Unit 1: PAS 41 – Agriculture

1.1 Agricultural Activity

1.1.1. Scope and Overview

This section will explain to you what items are covered by PAS 41 Agriculture and will set the
boundaries of its applicability.

PAS 41 Agriculture sets out the accounting for agricultural activity, the cultivation and management
of growth of living plants and animals. The standard generally accounts for such plants and animals
as biological assets which are required to be measured at fair value less costs to sell.

PAS 41 applies to biological assets (living plants and animals) with the exception of bearer plants and
agricultural produce at the point of harvest. However, it does apply to produce growing on bearer
plants before point of harvest.

It does not apply to:

• Land related to agricultural activity
• Intangible assets related to agricultural activity
• Government grants related to bearer plants, and bearer plants.

1.1.2. Key Terminologies

• Agricultural Activity - The management of the biological transformation of biological assets
(living animals or plants) and harvest of biological assets for sale or for conversion into
agricultural produce or into additional biological assets.

• Biological Assets - Are living animals or plants

• Biological transformation - Relates to the processes of growth, degeneration, and production

that can cause changes of quantitative or qualitative nature in a biological asset. Biological
transformation leads to various different outcomes.
i. Asset changes:
▪ Growth: increase in quantity and/or quality
▪ Degeneration: decrease in quantity and/or quality
ii. Creation of new assets:
▪ Production: producing separable non-living products
▪ Procreation: producing separable living animals

• Bearer plant - A living plant that:

o is used in the production or supply of agricultural produce;
o is expected to bear produce for more than one period; and
o has a remote likelihood of being sold as agricultural produce, except for incidental
scrap sales.

• Agricultural produce - The harvested product from biological assets.

• Point-of-harvest – the exact date when extraction of produce from its host (biological asset)
which marks the initial measurement of agricultural produce as inventory under PAS 2.
Fruits which are unharvested are not.

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 • Fair-value- the price you in an active market for the biological asset acquired. Other inputs
of fair value may be applied following the fair value hierarchy.

i. Level 1 inputs are quoted prices in active markets for identical assets or liabilities that
the entity can access at the measurement date. [IFRS 13:76]
ii. Level 2 inputs are inputs other than quoted market prices included within Level 1 that
are observable for the asset or liability, either directly or indirectly. [IFRS 13:81]
Examples:
▪ quoted prices for similar assets or liabilities in active markets.
▪ quoted prices for identical or similar assets or liabilities in markets that are not
active.
iii. Level 3 inputs inputs are unobservable inputs for the asset or liability. An entity
develops unobservable inputs using the best information available in the
circumstances, which might include the entity's own data, taking into account all
information about market participant assumptions that is reasonably available.

• Cost to sell - Costs directly attributable to the disposal or sale of an asset. (Excludes finance
costs and income taxes) These are costs necessary in making a sale possible such as
commissions to brokers and dealers, transfer taxes and duties and other levies by regulatory
agencies.

1.2 Accounting for Plants and Animals

1.2.1. Classification of living plants and animals

Living plants and animals are classified as one of the three:
Classes of living plants and animals Accounting standard
applicable
Biological asset PAS 41 Agriculture
Agricultural produce,
Before and at point of harvest PAS 41 Agriculture
Immediately after harvest PAS 2 Inventories
Bearer plants PAS 16 Property plant and
equipment

Biological assets – PAS 41 Agriculture sets the accounting principles for living plants and animals
that meet the definition of biological assets. Generally, all living plants and animals by default is
accounted for as biological assets unless sufficient proof provides otherwise.
Agricultural produce – at point of harvest PAS 2 Inventories apply in measuring agricultural
produce. To be classified as agricultural produce the asset should cease to be part of agricultural
activity and the only purpose of holding the asset should be for processing to be converted to its
saleable condition and future economic benefits from its disposal thru sale or other means of transfer
which essentially means they are inventories.
Bearer plants – bearer plants are used to produce agricultural produce and is not expected to be
disposed of thru its sale. It is also expected to bear agricultural produce for more than one period.
This function is comparable to that of a factory plant whose purpose is to convert raw materials and
produce inventories for more than one period. For that logical reason, bearer plants are accounted
for under PAS 16 Property, Plant and Equipment.

All living plants and animals by nature are biological assets. However not all of these plants and
animals are accounted for as a biological assets under PAS 41.

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 Examples of biological assets and their corresponding agricultural produce.

