LECTURE NOTES ON BIOLOGICAL ASSETS AND AGRICULTURAL PRODUCE

Scope of PAS 41
PAS 41 applies, when they relate to agricultural activity, to biological assets, agricultural produce at
the point of harvest, and government grants related to these biological assets. It does not apply to
land and intangible assets related to agricultural activity.

Note: Bearer plants were excluded from the scope of IAS 41 by Agriculture: Bearer Plants
(Amendments to IAS 16 and IAS 41), which applies to annual periods beginning on or after 1 January
2016.

Key definitions
 Agricultural 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.
 Biological transformation comprises the processes of growth, degeneration, production, and
procreation that cause qualitative or quantitative changes in a biological asset.
 Biological asset is a living animal or plant.
 Group of biological assets is an aggregation of similar living animals or plants.
 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 one period, and
- has a remote likelihood of being sold as agricultural produce, except for incidental scrap sales.
 Agricultural produce is the harvested product 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.
 Examples of biological assets, agricultural produce, and products that are the result of processing
after harvest:
Products that are
the result of
Agricultural processing after
Biological assets produce harvest
Sheep Wool Yarn, carpet
Trees in a
plantation forest Felled trees Logs, Lumber
Plants Cotton Thread, clothing
Harvested cane Sugar
Dairy cattle Milk Cheese
Pigs Carcass Sausages, cured
hams
Bushes Leaf Tea, cured
tobacco
Vines Grapes Wine
Fruit trees Picked fruit Processed fruit

Recognition
An entity should recognize a biological asset or agriculture produce when, and 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 FV or cost of the asset can be measured reliably.

Measurement

Biological assets should be measured on initial recognition and at subsequent reporting dates at fair
value less costs to sell, unless fair value cannot be reliably measured.
The gain on initial recognition of biological assets at fair value, and changes in fair value of biological
assets during a period, are reported in profit or loss.

Agricultural produce should be measured at fair value less costs to sell at the point of harvest.
Because harvested produce is a marketable commodity, there is no 'measurement reliability' exception
for produce.

A gain on initial recognition of agricultural produce at fair value should be included in profit or loss for
the period in which it arises.

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

Costs to sell are the incremental costs directly attributable to the disposal of an asset, excluding
finance costs and income taxes.
Disclosure
Disclosure requirements in PAS 41 include:
 aggregate gain or loss from the initial recognition of biological assets and agricultural produce and
the change in FV less costs to sell during the period*
 description of an entity's biological assets, by broad group
 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
 information about biological assets whose title is restricted or that are pledged as security
 commitments for development or acquisition of biological assets
 financial risk management strategies
 reconciliation of changes in the carrying amount of biological assets, showing separately changes in
value, purchases, sales, harvesting, business combinations, and foreign exchange differences*
* Separate and/or additional disclosures are required where biological assets are measured at cost less accumulated
depreciation

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.
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.

What is fair value of an asset?

PFRS 13 defines fair value as the price that would be received to sell an asset in an orderly transaction
between market participants at the measurement date.

Fair value is a market-based measurement, not an entity-specific measurement.

The asset
 A fair value measurement is for a particular asset. Therefore, when measuring fair value an entity
shall take into account the characteristics of the asset if market participants would take those
characteristics into account when pricing the asset at the measurement date. Such characteristics
include, for example, the following:
(a)  the condition and location of the asset; and
(b)  restrictions, if any, on the sale or use of the asset.

The transaction
 A fair value measurement assumes that the asset is exchanged in an orderly transaction between
market participants to sell the asset at the measurement date under current market conditions.
 A fair value measurement assumes that the transaction to sell the asset takes place either:
(a)  in the principal market for the asset; or
(b)  in the absence of a principal market, in the most advantageous market for the asset.

Market participants
 An entity shall measure the fair value of an asset using the assumptions that market participants
would use when pricing the asset, assuming that market participants act in their economic best
interest.

