BIOLOGICAL ASSETS

PAS 41 - Agricultural

This standard shall be applied to account for biological assets and agricultural
produce at the point of harvest. Biological assets are living animals and living plants.
Agricultural produce is the harvested product at the entity's biological assets.

Note that PAS 41 is applied to agricultural produce only at the point of harvest.
Thereafter, PAS 2 on inventories shall be applied. PAS 41 does not deal with the
processing of agricultural produce after harvest.

Harvest is the detachment of produce from a biological asset or the cessation of

biological asset's life processes.

Examples of Biological Assets

The following table provides examples of biological assets, agricultural produce and
products that are the result of processing after harvest.

Biological Asset Agricultural Produce Product after Harvest

1. Sheep Wool Yarn, carpet
Trees in plantation forest Logs Lumber
Plant Harvested cane Sugar
Dairy cattle Milk Cheese
Pigs Carcass Sausage, cured ham
Bushes Leaf Tea, cured tobacco
Vines Grapes Wine
Fruit trees Picked fruit Processed fruit

Again, the measurement of biological assets and agricultural produce is covered by

PAS 41 and the measurement of products after harvest is covered by PAS 2 on
inventories.

Recognition
An entity shall recognize a biological asset or agricultural produce when:
a. The entity controls the asset as a result of past events
b. It is probable that future economic benefits associated with the asset will flow to
the entity.
c. The fair value or cost of the asset can be measured reliably.

In agricultural activity, control may be evidenced by, for example, legal ownership of
cattle and the branding or otherwise marking of the cattle on acquisition or birth.

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

Measurement

A biological asset shall be measured on initial recognition and at each balance sheet
date at fair value less estimated point of sale costs. Point of sale costs include
commissions to brokers and dealers, levies by regulatory agencies and exchanges,
and transfer taxes and duties. Point of sale costs does not include transport and
other costs necessary to get the assets to a market.

Agricultural produce shall be measured at fair value less estimated point of sale costs
at the point of harvest.

Gain and Loss

A gain or loss arising on initial recognition of a biological assets at fair value less
estimated point of sale costs and any subsequent changes in fair value less estimated
point of sale costs shall be included in profit or loss.

A loss may arise on initial recognition of a biological asset because estimated point of
sale costs are deducted in determining fair value less point of sale costs of a
biological asset.

A gain may arise on initial recognition of a biological asset, for example, when a calf
is born.

A gain or loss arising from initial recognition of agricultural produce at fair value less
estimated point of sale costs shall also be included in profit or loss.
A gain or loss may arise on initial recognition of agricultural produce as a result of
harvesting.

An entity shall disclose the aggregate gain or loss arising on the initial recognition of
biological assets and agricultural produce and from the change in fair value less
estimated point of sale costs of biological assets.

Fair value of Biological Asset

There is a presumption that fair value can be measured reliably for a biological asset.
However, this presumption can be rebutted only on initial recognition for a biological
asset for which market determined prices are not available or estimates of fair
market-determined to be clearly unreliable. In such a case the biological asset shall
be measured at cost less accumulated depreciation and any accumulated
impairment loss.

However, once the fair value of such a biological asset becomes clearly measurable,
the entity shall measure the biological asset at fair value less estimated point of sale
costs.

Agricultural, Forest and Mineral Products

Inventory of agricultural, forest and mineral products are measured at net realizable
value at certain stages of production.

This occurs when agricultural crops have been harvested or mineral products have
been extracted and a sale is assured under a forward contract or a government
guarantee, or when a homogenous market exists and there is a negligible risk of
failure to sell.

Commodities of Broker-traders

Commodities of broker-traders are measured at fair value less cost to sell. Fair value
is the amount for which an asset could be exchanged, or a liability settled, between
knowledgeable and willing parties in an arm's length transaction.

Broker-traders are those who buy and sell commodities for others or on their own
account. The inventories of broker-traders are principally acquired with the purpose
of selling them in the near future and generating a profit from fluctuations in price or
broker-traders' margin.