Products after
Biological Asset Agricultural Produce
processing

Trees Logs Lumber

Dairy cattle Milk Cheese
Swine Carcass Sausages, cured hams
Fruit trees* Picked fruit Processed fruit

*fruit trees are biological assets by nature but accounted for as bearer plants

1.2.2. Recognition and measurement of biological assets and agricultural produce

An entity recognizes a biological asset or agriculture produce only when:
1. the entity controls the asset as a result of past events;
2. it is probable that future economic benefits will flow to the entity; and
3. the fair value or cost of the asset can be measured reliably.

1.2.3. Accounting for Biological Assets

Unless fair value cannot be reliably measured, biological assets within the scope of PAS 41 are
measured in both initial recognition and subsequent reporting dates at:
Fair value - Estimated costs to sell.

If fair value less costs to sell cannot be measured reliably, biological assets may be temporarily
measured at cost less accumulated depreciation and impairment losses until such fair value and costs
to sell become reliably measurable.
If there is a change in fair value less cost to sell between different periods, the difference will be
charged to “Gain or Loss on Changes in Fair Value” and be carried in profit or loss (Presented in the
income statement as “other income” (gain) and other expenses (loss).
Carrying Fair value Gain or (loss) on
– =
Amount (at year end) changes in fair value

Note that biological assets are not initially measured at cost. They are initially recorded at fair
value less cost to sell and subsequently adjusted for FVLCTS changes to profit or loss (income
statement).

1.2.4. Accounting for Agricultural Produce

Agricultural produce is measured at:

Fair value less estimated costs to sell at the point of harvest.

At point of harvest PAS 41 is applied to the agricultural produce in the harvest process. The purpose
of this is to determine an initial cost for the produce in preparation of its accounting as inventory
immediately after harvest.
The fair value less cost to sell at point of harvest of the agricultural produce is the initial cost of
the produce (inventory).

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After harvest, agricultural produce is then measured under PAS 2 Inventories where the point of
harvest fair value less cost to sell of the produce will be the cost basis for initial measurement of the
agricultural produce.
While unharvested, agricultural produce is accounted for as biological assets and measured at fair
value less cost to sell. A gain or loss may arise on initial recognition of agricultural produce (inventory)
as a result of harvesting.
Agricultural produce is measured at fair value less costs to sell at point of harvest (final application
of PAS 41). This measurement is considered the cost of the produce at that time and shall be the
deemed cost when the produce is measured under PAS 2 Inventories or any other applicable
standard).
Fruits are agricultural produce growing on bearer plants and their coming to existence provides an
additional asset to the entity, hence they are recorded as a gain.

1.2.5. Accounting for Bearer Plants

Bearer plants are expected to be used in the production of agricultural produce for more than one
period. They are accounted for in the same manner as a property plant and equipment which is
subject to depreciation.
The account title and caption of “Bearer plants” may be included under the line item “Property
plant and equipment”.
In other words, a plant is that is used solely to grow agricultural produce (fruits, leaves, sap, flowers)
and not for the harvest of the plant itself, for its entire productive life is considered as bearer plant.

Bearer plants are accounted for under PAS 16, carried initially at cost and subsequently accumulates
depreciation. The “Bearer plants” caption with its accumulated depreciation account will be
presented under the line-item Property, Plant and Equipment in the non-current asset section of
the Statement of Financial Position.

1.3 Physical Change and Price Change

1.3.1. Disclosure of physical change and price change

The change in fair value of biological assets is part physical change (growth, etc) and part price change
(i.e. change in selling price in an active market). Separate disclosure of the two components is
encouraged, not required. [PAS 41.51]

The fair value less costs to sell of a biological asset can change due to either physical changes or price
changes in the market. In such cases, an entity is encouraged to disclose, by group or otherwise, the
amount of change in fair value less costs to sell included in profit or loss due to physical changes and
due to price changes. Separate disclosure of physical and price changes is useful in appraising
current period performance and future prospects, particularly when there is a production cycle of
more than one year. This information is generally less useful when the production cycle is less than
one year.

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 1.3.1. Price change and Physical change
Price Change
Biological assets much like other commercial items are by nature mostly actively sold in the market.
Market prices for commodities that are actively traded fluctuate normally in the same manner as most
consumer goods. These fluctuations are referred to as price change in PAS 41, and may cause a change
in the future economic benefit of existing biological assets.
Physical Change
Biological transformation results in a number of types of physical change—growth, degeneration,
production, and procreation, each of which is observable and measurable. Each of those physical
changes has a direct relationship to future economic benefits. A change in fair value of a biological
asset due to harvesting is also a physical change.
Again, the gain or loss from price change and physical change components are only disclosed in the
notes to financial statement. They are not presented in the financial statements as separate gains or
losses rather as combined “Gain on change in fair value”

1.3.1. Other Relevant Information

• Plant with dual use is accounted for and reported as biological asset and not bearer plant.

