PAS 41 discussion

1. PAS 41 Agriculture
Learning Objectives
• Differentiate the following: biological assets, bearer
plants, agricultural produce and inventory.
• State the initial and subsequent measurement of
biological assets and agricultural produce.
• State the accounting for government grants that are
within the scope of PAS 41.
Conceptual Framework & Acctg.
Standards (by: Zeus Vernon B. Millan)
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2. Overview of Auditing in Specialized
Industries and PAS 41
Auditing and Assurance: Specialized Industries
Mr. Almario G. Parco, Jr. CPA, MBA

3. INTENDED LEARNING
OUTCOMES
At the end of the topic, the students are expected to be
able to:
1. Understand the nature of specialized industries;
2. Articulate the audit process of specialized
industries.
3. Prepare and solve the different problems regarding
audit of specialized industries.

4. What is a specialized industry?
Perhaps it is easiest to start by explaining that a specialized industry is not necessarily rare or
even unusual. Examples of specialized industries include:
• airline
• banking and insurance
• agriculture, and
• oil extraction.
What makes these industries specialized is that they are likely either to have specific financial
reporting standards applicable to them, or to have distinct accounting policies which have been
developed to account for specialized transactions and balances which are based on the normally-
applied financial reporting standards. For instance, IAS® 41, Agriculture is clearly relevant
specifically to the agriculture sector and IFRS®, 7 Financial Instruments: Disclosure will need
specific application by companies operating in the banking sector.

5. AUDIT
CONSIDERATI
ONS
Competence
• When accepting an audit engagement involving a specialist industry, the audit firm needs to pay close
attention to the competence of the audit firm to provide the service. ISQC 1, Quality Control for Firms
That Perform Audits and Reviews of Financial Statements, and Other Assurance and Related
Services Engagements requires the audit firm to consider whether the firm is competent to perform
the engagement and has the capabilities, including time and resources, to do so. This should include
consideration of whether the audit firm personnel has knowledge of relevant industries and has
experience with relevant regulatory or reporting requirements, or the ability to gain the necessary skills
and knowledge effectively.
• Larger audit firms are likely to meet the competence requirement for almost any type of industry – they
will either already possess necessary skill and competence through having existing clients in the
particular industry, or have the resource available to bring in experts and/or provide any necessary
staff training. Smaller firms may have to carefully consider their competence to take on an audit client
in a specialized industry if they have not previously worked with an audit client in the same industry.
However, regardless of size, audit firms may choose to specialize themselves in the audit of clients in
a particular market or sector, for example a smaller firm may specialize in the audit of clients in the
farming sector, or in not-for-profit organizations, so it should not be assumed that just because an
audit firm is small, it would not meet the competence requirement.

6. COMPETEN
CE
• The audit firm should also ensure that there is adequate
documentation to demonstrate that competence has been
considered, and the steps that have been taken to improve
competence where necessary, for example through appropriate
staff training

7. AUDIT
PLANNING
• Identification of the risk of material misstatement in a specialized industry
should be approached in the same was as in any other audit – by obtaining
appropriate understanding of the business and its environment. Assuming that
staff have the necessary competence, as discussed above, this should not be
problematical.
• To assist audit team members assigned to a specialized industry client, the
audit firm is likely to have additional resources available. There may be briefing
notes or internal technical guidance on how financial reporting standards should
be applied within the sector. For example, in the audit of banking sector clients,
an audit firm may produce guidance on the specific application of IFRS®
Standards relating to the range of financial instruments typically held by banks.
Audit staff can then refer to this guidance when performing the audit, particularly
when identifying risks of material misstatement.

8. AUDIT PLANNING
It is also important to remember that while there may be specific risks of material
misstatement relating to the industry-specific balances and transactions, there
must also be appropriate consideration of the “normal” balances and transactions.
For instance, in the audit of a bank, there will be plenty of risks to consider other
than those relating to bank-specific transactions and balances, for example the
depreciation of properties, recognition of provisions and impairment of goodwill
would all still be relevant. These 'normal' types of risk must not be forgotten, just
because the client operates in a specialized industry.

9. RELIANCE ON EXPERTS
• Linked to the previous matters, competence, audit planning and
the specialized nature of some transactions and balances, the
auditor may plan to use an auditor’s expert to obtain audit
evidence. This is quite likely in a specialized industry as despite
being competent to perform the engagement, the audit firm may
not have the necessary specific expertise in some areas. For
instance in the audit of a bank, specialists may be brought in to
value complex financial instruments.

10. RELIANCE ON EXPERTS
In this situation, the audit firm must adhere to the requirements and principles of ISA
620, Using the Work of an Auditor’s Expert which deals with matters including the
evaluation of the objectivity, competence and capabilities of the auditor’s expert,
determining and communicating the scope and objectives of their work, and assessing their
findings. It is particularly important that the auditor evaluates the relevance and adequacy
of the expert’s findings or conclusions. There is a danger of over-reliance on the expert’s
work; the fact that the audit is of a specialized nature does not mean that the auditor can
pass all responsibility over to an expert. For instance, the auditor must consider whether
the expert’s findings are consistent with the auditor’s understanding of the client and with
the conclusions of other audit procedures. Any inconsistencies must be investigated.

