BIOLOGICAL ASSETS

PAS 41- AGRICULTURE

PAS 41 shall be applied to account for the following when they relate to agricultural activity:

a. Biological assets
b. Agricultural produce
c. Government grant related to a biological asset

PAS 41 is applied to agricultural produce at the point of harvest. Thereafter, PAS 2 on

inventories shall be applied. Also, PAS 41 does not deal with processing of agricultural
procedure after harvest. For an instance, the processing of grapes into wine is covered by PAS
2.

BIOLOGICAL ASSETS are “living animals and living plants”.

AGRICULTURAL PROCEDURE is the harvested product of an entity’s biological assets.

Harvest is the detachment of procedure from a biological asset or the cessation of a biological
asset’s life processes.

EXAMPLES OF BIOLOGICAL ASSETS

These will be the result of processing after harvest.

Biological Asset Agricultural Procedure Product after harvest

1. Sheep Wool Yarn, carpet
2. Trees in plantation Felled trees Logs, lumber
forest
3. Plant Harvested cane Sugar
4. Dairy cattle Milk Cheese
5. Pigs Carcass Sausage, cured ham
6. Bushes Leaf Tea, cured tobacco
7. Vines Grapes Wine
8. Fruit trees Picked fruits Processed fruit
Agricultural activity or simply "agriculture"
This is the management by an entity of the biological transformation and harvestof biological
assets for sale or for conversion into agricultural produce or into additional biological assets.

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

Features of agricultural activity

Certain common features of agricultural activity are as follows:

A. Capability to change

Living animals and plants are capable of biological transformation.

B. Management of change

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.

Such management distinguishes agricultural activity from other activities.

For example, harvesting from "unmanaged" sources, such as ocean fishing and deforestation, is
not agricultural activity.

C. Measurement of change

The change is quality or quantity brought about by biological transformation or harvest is

measured and manufactured as a routine management function.
Biological transformation
Biological transformation comprises the processes of growth, degeneration, production and
procreation that cause qualitative and quantitative changes in a biological asset.

Biological transformation results from the following types of outcomes:

1. Asset changes through:

A. Growth - increase in the quantity of improvement in quality of animal or plant.

B. Degeneration - decrease in quantity or deterioration in quality of animal or plant.
C. Procreation - creation of additional living animal or plant.

2. Production of agricultural Produce such as latex, tea leaf, wool and milk.

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 asset will flow to the entity.

c. The fair value of 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 otherwise marking the cattle on acquisition or birth.

Measurement

 A biological asset should be measured at each balance sheet date at its fair value less
estimated point of sale costs. The price in an active market is the best basis of the
asset’s fair value.
 Agricultural produce shall be measured at fair value less costs to sell at the point of
harvest.
 Cost to sell -the incremental costs directly attributable to the disposal of an asset.
-costs necessary for a sale to occur
-exclude transport cost, finance costs and income taxes (PAS 41-
Conclusions)
  When market determined prices or values are not available in its present condition, the
present value of expected net cash flows from the asset discounted at current
determined pretax rate may be used.
 Point-of-sale costs include broker’s commissions, levies by regulatory authorities, and
transfer taxes and duties. They don’t include, however, costs of getting the asset to a
market.
 Any change in the fair value less point of sale costs during a reporting period is taken to
profit or loss. PAS/IAS 41 encourages separate disclosures of change in fair value less
estimated point of sale costs due to physical change.
 When fair value is not reliably determinable for a biological asset, and when alternative
estimates of fair value are determined to be clearly unreliable, the biological asset is
measured on the balance sheet at cost less accumulated depreciation and accumulated
impairment losses.
 If in subsequent period, the fair for the biological asset becomes reliably measurable, the
entity must switch to fair value less point-of-sale costs measurement basis.

Fair Value of Biological Asset

 There is a presumption that fair value can be measured reliably for a biological asset,
but it can only be rebutted on initial recognition for a biological asset.
 The biological asset shall be measured at cost less accumulated depreciation and any
accumulated impairment loss.
 However, once the fair value becomes measurable, the entity shall measure the
biological asset at fair value less costs to sell.

Fair Value of Agricultural Asset

 In all cases, an entity shall measure agricultural produce at the point of harvest at fair
value less costs to sell.
 Fair value of agricultural produce at the point of harvest can always be measured
reliably.
(PAS 41)
 After the point of harvest, PAS 2 shall be applied. It means that the inventory shall be
measured at the lower cost and nest realizable value.
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.