A plant may have a dual use if:

a. the plant is cultivated for bearing agricultural produce;
b. the plant itself may be sold as a living plant or harvested as agricultural produce.

For example, a coconut tree cultivated to produce fruits to be sold for processing coconut oil and
at the same time may be sold as a living plant or cut down at the end of its productive life and sold
as coco-lumber. In this case the coconut tree is accounted for as a biological asset.

However, coconut trees are recognized as bearer plants if cultivated only for its fruits and not
later cut down for its coco-lumber.

• Bearer animals are animals held exclusively for procreation (sow exclusively raised to bear
piglets). However unlike bearer plants, bearer animals are not accounted for as property plant
and equipment as explicitly excluded by IASB ammendments on PAS 41.

• Recreational animals are animals held purely for recreational activities, for example animals in
zoos, race horses, animals in game parks. Animals whose primary purpose is recreational,
notwithstanding the incidental breeding that may be involved, are not biological assets but
accounted for under PAS 16, Property, plant and equipment

• Agricultural land is an asset accounted for under PAS 16 Property, Plant and Equipment.
However, biological assets (other than bearer plants) that are physically attached to land are
measured as biological 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 IAS 38 Intangible Assets.

• Government grants for which no conditions are attached, 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 the income
statement only when the conditions have been met. [PAS 41.35]

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1.4 Disclosure Requirements

1.4.1. Primary disclosure requirements in PAS 41

• 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]
• Description of an entity's biological assets, by broad group [PAS 41.41]
• 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]
• Information about biological assets whose title is restricted or that are pledged as security [PAS
41.49]
• Commitments for development or acquisition of biological assets [PAS 41.49]
• Financial risk management strategies [PAS 41.49]
• 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]
1.4.2. Disclosures required when fair value cannot be measured reliably.
Additional required disclosures include: [PAS 41.54]
• 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

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 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. [PAS 41.57]

1.5 Illustrative Problems

Illustrative Problem 1:
Prepare journal entries for each independent case.

Case 1: Margarita Farm acquired 100 pigs on January 1, 2020 for a cost of P5,500 each, equal its
current fair value and a cost to sell of P500 each. By December 31, 2020, the pigs had a fair value less
cost to sell of P7,200 each.

Case 2:
The following events took place in 2020 for Thalers Farm:
1. Thalers Farm acquired 100 pigs on January 1, 2020 for P5,000 each. On the same date the pigs
had a fair value less cost to sell of P6,000 each.
2. By December 31, 2020, the pigs had a fair value less cost to sell of P7,000 each.
3. Also on December 31, 2020 the pigs gave birth to 20 new-born piglets with a fair value less
costs to sell of P1,000 each.

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 4. During the year Thalers incurred and paid the following costs:
Animal feeds P 50,000
Supplements & vaccines 25,000
Maintenance and repairs 30,000
Salaries of farmhands 40,000

Illustrative Problem 2:
On December 31, 2023, Marina harvested 1,000 kilos of ripe mangos which had point of harvest, fair
value less cost to sell of P150 per kilo. Also, by the end of the year the unripe mangos which remains
unharvested had a total fair value less costs to sell of P70,000.

Requirements:
1. What amount of biological assets will be presented from the foregoing events?
2. What amount of inventory will be presented?
3. Prepare the journal entries to record the foregoing events.

Illustrative Problem 3:
Determine whether such will form part of “Cost of Disposal” in the computation of Fair Value less
Cost of Disposal.

ITEM Answer
Transport Cost
Finance Cost
Income Tax
Commission to broker & dealer
Levy by regulatory agency & commodity
exchange
Transfer tax and duty

Illustrative Problem 4:
Determine whether the item is a biological asset (PAS 41) or inventories (PAS 2) or PPE (PAS 16)

ITEMS ACCOUNTING TREATMENT

Coconut tree
Growing coconut fruits
Bottled buko shake
Landscaping trees
Grape vines
Growing grapes
Harvested grapes
Grape wines
Palay
Harvested palay
Plant with dual-use
Rubber tree
Bearer plants
Bearer animals
Lion in a zoo
Agricultural land
Ornamental plants

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Illustrative Problem 5:
On December 31, 2023, Santa Domingo had unharvested produce growing on its mango plantation.
On that date, the produce had a fair value less cost to sell of P1,750,000.
Santa Domingo harvested all the mango fruits in its plantation on January 31, 2024. On that date the
mango produce had a fair value less cost to dispose of P2,000,000.
Requirement: Prepare the journal entries to record the foregoing events.

