Audit of Biological Assets & Government Grants

Learning Objectives:
1. Appreciate the concept of PAS 41 (Agriculture)
2. Describe the feature of an agricultural activity
3. Discuss the initial recognition, measurements, derecognition and financial statement presentation of biological
assets and agricultural produce
4. Account government grant in relation to biological asset
5. Describe the difference between Full PFRS and PFRS for SME for agriculture
 
Agriculture
This refers to the cultivation of plants and fungi for food, fiber, biofuel, medicinal plants and breeding of animals and
other products that is used to sustain and enhanced life. PAS 41 Agriculture, prescribes the accounting and disclosure
requirements in relation to an agricultural activity. An agricultural activity refers to the management by an entity of the
biological transformation of a biological assets for sale into agricultural products or produce or additional biological
assets. An agricultural activity covers the following:
 Aquaculture
 Raising livestock
 Cultivation of orchids and plantations
 Annual or perennial cropping
 Forestry
 Floriculture

In any agricultural activity there is either a capacity to change just like the capacity of plants and a living animals of
biological transformation and management of change where it facilitates biological transformation by enhancing or at
least stabilizing, conditions necessary for the process to take place where it distinguishes agricultural activity from other
activities. The change in quality or even in quantity brought about by biological transformation or harvest s measured and
monitored as a routine function.

Biological transformation refers to the following conditions:

1. Where an asset changes through
1. Growth, and
2. Degeneration
3. Procreation
2. Production of agricultural produce. 

PAS 41 or Agriculture is the applicable standard which prescribes the accounting treatment, financial statement
presentation and disclosure of an agricultural activity. It shall be applied to account for the following when they relate to
agricultural activity:
1. Biological asset
2. Agricultural produce at the point of harvest
3. Government grants related to a biological asset that is measured at fair value less cost to sell

PAS 41 is not applicable for:

1. Agricultural activity that is not managed, such as ocean fishing
2. Agricultural produce after the point of harvest
3. Intangible assets related to an agricultural activity
4. Land related to an agricultural activity

A biological asset is a living animal or a plant. While an agricultural produce is the harvested product of the entity's
biological assets. Hence, once there is a harvest, or the detachment of a produce from the biological asset or the cessation
of a biological asset life process.

Consumable biological assets are those that are to be harvested as an agricultural produce or sold as a biological asset.
However a bearer biological assets are matured biological assets held for more than one financial period capable for
bearing consumable biological asset to be harvested as an agricultural produce. A bearer biological assets are not
agricultural produced but rather are as self-generating. Bearer plant assets are accounted as PPE as it will meet its
definition while a bearer animals are accounted as a biological asset measured under PAS 41. 

A biological asset maybe classified either as mature biological assets or immature biological assets. Mature biological
assets are those that have attained harvest specification or are able to sustain regular harvest.

A. Initial Recognition:
An entity shall recognize a biological asset when:
1. The entity controls the assets as a result of a past events
2. It is probable that future economic benefits will flow to the enterprise, and
3. The fair value or cost of the asset can be measured reliably

B. Initial & Subsequent Measurement

1. Biological Assets shall be measured at its fair value less cost to sell, except when the fair value cannot be
measured reliably. Fair value less cost to sell is:
          Estimated Selling Price or Market Price                                                                            Php xxxx
          Less: Transport & Other Cost Necessary to Bring the Asset to Market                   xxxx
          Fair Value                                                                                                                         Php xxxx
          Less: Cost To Sell:
                      Commission To Brokers and Dealers                                            Php xxxx
                      Levies of Regulatory Agencies & commodity exchanges            xxxx
                      Transfer Taxes & Duties                                                                        xxxx                  xxxx
            Fair Value Less Cost To Sell                                                                                             Php xxxx

2. Agricultural produce is measured at:

1. Initial measurement  - shall be measured at its fair value less costs to sell at the point of harvest
2. Subsequent measurement - shall be measured at accordance with PAS 2 (Inventory) or other applicable
standard. 