Agricultural Activity or simply "Agriculture"

This is the management by an entity of the biological transformation of biological

assets for sale into agricultural produce or into additional biological assets.

Biological transformation comprises the processes of growth, degeneration,

production and procreation that cause qualitative or quantitative changes in a
biological asset.

Examples of Agricultural Activity

Agricultural activity covers a diverse range of activities such as the following:

1. Raising livestock
2. Annual or perennial cropping
3. Cultivating orchards and plantations
4. Floriculture
5. Aquaculture, including fish farming

The agricultural activity must be "managed" to facilitate the 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.

Thus, harvesting from "unmanaged" sources, such as ocean fishing and

deforestation, is not an agricultural activity.

Fair value of agricultural produce

In all cases, an entity shall measure agricultural produce at the point of harvest at fair
value less estimated point of sale cost.

The standard reflects the view that the fair value of agricultural procedure at the
point of harvest can always be measured reliably.

Determination of Fair Value

PAS 41 sets out several ways of measuring fair value which include the following:
1. Quoted price in an active market.
2. Most recent market transaction price.
3. Market price for similar asset with adjustment to reflect any differences.
4. Sector benchmark such as value of an orchard per hectare, or value of cattle per
kilogram.
5. Present value of expected net cash flows from the asset.

Agricultural Land

Agricultural land is not deemed a biological asset. The principles espoused in PAS 41
for biological assets and agricultural produce do not apply to agricultural land.

The requirements of PAS 16 which are applicable to property, plant, and equipment
apply equally to agricultural land for purposes of measurement.

Government Grant

An unconditional government grant related to a biological asset that has been

measured at fair value less estimated point of sale cost shall be recognized as income
when the grant becomes receivable.

If a government grant related to a biological asset measured at fair value less

estimated point of sale cost is conditional, the grant shall be recognized income only
when the conditions attaching to the grant are met.
 BIOLOGICAL ASSETS
Problem Solving

Problem 13-1 (IFRS)

Forester Company on adoption of PAS 41 has reclassified certain assets as biological assets. The total
value of the forest assets is P6,000,000 which comprises:

Foresting trees 5,100,000

Land under trees 600,000
Roads in forests 300,000
TOTAL 6,000,000

In Forester Company's statement of financial position, how much of the forest assets
shall be classified as biological assets?
a. 5,100,000
b. 5,700,000
c. 5,400,000
d. 6,000,000

Problem 13-2 (IFRS)

Colombia Company is a producer of coffee. The entity is considering the valuation of its
harvested coffee beans. Industry practice is to value the coffee beans at market value
and uses as reference a local publication "Accounting for Successful Farms."

On December 31, 2009, the entity has harvested coffee beans costing P3,000,000 and
with fair value less cost to sell of P3,500,000 at the point of harvest.

Because of long aging and maturation process after harvest, the harvested coffee beans
were still on hand December 31, 2010. On such date, the fair value less cost to sell is
P3,900,000 and te net realizable value is P3,200,000.

The coffee beans inventory shall be measured at:

 a. 3,000,000
b. 3,500,000
c. 3,200,000
d. 3,900,000

Problem 13-3 (IFRS)

Joan Company provided the following data:

Value of biological asset at acquisition cost on December 31, 2009 600,000

Fair valuation surplus on initial recognition at fair value on December 31, 2009 700,000
Change in fair value to December 31, 2010 due to growth and price fluctuation 100,000
Decrease in fair value due to harvest 90,000

1. What is the carrying amount of the biological asset on December 31, 2010?
a. 1,400,000
b. 1,310,000
c. 1,300,000
d. 1,490,000

2. What is the gain from change ion fair value of biological asset that should be shown in
the 2010 income statement?

a. 100,000
b. 800,000
c. 710,000
d. 10,000

Problem 13-4 (IFRS)