Active Market

 An active market is a market where all of the following conditions exist:

1. The items traded within the market are homogeneous, meaning similar identical
in nature or form.
2. Willing buyers and sellers can normally be found at any time.
3. Prices are available to the public.

Gain and Loss

 A gain or loss arising on initial recognition of a biological asset at fair value less costs to
sell. Any subsequent changes shall be included in profit or loss.
 A gain or loss arising from initial recognition of agricultural produce at fair value less
costs to sell 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 costs to
sell of biological assets.

Agricultural Land

 It is not deemed a biological asset. It doesn’t apply to agricultural land based on the
principle in PAS 41.
 The requirements of PAS 16 which are applicable to property, plant and equipment
apply equally to agricultural land for purposes of measurement.
Biological Assets Attached To Land

 These are often physically attached to land, for example, trees in a plantation forest.
 There may be no separate market for biological assets that are attached to the land but
an active market may exist for the combined assets, that is, for the biological assets and
land as a package.

Government Grant

 An unconditional government grant related to a biological asset that has been measured
at fair value less cost to sell shall be recognized as income when the grant becomes
receivable.
 The grant shall be recognized as income only when the conditions attaching to the grant
are met, if it is conditional.

If a government grant relates to a biological asset measured at cost less any accumulated
depreciation and any accumlated impairment losses, PAS 20 on “government grant” is applied.

Accounting Entries for Biological Assets

For a complete illustration of transactions relating to biological assets, assume the

following information for Monteclaire Farms, Inc.

FV less point of sale cost of biological assets at December 31,2006 P3,500,000

Biological assets during the period
Purchase price 4,000,000
FV less point of sale cost upon purchase 3,900,000
Gain arising from change in fair value less point of sale costs
due to price changes 1,200,000
due to physical changes 2,500,000
Sale of biological assets 4,200,000

Upon purchase of the biological assets

Biological assets 3,900,000

Loss on Initial Recognition of Biological Assets 100,000
Cash 4,000,000

Increase in fair value less POS (point of sale) costs during the period (inclusive of birth of
biological assets and change in fair value immediately prior to sale)

Biological Assets 3,700,000

Gains arising from change in FV less POS
costs due to price change 1,200,000
 Gains arising from change in FV less POS
costs due to physical change 2,500,000

Sale of biological assets (any change in fair value is assumed to have been taken up in the
above entry)

Cash 4,200,000
Biological Assets 4,200,000

 In the notes to the financial statements, the disclosure of the reconciliation of the changes in
the carrying amounts of the biological assets during the period is presented as follows:

Carrying amount, January 01,2007 P3,500,000

Increase due to purchases 3,900,000
Gains arising from change in FV less POS
costs due to price change 1,200,000
Gains arising from change in FV less POS
costs due to physical change 2,500,000
Decreases due to sales (4,200,000)
Carrying amount, December 31,2007 P6,900,000

 If the biological assets are not expected to be disposed of within twelve months after the
balance sheet date, they are presented as part of non-current assets on the balance sheet.
 The account gain arising from change in fair value less point of sale costs biological assets
is presented as revenue in the income statement.

Disclosing separately the change in Fair Value due to Price Change and the Change in
Fair Value due to Physical Change

 Fair value of bilogical assets- can change due to both physical changes and price
changes in the market
 PAS/ IAS 41 encourages but not require separate disclosures of these two elements
accounting for change in fair value.
 Separate disclosure- useful in appraising current period performance and future
prospects particularly when production cycle is more than one year (PAS 41, par 51)

 If the company opts to disclose the two factors separately, the recognition of income is
split into two components.
 The change in fair value due to price change – increase or decrease in the price of
the biological asset having the same characteristics at two different dates

Example:

If a two year old cattle had a fair value less point of sale cost of P25,000 on January 1, 2007
and a two year old cattle having the same size and characteristics had a fair value less point of
sale cost of P28, 000 on December 31, 2007, then the gain arising from change in fair value due
to price change during the year for that cattle is P3,000. The two year old cattle on January
1,2007 is already three years old at December 31,2007. If the fair value of a three year old cattle
on December 31 is P35,000, the change in fair value less point of sale costs due to physical
change is P7,000, which is P35,000 – P28,000. The birth of an animal gives rise to change in
fair value due to physical change.

