MODULE 8 AGRICULTURE

LEARNING OBJECTIVES:
1. Differentiate the following: biological assets, bearer plants, agricultural produce and
inventory.
2. State the initial and subsequent measurement of biological assets and agricultural
produce.
3. State the accounting for government grants that are within the scope of PAS 41.

OVERVIEW
PAS 41 Agriculture sets out the accounting for agricultural activity – the transformation of biolog-
ical assets (living plants and animals) into agricultural produce (harvested product of the entity's
biological assets). The standard generally requires biological assets to be measured at fair
value less costs to sell.

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Objective
The objective of PAS 41 is to establish standards of accounting for agricultural activity – the
management of the biological transformation of biological assets (living plants and animals) into
agricultural produce (harvested product of the entity's biological assets).

PAS 41 applies to the following when they relate to agricultural activity:

a. Biological assets, except bearer plants;
b. Agricultural produce at point of harvest; and
c. Unconditional government grants related to a biological asset measured at fair value
less cost to sell.

Biological asset – is a “living animal or plant.” (PAS 41.5)

“Bio” means life, therefore, dead animals, dead plants and other non-living things cannot qualify
as biological assets.

Types of biological assets:

1. Consumable biological assets – “those that are to be harvested as agricultural
produce or sold as biological assets.” (PAS 41.44)

Examples:
a. Livestock intended for the production of meat
b. Livestock held for sale
c. Fish in farms
d. Crops such as maize and wheat
e. Produce on bearer plants
f. Trees being grown for lumber.

2. Bearer biological assets – those that are held to bear produce. Only the produce is
harvested while bearer biological asset remains.
 Examples:
a. Livestock from which milk is produced
b. Fruit trees from which fruit is harvested (PAS 41.44)

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 plant 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 one period; and
c. Has remote likelihood of being sold as agricultural produce, except for incidental scrap
sales. (PAS 41.5)
d. Plants that are to be harvested as agricultural produce are not bearer plants. For
example, a tree that is intended to be cut down and used as lumber is consumable plant,
and therefore classified as biological asset.
e. A tree that is intended to bear fruits and only the fruits are harvested while the tree
remains is a bearer plant, and therefore classified as PPE.
f. Bearer plants may be sold as scrap when no longer used are not necessarily precluded
from being classified as bearer plants.

Agricultural produce – is “the harvested produce of the entity’s biological assets.” (PAS 41.5)

Harvest is “the detachment of produce from a biological assets or cessation of biological asset’s
life processes.” (PAS 41.5)

Agricultural produce refers to those that are in their natural state and are not yet processed.
Those processed are treated as inventory.

PAS 41.5C states that “Produce growing on bearer plants is a biological assets.” However, in
many cases, it is impractical to account for fruits growing on trees before they are harvested.
Many companies, therefore, start to apply PAS 41 on the fruits only at the point of harvest. This
is also true for produce of animals, e.g., milk is accounted for only after it is squeezed from the
cow’s breast.

Agricultural activity is “ the management of an entity of the biological transformation and

harvest of biological assets for sale or for conversion into agricultural produce or into additional
biological assets.” (PAS 41.5)

Examples of agricultural activities include: raising livestock, forestry, annual or perennial

cropping, cultivating orchards and plantation, floriculture, and aquaculture (including fish
farming). (PAS 41.5)

The following are common features of agricultural activities:

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, harvesting from unmanaged sources (such as ocean fishing and deforestation) is
not agricultural activity; and
 c. Measurement of change – the change in quality or quantity brought about by biological
transformation or harvest is measured and monitored as a routine management function.

Biological transformation – comprises of the following processes that cause qualitative or

quantitative changes in biological asset:
1. Assets changes through:
a. Growth – an increase in quantity or improvement in quality of an animal or plant.
b. Procreation - is the creation of additional living animals or plants.
c. Degeneration – is a decrease in the quantity or deterioration in quality of an animal or plant.
2. Production of agricultural produce.

Initial recognition
An entity recognises a biological asset or agriculture produce only when the entity controls the
asset as a result of past events, it is probable that future economic benefits will flow to the
entity, and the fair value or cost of the asset can be measured reliably.