Honey Company has a herd of 10 2-year old animals on January 1, 2009. One animal aged 2.5 years was
purchased on July 1, 2009 for P108 and one animal was born on July 1, 2009. No animals were sold or
disposed of during the year. The fair value less cost to sell per unit is as follows:

2 year old animal on January 1 100

2.5 year old animal on July 1 108
Newborn animal on July 1 70
2 year old animal on December 31 105
2.5 year old animal on December 31 111
Newborn animal on December 31 72
3 year old animal on December 31 120
0.5 year old animal on December 31 80

1. What is the fair value of the biological asset on December 31, 2009?
a. 1,400
b. 1,320
c. 1,440
d. 1,360

2. What is the gain from change in fair value of biological assets to be recognized in
2009?
a. 222
b. 292
c. 300
d. 332

3. What is the gain from change in fair value due to price change?
a. 292
b. 222
c. 237
d. 55

Problem 13-5 (IFRS)

Farmland Company produces milk on its farms. The entity produces 20% of the community's milk that is
consumed. Farmland Company owns 5 farms and had a stock of 2,100 cows and 1,050 heifers.

The farms produce 800,000 kg of milk a year and the average inventory held is 15,000 kg of milk.
However, on December 31, 2009 the entity is currently holding 50,000 kg of milk in powder. On
December 31, 2009, the herds are:

Purchased on or before January 1, 2009 (3 years old) 2,100 cows

Purchased on January 1, 2009 (2 years old) 300 heifers
Purchased on July 1, 2009 (1.5 years old) 750 heifers

No animals were born or sold during the current year. The unit fair value less cost to sell is as follows:

December 31, 2009:

1 year old 3,200
2 year old 4,500
1.5 year old 3,600
3 year old 5,000

July 1, 2009:
1 year old 3,000

January 1, 2009
1 year old 3,000
2 year old 4,000

The entity has had problems during the year. Contaminated milk was sold to customers.
As a result, milk consumption has gone down.

The entity's business is spread over different parts of the country. The only region
affected by the contamination was Batangas. However, the cattle in this area were
unaffected by the contamination and were healthy. The entity feels that it cannot
measure the fair value of the cows in the region because of the problems created by the
contamination. There are 600 cows and 200 heifers in the Batangas farm and all these
animals had been purchased on January 1, 2009.

1. What is the fair value of the biological assets on January 1, 2009?

a. 9,300,000
b. 9,600,000
c. 8,400,000
d. 7,200,000
2. What is the fair value of biological assets purchased on July 1, 2009?
a. 2,250,000
b. 3,000,000
c. 3,750,000
d. 3,375,000

3. What is the fair value of biological assets on December 31, 2009?

a. 14,550,000
b. 15,750,000
c. 15,225,000
d. 11,850,000

4. What is the increase in fair value of biological assets on December 31, 2009?
a. 3,000,000
b. 5,250,000
c. 4,950,000
d. 6,150,000

5. What is the increase in fair value of the biological assets due to physical change?
a. 1,260,000
b. 1,740,000
c. 3,000,000
d. 1,440,000

Problem 13-6 (IFRS)

Dairy Company provided the following balances for the year ended December 31, 2009:

Cash 500,000
Trade and other receivables 1,500,000
Inventories 100,000
Dairy livestock - immature 50,000
Dairy livestock – mature 400,000
 PPE, net 1,400,000
Trade and other payables 520,000
Note payable - long-term 1,500,000
Share Capital 1,000,000
Retained earnings - January 1 800,000
Fair value of milk produced 600,000
Gain from change in fair value 50,000
Inventories used 140,000
Staff costs 120,000
Depreciation expense 15,000
Other operating expenses 190,000
Income tax expense 55,000

1. What is the net income for 2009?

a. 650,000
b. 600,000
c. 130,000
d. 185,000

2. What is the fair value of biological assets on December 31, 2009?

a. 550,000
b. 450,000
c. 500,000
d. 400,000