The price
 Fair value is the price that would be received to sell an asset in an orderly transaction in the
principal (or most advantageous) market at the measurement date under current market
conditions (ie an exit price) regardless of whether that price is directly observable or estimated
using another valuation technique.
 The price in the principal (or most advantageous) market used to measure the fair value of the
asset shall not be adjusted for transaction costs. Transaction costs shall be accounted for in
accordance with other IFRSs. Transaction costs are not a characteristic of an asset; rather, they
are specific to a transaction and will differ depending on how an entity enters into a transaction for
the asset.
 Transaction costs do not include transport costs. If location is a characteristic of the asset (as
might be the case, for example, for a commodity), the price in the principal (or most
advantageous) market shall be adjusted for the costs, if any, that would be incurred to transport
the asset from its current location to that market.

Fair value at initial recognition

 When an asset is acquired in an exchange transaction, the transaction price is the price paid to
acquire the asset (an entry price). In contrast, the fair value of the asset is the price that would be
received to sell the asset (an exit price). Entities do not necessarily sell assets at the prices paid to
acquire them.
 In many cases the transaction price will equal the fair value (eg that might be the case when on
 the transaction date the transaction to buy an asset takes place in the market in which the asset
would be sold).
 If the transaction price differs from fair value, the entity shall recognize the resulting gain or loss in
profit or loss.

Valuation techniques
An entity shall use valuation techniques that are appropriate in the circumstances and for which
sufficient data are available to measure fair value, maximising the use of relevant observable inputs
and minimising the use of unobservable inputs.

Fair value hierarchy

To increase consistency and comparability in fair value measurements and related disclosures, PFRS
13 establishes a fair value hierarchy that categorises into three levels the inputs to valuation
techniques used to measure fair value. The fair value hierarchy gives the highest priority to quoted
prices (unadjusted) in active markets for identical assets or liabilities (Level 1 inputs) and the lowest
priority to unobservable inputs (Level 3 inputs).

Level 1 inputs
 Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets that the entity
can access at the measurement date.
 A quoted price in an active market provides the most reliable evidence of fair value and shall be
used without adjustment to measure fair value whenever available.

Level 2 inputs
 Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for
the asset, either directly or indirectly.
 If the asset has a specified (contractual) term, a Level 2 input must be observable for substantially
the full term of the asset. Level 2 inputs include the following:
(a) quoted prices for similar assets in active markets.
(b) quoted prices for identical or similar assets in markets that are not active.
(c) inputs other than quoted prices that are observable for the asset, for example:
(i)  interest rates and yield curves observable at commonly quoted intervals;
(ii)  implied volatilities; and
(iii)  credit spreads.
(d) market-corroborated inputs.

Level 3 inputs
 Level 3 inputs are unobservable inputs for the asset.
Unobservable inputs are inputs for which market data are not available and that are developed using
the best information available about the assumptions that market participants would use when pricing
the asset.

PROBLEMS
1. An entity in agribusiness produces cacao to sell to chocolate factories. Its statement of financial
position at 31 December 2015 presents: two tractors (P500,000 each), three computers (P20,000
each) and software (P50,000) to manage the cultivation of cacao on its farmland, which is planted
with cacao-bearing trees (estimated value, P10 million). The entity’s assets also included pods of
recently harvested cacao (estimated value, P2 million). How much should be classified as
biological assets?

2. An entity on adoption of PAS 41 has reclassified certain assets as biological assets. The total
value of the entity’s forest assets is P200 million comprising: freestanding trees; land under trees
valued at P20 million; and roads in forests valued at P10 million. How much should be classified
as biological assets?