Illustrative Problem 6:
On January 1, 2023 Santa Domingo acquired a farm by paying cash of P10,000,000. The farm assets
consisted of the following properties with their cost allocation:
Agricultural land 3,000,000
Mango trees 5,000,000
Timber trees 2,000,000
The mango trees are expected to consistently bear fruits for a period of 10 years from acquisition
with no residual value and has a fair value of P6,000,000 with related costs to sell of P750,000. On
the other hand, the timber trees had fair market value of P2,500,000 and costs to sell of P350,000.
On December 31, 2023, Santa Domingo harvested the produce of mango fruits with a fair value less
cost to sell of P500,000. On the same date, fair value and costs to sell related assets were as follows:
Fair value Costs to sell
Unripe mango fruits 200,000 50,000
Mango trees 5,800,000 750,000
Timber trees 2,000,000 350,000
Requirements: On December 31, 2023, determine the following:
1. Biological assets
2. Property, plant & equipment
3. Inventory
4. Journal entries to record the transactions in 2023.

Illustrative Problem 7:
Samgyupsal Company has a herd of 100 2-year old sheep on January 1, 2023. Also, 10 sheep were
born on the same date. Samgupsal acquired 50 2 year-old sheep on July 1, 2023 at a price equal to its
fair value less cost to sell. No sheep were sold or disposed of during the year.

The 2023 per-unit fair value less costs-to-sell of sheep are as follows:
Newborn on January 1 P 2,000
2-year old animal on January 1 10,000
2-year old animal on July 1 10,400
1-year old animal on December 31 6,400
2-year old animal on December 31 11,500
2.5-year old animal on December 31 12,750
3-year old animal on December 31 15,500
Newborn on December 31 2,500

Requirements:
1. What amount of biological assets will be presented December 31, 2023?
2. What amount may be disclosed as gain or loss from physical change in 2023?
3. What amount may be disclosed as gain or loss from price change in 2023?
4. Prepare the journal entries in 2023.

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Illustrative Problem 8:
On January 1, 2020, Ningguang acquired a mountain range for P1,550,000 and for a separate price
Ningguang also paid for the 120 timber trees growing on the mountain range for P4,800,000, their
current fair value less cost to sell. By December 31, 2020 the trees have increased to a fair value of
P5,520,000 and costs to sell of 120,000.
For the entire year, Ningguang also incurred costs related to agricultural activities amounting to
P175,000 inclusive of salaries of caretaker, fertilizers, insecticides and maintenance costs.
Requirements:
1. Provide the journal entries to record the transactions in 2020.
2. What amount will be presented on Ningguang’s December 31, 2020 statement of financial
position as biological assets?

Illustrative Problem 9:
On January 1, 2021, Beidou acquire an existing avocado plantation for a price of P5,000,000 of that
amount 1,300,000 was properly recorded as land, the remaining amount is attributed to the 1,000
avocado trees capable of produce for an estimated life of 6 years and a residual value of 700,000.

During the year Beidou planted an additional 500 avocado trees and incurred a total cost of
P1,000,000 in purchase of seedlings, planting labor and overhead. The immature trees were not yet
capable of bearing fruit and therefore not ready for its intended use.

During the year, Beidou spent P275,000 on fertilizers, 150,000 on supplies and P500,000 on labor
costs on the mature avocado trees and P200,000 fertilizers, 100,000 supplies and P250,000 labor
costs on cultivating and maintaining the immature plants.

By December 31, 2020, Beidou harvested avocado fruits at a point of harvest fair value less costs to
sell of P1,500,000. Unripe avocado fruits which remain unharvested had fair value less costs to sell of
P400,000.

Requirements:
1. Prepare the journal entries to record the above transactions for the year.
2. What amount of biological assets will be presented in the 2021 financial statements?
3. What amount of property, plant and equipment will be presented in the 2021 financial
statements?
4. What amount of expenses if any, shall be presented in the December 31, 2021 financial
statement from the foregoing transactions?