Measurement
Biological assets within the scope of PAS 41 are measured on initial recognition and at
subsequent reporting dates at fair value less estimated costs to sell, unless fair value
cannot be reliably measured. [PAS 41.12]

Agricultural produce is measured at fair value less estimated costs to sell at the point of
harvest. [PAS 41.13] Because harvested produce is a marketable commodity, there is no 'mea-
surement reliability' exception for produce.

The gain on initial recognition of biological assets at fair value less costs to sell, and
changes in fair value less costs to sell of biological assets during a period, are included in
profit or loss. [PAS 41.26]

A gain on initial recognition (e.g. as a result of harvesting) of agricultural produce at fair value
less costs to sell are included in profit or loss for the period in which it arises. [PAS 41.28]

All costs related to biological assets that are measured at fair value are recognised as
expenses when incurred, other than costs to purchase biological assets.

PAS 41 presumes that fair value can be reliably measured for most biological assets. However,
that presumption can be rebutted for a biological asset that, at the time it is initially recognised,
does not have a quoted market price in an active market and for which alternative fair value
measurements are determined to be clearly unreliable. In such a case, the asset is measured at
cost less accumulated depreciation and impairment losses. But the entity must still measure all
of its other biological assets at fair value less costs to sell. If circumstances change and fair
value becomes reliably measurable, a switch to fair value less costs to sell is required.
[PAS 41.30]

Other accounting issues

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, not required. [PAS
41.51]
Agricultural produce is measured at fair value less costs to sell at harvest, and this measure-
ment is considered the cost of the produce at that time (for the purposes of PAS 2 Inventories or
any other applicable standard). [PAS 41.13]

Agricultural land is accounted for under PAS 16 Property, Plant and Equipment. However, bio-
logical assets (other than bearer plants) that are physically attached to land are measured as bi-
ological assets separate from the land. In some cases, the determination of the fair value less
costs to sell of the biological asset can be based on the fair value of the combined asset (land,
improvements and biological assets). [PAS 41.25]

Intangible assets relating to agricultural activity (for example, milk quotas) are accounted for
under PAS 38 Intangible Assets.

Government grants
Unconditional government grants received in respect of biological assets measured at fair
value less costs to sell are recognised in profit or loss when the grant becomes receivable.
[PAS 41.34]

If such a grant is conditional (including where the grant requires an entity not to engage in
certain agricultural activity), the entity recognises the grant in profit or loss only when the
conditions have been met. [PAS 41.35]

Disclosure
Disclosure requirements in PAS 41 include:
o aggregate gain or loss from the initial recognition of biological assets and agricultural
produce and the change in fair value less costs to sell during the period* [PAS 41.40]
o description of an entity's biological assets, by broad group [PAS 41.41]
o description of the nature of an entity's activities with each group of biological assets and
non-financial measures or estimates of physical quantities of output during the period
and assets on hand at the end of the period [PAS 41.46]
o information about biological assets whose title is restricted or that are pledged as
security [PAS 41.49]
o commitments for development or acquisition of biological assets [PAS 41.49]
o financial risk management strategies [PAS 41.49]
o reconciliation of changes in the carrying amount of biological assets, showing separately
changes in value, purchases, sales, harvesting, business combinations, and foreign
exchange differences* [PAS 41.50]

Disclosure of a quantified description of each group of biological assets, distinguishing between

consumable and bearer assets or between mature and immature assets, is encouraged but not
required. [PAS 41.43]

If fair value cannot be measured reliably, additional required disclosures include:

 description of the assets
 an explanation of why fair value cannot be reliably measured
 if possible, a range within which fair value is highly likely to lie
 depreciation method
 useful lives or depreciation rates
 gross carrying amount and the accumulated depreciation, beginning and ending.
If the fair value of biological assets previously measured at cost subsequently becomes
available, certain additional disclosures are required. [PAS 41.56]

Disclosures relating to government grants include the nature and extent of grants, unfulfilled
conditions, and significant decreases expected in the level of grants.
MODULE 8 Post-test
PRACTICAL ACCOUNTING 1 – REVIEW
BIOLOGICAL ASSETS
PROF. U.C. VALLADOLID

Multiple Choice
Identify the choice that best completes the statement or answers the question.

