PRELEC1 1st Semester 2023-2024

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) except for 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.

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• 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.
• 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

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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 biological assets under PAS 41.

Examples of biological assets and their corresponding agricultural produce.

Biological Asset Agricultural Produce Products after 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).

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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).

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.

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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.

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.

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• 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]

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

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• 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, 2024 for a cost of P5,500 each, equal its current fair
value and a cost to sell of P500 each. By December 31, 2024, the pigs had a fair value less cost to sell of P7,200
each.

Case 2:
The following events took place in 2024 for Thalers Farm:
1. Thalers Farm acquired 100 pigs on January 1, 2024 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, 2024, the pigs had a fair value less cost to sell of P7,000 each.
3. Also on December 31, 2024 the pigs gave birth to 20 new-born piglets with a fair value less costs to
sell of P1,000 each.
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:
Determine whether the item is a biological asset (PAS 41) or inventories (PAS 2) or PPE (PAS 16)

ITEMS ACCOUNTING TREATMENT

1. Coconut tree
2. Growing coconut fruits
3. Bottled buko shake
4. Landscaping trees
5. Grape vines

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6. Growing grapes
7. Harvested grapes
8. Grape wines
9. Palay
10. Harvested palay
11. Plant with dual-use
12. Rubber tree
13. Bearer plants
14. Bearer animals
15. Lion in a zoo
16. Agricultural land
17. Ornamental plants

Illustrative Problem 3:
On December 31, 2025, 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 4:
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 5:
On December 31, 2024, 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, 2025. 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.

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Illustrative Problem 6:
On January 1, 2025, 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, 2025, 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, 2025, determine the following:
1. Biological assets
2. Property, plant & equipment
3. Inventory
4. Journal entries to record the transactions in 2025.

Illustrative Problem 7:
Samgyupsal Company has a herd of 100 2-year old sheep on January 1, 2025. Also, 10 sheep were born on the
same date. Samgupsal acquired 50 2 year-old sheep on July 1, 2025 at a price equal to its fair value less cost to
sell. No sheep were sold or disposed of during the year.

The 2025 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, 2025?
2. What amount may be disclosed as gain or loss from physical change in 2025?
3. What amount may be disclosed as gain or loss from price change in 2025?
4. Prepare the journal entries in 2025.

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Illustrative Problem 8:
On January 1, 2025, 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, 2025 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 2025.
2. What amount will be presented on Ningguang’s December 31, 2025 statement of financial position as
biological assets?

Illustrative Problem 9:
On January 1, 2025, 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, 2025, 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 on
that date.

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 2025 financial statements?
3. What amount of property, plant and equipment will be presented in the 2025 financial statements?
4. What amount of expenses if any, shall be presented in the December 31, 2025 financial statement
from the foregoing transactions?

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