For a complete illustration, consider the following:

A herd of 20, 2-year old animals was held on January 1,2007. Five animals, aged 2.5 years old,
were purchased on July 1,2007. On the same date, 4 animals were born. Ten animals were sold
at December 31,2007, aged 3 years old, at fair value. Per unit fair value less estimated point of
sale costs were as follows:

January 1,2007
2 year old animal P15,000
July 1,2007
New born animal 8,000
2.5 year old animal 20,000
December 31,2007
New born animal 8,500
0.5 year old animal 9,500
2 year old animal 16,500
2.5 year old animal 23,000
3 year old animal 28,000

The following are the entries to record the foregoing transactions:

July 1 Biological Assets 100,000

Cash 100,000
Purchased five 2.5 year old animals

1 Biological Assets 32,000

Gain Arising from FV less POS cost
Due to Physical Change 32,000
Birth of 4 animals
(8,000 x 4)

Dec. 31 Biological Assets 306,000

Gain Arising from FV less POS cost
Due to Price Change 47,000
Gain Arising from FV less POS cost
Due to Physical Change 259,000
Price Change
New born
4 x (8,500 – 8,000) P2,000
2 year old animals
20 x (16,500 – 15,000) 30,000
2.5 year old animals
5 x (23,000 – 20,000) 15,000
Total P47,000

Physical Change
0.5 year old animals
 4 x (9,500 – 8,500) P4,000
3 year old animals
20 x (28,000 – 16,500) 230,000
5 x (28,000 – 23,000) 25,000
Total P259,000

Cash (10 x 28,000) 280,000

Biological Assets 280,000
Sale of ten animals

Reconciliation
Balance, January 1,2007 P300,000
Purchase on July 1 100,000
Change in FV less POS Cost due
to Price Change 47,000
Change in FV less POS Cost due
to Physical Change (259,000 + 32,000) 291,000
Sale (280,000)
Balance, December 31,2007 P458,000

On hand on December 31,2007

0.5 year old animals ( 4 x P9,500) P38,000
3 year old animals (15 x 28,000) 420,000
Balance, December 31,2007 P458,000

Disclosing Separately The Change in Fair Value Less Point of Sale Costs Due to Price
Change and Due to Physical Change

2 year old cattle at January 1,2007 P25,000

Increase in FV less POS cost due
2 year old cattle at December 31,2007 28,000 to Price Change= P3,000

Increase in FV less POS cost due

3 year old cattle at December 31,2007 P35,000 to Physical Change= P7,000
Agricultural Produce

 Agricultural produce is the harvested product of the entity’s biological assets.

 If so, it shall be measured at its fair value less estimated point-of-sale costs at the point
of harvest. Such measurement is the cost at that date when applying PAS 2. Inventories
of another applicable accounting standard. (PAS 41, paragraph 13)
 A gain or loss arising from an initial recognition of agricultural produce at fair value less
estimated point-of-sale costs shall be included in profit or loss for the period in which it
arises. A gain or loss may arise on initial recognition of agricultural produce as a result of
harvesting. (PAS 41, paragraphs 25 and 29)
  PAS 41 reflects the view that the fair value of agricultural produce at the point of harvest
can always be measured reliably.

Required Disclosures

An entity shall disclose the following relating to biological assets and agricultural procedure.

(a) The aggregate gain or loss on initial recognition of biological assets and agricultural
procedure and from the change in fair value less point of sale costs of the biological
assets;
(b) a description of each group of biological assets;
(c) the methods and assumptions applied in determining fair values;
(d) the fair value less estimated point of sale costs of agricultural procedure harvested
during the period;
(e) any restrictions on title and carrying amounts of biological assets pledged as security
for liabilities;
(f) the amounts of commitments for the development or acquisition of biological assets;
(g) a reconciliation of changes in carrying amount, showing separately changes in value,
purchases, sales, harvest, business combination and exchange differences;
(h) gain or loss on disposal;
(i) where fair value cannot be measured reliably, the depreciation method used, useful
lives or depreciation rates;
(j) where fair value cannot be measurable and the effect of the change for biological
assets previously measure at cost less accumulated depreciation and impairment
loss;
(k) The nature and extent of government grants of biological assets, conditions relating
to the grants that have not been fulfilled, and significant changes in the expected
levels of the grants.