1. A group of twenty 2-year old cattle was held at January 1, 2020. Five 2-year old cattle were
purchased on January 2, 2020 for 12,000 each and five calves were born on the same date. No
cows or calves were disposed of during the period. Per unit fair values less estimated point of
sales were as follows:
January 1, 2020
2-year old cattle 12,000
Newborn cattle 4,000

December 31, 2020

3-year old cattle 15,000
2-year old cattle 13,000
1-year old cattle 7,000
Newborn cattle 5,000

1. How much shall be taken to profit or loss as a gain arising from change in fair value due
to physical change?
a. 30,000
b. 60,000
c. 80,000
d. 110,000

2. How much shall be taken to profit or loss as a gain arising from change in fair value due
to price change?
a. 30,000
b. 60,000
c. 80,000
d. 110,000

3. What amount shall be presented on the statement of financial position on December 31,
2020 under the caption Biological Assets?
a. 320,000
b. 350,000
c. 390,000
d. 410,000

2. The following information is made available by Robby Farms of its dairy livestock:
Carrying amount, January 1, 2020 450,000
Fair value less point of sale costs of livestock
purchased during the year 250,000
Increase in fair value less estimated point of
sale costs attributable to physical changes 220,000
 Increase in fair value less estimated point of
sale costs attributable to price change 64,000
Total selling price less point of sale costs of
livestock sold during the period 290,000

1. At what amount should the biological assets on the statement of financial position be
reported at December 31, 2020?
a. 1,274,000
b. 764,000
c. 694,000
d. 630,000
e. 994,000

2. What amount shall be included in gross income of Robby Farms as a result of the
transactions on its dairy livestock?
a. 64,000
b. 220,000
c. 284,000
d. 290,000

3. Burberry Dairy Products produces milk on its farms. At January 1, 2020, Burberry has 125 cows
with average age of two years and 75 heifers with average of one year. On July 1, 2020,
Burberry purchased 80 heifers with average age of one year. The unit values less estimated
point of sale costs were:
Age January 1, 2020 July 1, 2020 December 31, 2020
1year old P3,000 P3,100 P3,200
2years old 4,000 4,500
1.5years old 3,600
3years old 5,000

The increase in value of biological assets in 2020 due to change in fair value is
a. 525,000
b. 277,000
c. 192,000
d. 85,500
e. 277,500

4. A group of thirty 2-year old cattle was held at January 1, 2020. Five 2-year old cattle were
purchased on January 2, 2020 for 12,500 each and 5 calves were born on January 2, 2020. No
cows or calves were disposed of during the period. Per unit value less estimated point of sale
costs were:
January 1, 2020 December 31, 2020
2yr old cattle 12,500 3yr old cattle 15,000
Newborn cattle 4,000 2yr old cattle 13,000
1yr old cattle 7,000
Newborn cattle 4,500

1. The company records separately the increase in fair value less point of sale cost due to
physical change and change in fair value less point of sale cost due to price change.
How much shall be taken to profit or loss as a gain arising from the change in fair value
less point of sale cost due to physical change?
 a. 70,000
b. 82,000
c. 90,000
d. 102,500

2. How much shall be taken to profit or loss as a gain arising from change in fair value less
point of scale cost due to price change?
a. 17,500
b. 20,000
c. 25,000
d. 102,500

5. The Sergio Company has a herd of ten 2-year old animals on January 1, 2020. One animal
aged 2.5 years was purchased on July 1, 2020 for 10,800 and one animal was born on July 1,
2020. No animals were sold or disposed of during the year.

The fair value less estimated point of sale costs per unit were:
2-year old animal on January 1 – 10,000
2.5 year old animal on December 31 – 11,100
2.5 year old animal on July 1 – 10,800
2-year old animal on December 31 – 10,500
Newborn animal on July 1 – 7,000
0.5 year old animal on December 31 – 8,000
3-year old animal on December 31 – 12,000
Newborn animal on December 31 – 7,200

1. The December 31, 2020 statement of financial position should report biological assets of
a. 144,000
b.140,000
c.117,000
d.110,800

2. The gain arising from change in fair value less estimated point of sale costs reported in
the 2020 statement of comprehensive income is
a. 5,500
b.23,700
c.29,000
d.29,200

3. What is the change in fair value of the biological assets due to price change?
a. 5,000
b. 6,000
c. 5,500
d. 6,500

4. in fair value of the biological assets due to physical change?

a. 27,300 c, 23,700
b. 26,307 d. 23,607