next 15 years depreciated using
150% declining method.

Immature coffee trees are not yet capable of bearing fruits. The following transactions
transpired in 2021:

 Incurred costs for planting additional coffee trees for a total cost of P500,000
 Incurred cleaning, maintenance, utilities and labor costs subsequent to planting as
follows: mature: P500,000; immature: P700,000.
 Certain immature coffee trees with accumulated costs of P1,000,000 were already
capable of bearing produce were reclassified to mature coffee trees on October 1,
2021.
 Prior to harvest, fair value less cost to sell of the coffee beans – growing increased by
P2,800,000.
 Harvested 10,000 kg. of coffee beans with a fair value less cost to sell of P3,000,000
at the time of harvest.
 Incurred additional operating expenses amounting to P300,000.
 One-fourth of the harvested coffee beans were sold for P1,000,000. The net realizable
value at the end of the year for the remaining inventory was measured at P2,500,000.
 Fair value less cost to sell at the end of the year: Coffee beans – growing P400,000;
No identified impairment for mature coffee trees and immature coffee trees.

Required: Prepare a working paper for 2021 showing (a) income statement for the year
and (b) partial statement of financial position.

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Copyright © 2020 Tugas & Bendo. All rights reserved.
No part of this learner’s material may be reproduced, stored, or transmitted in any form or by any means – electronic,
mechanical, or otherwise – without the written consent of the authors.
Auditing and Assurance Services: Theory and Practice [for MODAUD1] (Tugas & Bendo)
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CASE E: PRELIMINARIES (GUIDE QUESTIONS)

How do we account for government grants related to biological assets under IAS 41 and bearer plants
under IAS 20?

CASE E: GOVERNMENT GRANTS

You have accepted a new audit engagement for the audit of an entity engaged in various agricultural
activities. The entity received several government grants which were not recognized by the entity,

 During the year, the government announced an unconditional government grant of P500,000 for
farmers cultivating corn and rice. The entity accounts for its corn and rice plants at fair value less
cost to sell. The entity already complied with all the application requirements and was informed
that it is entitled to such grant which will be released January of the following year.

 During the year, the government announced the distribution of government grant to all farmers
raising poultry. The grant provides that qualified farmers would be receiving a grant of P5 for every
poultry animal raised. The entity’s poultry animals were measured at fair value less cost to sell.
The entity was able to raise 1,000 poultry animals.

 In the previous year, due to excessive supply of lettuce in the region, the government announced
that it will provide grants to all farmers who will temporarily discontinue engaging in the specified
agricultural activity for a year. For an entire year, the entity followed this regulation which ended
October of the current year. The entity received a grant of P500,000 for complying with the
condition.

 In line with the government’s plan to enhance the farming activities in the region, the government
announced in January 2019 the provision of grant to entities who will engage in cabbage and
cassava plantation for a period of five years. The grants were provided to farmers in 2019 which
amounted to P200,000 related to cabbage and P350,000 related to cassava. For entities who
would plant cabbage, recipients are required to return all of the grant if it farms for a period shorter
than five years. For entities who would plant casava, recipients are allowed to retain part of the
grant according to the time that has elapsed. It accounts for these biological assets at fair value
less cost to sell. Due to the very low return on the said plants/crops, the entity decided to
discontinue its cabbage and casava plantation at the end of 2020. After harvesting early in 2021,
the entity shifted its plantation of more bearer plants.

 The company has a mango plantation in Tagaytay. In January of the previous year, this plantation
was adversely affected by the Taal Volcano eruption. The entity was entitled to a government grant
that become receivable by an entity as compensation for expenses or losses incurred from the
unfortunate event.

 The entity also has plantations of Narra and Mahogany trees for future harvest of lumber/wood. It
normally takes 20 years before trees mature and become harvestable. These were planted at the
beginning of the year with no available fair value in the market. The entity received P1,000,000
from the government as grant to compensate for the planting costs related to these biological
assets.

 The entity has a farm with several jackfruit and coconut trees. During the year, the entity received
grant worth P300,000 and P500,000 for the purchase of fertilizers used.

 The entity received P5,000,000 from the government to management of its coffee plantation. The
coffee plants are depreciated over an estimated useful life of 20 years.

 In 2020, the government granted land worth P2,000,000 to the entity on the condition that the
entity will construct a building to house farm-related community livelihood projects and post-
harvest facilities. The entity building was completed at the end of 2020 and was operational
beginning 2021. The building cost amounted to P500,000 with an estimated useful life of 20 years.

Required: Identify the applicable specific standard paragraph and determine the appropriate
treatment.

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Copyright © 2020 Tugas & Bendo. All rights reserved.
No part of this learner’s material may be reproduced, stored, or transmitted in any form or by any means – electronic,
mechanical, or otherwise – without the written consent of the authors.