Fair value is the price that would be received to sell an asset or be paid to transfer a liability in an orderly transaction
between market participated at the measurement date. An entity would need to consider the requirements of PFRS 13
(Fair Value Measurement) in order to determine the fair value. Cost sometimes approximates the fair value when:
1. Little biological transformation has taken place since initial cost incurrence or
2. The impact of biological transformation on price is not expected to be material 

There is a presumption that a fair value can be measure reliably for a biological asset, however, the presumption is not
absolute on its initial recognition for a biological asset for which quoted market prices are not available or alternative fair
value measurements are determined to be clearly unreliable. In such event, that biological assets shall be measured
as follows after consideration of PAS 2 (Inventory), PAS 16 and 36:
            Cost                                                                                                                    Php        xxxx
            Less: Accumulate Depreciation and Impairment Loss                         xxxx
            Carrying Amount Php xxxx

The above presumption only exists for a biological asset and not on a agricultural produce because a harvested product is
a marketable commodity. An entity that has measured previously a biological asset at its fair value less costs to sell shall
continue to measure the biological asset at its fair value less costs to sell until it is disposed. When the fair value becomes
reliably measureable, the entity shall measure it at its fair value less costs to sell. Costs to Sell are incremental costs that
are directly attributable to the disposal of an asset and that are:
 Included cost to sell:
o Commission to brokers and dealers
o Levies by regulatory agencies and commodity exchanges
o Transfer taxes and duties

 Excluded to costs to sell:

o Income taxes
o Finance cost
 o Transport and other costs necessary to get asset to the market

Any cost incurred after the harvest date shall be recognized as an expense when they are incurred. The entity should not
include any cash flow for financing the assets, taxation or re-establishing biological assets after harvest. A biological asset
that is attached to the land should be accounted separately. In case there is no available market for biological asset:
      Combined Market Price                                                          Php xxxx
      Less: Fair value of raw land and improvements                  xxxx
      Fair Value of Biological Assets Php xxxx
 
C. Gains & Losses
1. Initial Recognition - gains or losses on initial recognition are recognized in the profit or loss on the period they
arise. 
1. Biological Asset may have:
1. Loss on initial recognition because costs to sell are deducted in determining the fair value less
costs to sell
2. Gain on initial recognition may arise on initial recognition as when a calf is born.
2. In an agricultural produce - a gain or loss on initial recognition as a result of harvest.

2. Subsequent Reporting Date - gains or losses from changes in fair value less costs to sell of a biological assets
shall be included in the profit or loss for the period in which it arises.
 
D. Changes to Fair Value Less Costs to Sell Costs of a Biological Assets
The change in the fair value of a biological assets is attributable to a (a) physical change, such as growth and (b) unit price
change. Separate disclosure of the two components is encouraged but somehow is not required. The change in fair value
due to physical and price change maybe computed as:

1. Due To Price Change:

For biological asset existing at the beginning of year, acquired during the year and during the year.
      FVLCTS @ end of year using age @ beg of the year or date of acquisition or birth      Php xxxx
      Less: FVLCTS @ beg of year using age @ beg of year or date of acquisition or birth             xxxx
      Gain or loss per Unit                                                                                                        Php xxxx
      Multiply: Quantity or number of biological asset                                                                      xxxx
      Gain (Loss) due to Price Change                                                                                     Php xxxx

2. Due to Physical Change:

      A. For biological assets existing at the beginning of the year  and biological assets acquired during the year:
     FVLCTS @ end of year  using current age                                                                      Php xxxx
     Less: FVLCTS @ end of year using age @ beg of year or date of purchase             xxxx
     Gain (Loss) per unit                                                                                                           Php xxxx
     Multiply: Quantity or number of biological asset                                                    xxxx
    Gain or (Loss) due to Physical Change                                                                             Php xxxx
 
  B. For biological assets born during the year:
    FVLCTS @ end of year  using current age                                                                        Php xxxx
     Less: FVLCTS @ end of year using age @ date of birth                                                     xxxx
     Gain (Loss) per unit                                                                                                             Php xxxx
     Multiply: Quantity or number of biological asset                                                       Php xxxx
    Total Gain or (Loss)                                                                                                             Php xxxx
     Add: FVLCTS at the date of birth x by quantity                                                                     xxxx
    Gain (Loss ) due to physical change                                                                                    Php xxxx