3. The following pertains to Smile Company’s biological assets:

Price of the asset in the market P5,000
Estimated commissions to brokers and 500
dealers
Estimated transport and other costs
necessary to get asset to the market 300
Selling price in a binding contract to sell 5,200
The entity’s biological assets should be valued at

4. The following pertains to the biological assets owned by ABC Farms, Inc.:
Carrying amount at January 1 P459,570
Purchases 26,250
Gain arising from changes in fair value
less costs to sell attributable to
physical changes 15,350
Gain arising from changes in fair value
less costs to sell attributable to
price changes 24,580
Sales 100,700
 The carrying amount of the biological assets on December 31 is

5. The following pertains to the biological assets owned by Ngitngit Farms, Inc.:
Carrying amount, January 1 P 800,000
Carrying amount, December 31 1,080,000
Purchases 230,000
Sales 110,000
The amount to be recognized in the current period profit or loss related to these biological assets
is

Use the following information for next three questions.

A herd of 10 2 year old animals was held at January 1 of the current period. On July 1, one animal
aged 2.5 years was purchased for 108 and one animal was born. No animals were sold or disposed of
during the period. Per-unit fair values less costs to sell were as follows:
2 - year old animal on January 1 100
Newborn animal at July 1 70
2.5 - year old animal on July 1 108
New born animal on December 31 72
0.5 - year old animal on December 31 80
2 - year old animal on December 31 105
2.5 - year old animal on December 31 111
3 - year old animal on December 31 120

6. The carrying amount of biological assets as of December 31 is

7. The increase in fair value of biological assets in the current period due to price change is

8. The increase in fair value of biological assets in the current period due to physical change is

9. An entity cultivates cattle for the fresh meat industry. It slaughters its cattle and butchers the
meat into cuts before selling them to its meat wholesaler customers.
The entity’s statement of financial position at 31 December 2014 reported cattle at their fair value
less costs to sell of P1,000,000.
At 31 December 2015, when the fair value less costs to sell of the entity’s herd is P1,500,000, the
entity slaughtered 40 per cent of its herd (10 cattle) incurring slaughter costs of P5,000. The
quoted price of a carcass is P70,000 and the costs to sell are estimated at P200 per carcass.
On 31 December 2015 the entity also incurs P30,000 direct costs in processing the carcasses into
meat cuts ready for sale to its customers.
The net amount to be recognized in 2015 profit or loss is

10. At the end of the reporting period, a tomato grower’s vines are six months old and bearing fully
developed ripe tomatoes (ie the tomatoes will soon be harvested). The accumulated cost of the
fruit-bearing vines is P12,500 and their fair value is P100,000. It is expected to cost the entity
P5,000 to sell the tomato crop at market. Once the tomatoes have been harvested the then-
worthless vines will be abandoned. At the end of the reporting period:
a. The entity measures the tomatoes at P82,500, the tomato vines at P12,500 and recognizes a
gain of P82,500 for the increase in fair value.
b. The entity measures the biological assets (tomato-bearing vines) at P95,000 and recognizes a
gain of P82,500 for the increase in fair value.
c. The entity measures the biological assets (tomato-bearing vines) at P100,000 and recognizes
a gain of P87,500 for the increase in fair value.
d. The entity measures the tomatoes at P95,000, the tomato vines at P0 and recognizes a gain
of
P82,500 for the increase in fair value.

Use the following information for next two questions.

At the end of the reporting period (31 December 2014) a tomato grower’s vines are bearing developed
ripe tomatoes. On 31 December 2014, the fair value less costs to sell of the vines with the soon-to-be
harvested tomatoes attached is measured at P24,000. The initial cost of the vines was P5,500 and the
cost of growing them during 2014 (planting, irrigation and fertilization) was P7,250.

The entity harvested its tomatoes on 3 January 2015. The cost of harvesting the tomatoes is P1,000.
The quoted price per kilogram of tomatoes is P50 and costs to sell are estimated at 1 per cent of
quoted price. The entity harvests 500 kilograms of tomatoes.

The life of a tomato vine is about 6 months. After harvest, the vine has come to the end of its life and
its fair value is negligible.

11. The fair value adjustment gain to be recognized in 2014 profit or loss is
12. Thefair value adjustment gain on initial recognition of agricultural produce to be recognized in
2015 profit or loss is