Illustration Problem:
Jojo Farm has a herd of 15, one-year old animals on January 1, 2018. In addition, three animals were born on July 1, 2018.
The fair values per unit less costs to sell costs are summarized as follows:
1-year old animal at January 1, 2018 Php 4,500
Newborn animal at July 1, 2018 3,000
1-year old animal at December 31, 2018 4,600
Newborn animal at December 31, 2018 3,300
2-year old animal at December 31, 2018 5,500
0.5 year old animal at December 31, 2018 3,400

Required:
1. Compute for the gain/loss due to price change
2. Compute for the gain/loss due to physical change
3. Journal entries

Solution:
1. Price  Change:
      1-year old animal(Php 4,600 - Php 4,500) x 15                                 -              Php 1,500
       Newborn (Php 3,300 - Php 3,000) x 3                                                                        900
      Gain due to price change                                                                                   Php 2,400
 
 2. Physical Change
       2-year old animal (Php 5,500 - Php 4,600) x 15                                               Php 13,500
       0.5 year old animal (Php 3,400 - Php 3,300) x 3                                                           300
      Total                                                                                                                    Php 13,800
      Gain on initial recognition - newborn (Php 3,000 x 3)                                                 9,000
      Total gain due to physical change Php 22,800
 
   3. To record the new born biological asset on July 1, 2018:
                  Biological Assets                                  Php 9,000
                       Gain on Initial Recognition               Php 9,000
         To record the gain due to physical change on December 31, 2018 (excluding the Php 9,000)
                 Biological Assets                                Php 13,800
                   Gain due to Physical Change                   Php 13,800
           To record the gain due to change in price on December 31, 2018:
                 Biological Assets                              Php 2,400
                      Gain due to price change            Php 2,400
 
E. Financial Statement Presentation:
Dairy livestock whether mature or immature are to be presented in the non-current asset section of the Statement of
Financial Position. The entity is encouraged but is not required to provide a quantified description of each group of
biological assets such as distinguish between consumable and bearer biological assets or between mature and immature
biological assets. The entity also discloses the basis for making such disclosure. Fair value of milk produced and gains
arising from changes in fair value less costs to sell of a dairy livestock shall be included in the profit or loss for the period
in which they arise. Cash receipts from sales of milk. livestock and cash paid for purchase are to be presented in the
operating activities of the statement of cash flow.
 
F. Government Grant Related to a Biological Assets:
A government grant may either be:
1. Conditional (subject to condition), such as:
1. If there is non-compliance, the entire grant will be returned
1. In this case, the amount as received will be deferred in recognizing as income unless the
condition is satisfied, and
2. If the grant allow a portion of it to be retained according to time lapse
1. In this case, the amount as received will be deferred in recognizing income and will be amortized
over the period of time

2. Unconditional (not subject to condition) such as when the grant becomes receivable and the amount will be
recognize as income in full upon receipt
 3. Other issues:
1. If the asset is carried at cost, PAS 20 or Accounting for Government Grants and Disclosure for
Government Assistance should be applied:
1. Treat the grant as a deferred income
2. Deduct the grant from the carrying amount of the asset

2. Government grant recognize during the period should be separately identified and any unfulfilled
conditions attached to such grants should be  explained

3. An indication should be given in the financial statements where there is expected to be decrease in the
amount of government grants receivable in the future periods. 

Illustration Problem:
Jojo Company was granted by the province of Kalinga an amount of Php 500,000 on November 2018 to aid in planting a
Narra tree. The grant becomes receivable when Jojo Company acquires a suitable site to plant the Narra tree. As of
December 31, 2018, Jojo Company has not yet found any suitable place in which to plant the tree but on January
15 ,2019, however, Jojo Company acquired a site in the City of Kabundukan to plant the trees at a cost of Php 200,000

Required: Journal Entries

Solution:
1. To record the receipt of grant on November 2018:
               Cash                                                  Php 500,000
                  Deferred Income - Government Grant            Php 500,000

2.     To record the acquisition of the land and recognition of income from government grant on January 15:
               Land                          PHp 200,000
                 Cash                               Php 200,000
       
Deferred Income - Government Grant           Php 500,000
                    Income from Government Grant                        Php 500,000
 
In relation above, assume that the grant bears no condition, the journal entry on the date of receipt of grant would be:
              Cash                                                  Php 500,000
                 Income from Government Grant         Php 500,000

The End!