11. Scope
PAS 41 is applied to account for the following when they
relate to agricultural activity:
a. Biological assets, except for bearer plants.
b. Agricultural produce at the point of harvest; and
c. Unconditional government grants related to a biological
asset measured at its fair value less cost to sell
Conceptual Framework & Acctg.
Standards (by: Zeus Vernon B. Millan)
11

12. Scope - continuation
PAS 41 does not apply to the following:
a. Land (PAS 16 PPE and PAS 40 Investment Property)
b. Bearer plants related to agricultural activity (PAS 16). However,
PAS 41 applies to the produce on those bearer plants.
c. Government grants related to bearer plants (PAS 20 Acctg. for
Gov’t. Grants and Disclosure of Gov’t. Assistance).
d. Intangible assets (PAS 38 Intangible Assets).
• PAS 41 is applied to agricultural produce at the point of
harvest. After the point of harvest, PAS 2 Inventories or other
applicable standard is applied.
Conceptual Framework & Acctg.
Standards (by: Zeus Vernon B. Millan)
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13.  Nature of asset Type of asset
 Living animal or plant Biological asset (PAS 41)
However, bearer plants are
classified as Property, Plant
and Equipment (PAS 16)
 Unprocessed harvested
product
Agricultural produce
(PAS 41)
 Processed harvested
product
Inventory (PAS 2)
Conceptual Framework & Acctg.
Standards (by: Zeus Vernon B. Millan)
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14. Conceptual Framework & Acctg.
Standards (by: Zeus Vernon B. Millan)
LIVE COW - BIOLOGICAL ASSET
CARCASS - AGRICULTURAL PRODUCE
INVENTORY
INVENTORY
INVENTORY
MOOOO!!!
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15. Consumable vs. Bearer biological assets
Biological assets are either consumable or bearer.
a. Consumable - those that are to be harvested as agricultural
produce or sold as biological assets. Ex. Timber
b. Bearer - those other than consumable biological assets. Ex.
Fruit tree
• PAS 41 applies to both consumable and bearer animals.
However, PAS 41 only to consumable plants but not to
bearer plants.
Conceptual Framework & Acctg.
Standards (by: Zeus Vernon B. Millan)
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16. Conceptual Framework & Acctg.
Standards (by: Zeus Vernon B. Millan)
MANGO TREE
(BEARER PLANT – PAS 16)
MAIZE PLANT – ANNUAL CROP
(CONSUMMABLE – PAS 41)
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17. Agricultural activity
• PAS 41 applies to biological assets, agricultural
produce and gov’t. grants only when they relate
to agricultural activity.
• Agricultural activity is the management by
an entity of the biological transformation of
biological assets for sale, into agricultural
produce, or into additional biological assets.
Conceptual Framework & Acctg.
Standards (by: Zeus Vernon B. Millan)
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18. Common features of agricultural activity
a. Capability to change – Living animals and plants are capable of
biological transformation.
b. Management of change – Management facilitates biological
transformation by enhancing, or at least stabilizing, conditions
necessary for the process to take place.
• Harvesting from unmanaged sources is not agricultural
activity.
c. Measurement of change – The change in quality or quantity
brought about by biological transformation is measured and
monitored as a routine management function.
Conceptual Framework & Acctg.
Standards (by: Zeus Vernon B. Millan)
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19. Recognition
A biological asset or agricultural produce is recognized when:
a. the entity controls the asset as a result of past events;
b. it is probable that future economic benefits associated with the
asset will flow to the entity; and
c. the fair value or cost of the asset can be measured reliably.
Conceptual Framework & Acctg.
Standards (by: Zeus Vernon B. Millan)
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20. Measurement
• A biological asset shall be measured on initial recognition and at
the end of each reporting period at its fair value less costs to
sell.
• Agricultural produce harvested from an entity’s biological assets
shall be measured at its fair value less costs to sell at the
point of harvest. Such measurement is the cost at that date when
applying PAS 2 Inventories or another applicable standard.
Conceptual Framework & Acctg.
Standards (by: Zeus Vernon B. Millan)
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21. Measurement - continuation
• A biological asset is measured at cost less accumulated
depreciation and accumulated impairment loss if the fair
value of the biological asset cannot be measured reliably on
initial recognition.
Conceptual Framework & Acctg.
Standards (by: Zeus Vernon B. Millan)
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22. Definitions
• Fair value is the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants
at the measurement date.
• Costs to sell are the incremental costs directly attributable to the
disposal of an asset, excluding finance costs and income taxes (e.g.,
Commissions to brokers, Levies by regulatory agencies and commodity
exchanges, and Transfer taxes and duties)
• Costs to sell do not include transport costs, advertising costs, income
taxes, and interest expense.
• If location is a characteristic of the biological asset, the price in the
principal (or most advantageous) market shall be adjusted for the
transport costs.
Conceptual Framework & Acctg.
Standards (by: Zeus Vernon B. Millan)
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23. Gains and losses
• A gain or loss arising on initial recognition of a
biological asset at fair value less costs to sell and from
a change in fair value less costs to sell of a biological
asset shall be included in profit or loss for the period
in which it arises.
Conceptual Framework & Acctg.
Standards (by: Zeus Vernon B. Millan)
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24. Government Grants
Nature of government grant Accounting procedure
 Government grant (a) is
unconditional and (b) relates to
biological asset measured at
FVLCS
 Recognize income equal to fair
value of the grant when the
grant becomes receivable.
 Government grant is conditional  Recognize income only when
condition is met.
 Government grant relates to
biological asset measured at
cost
 Account for the grant under PAS
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 Government grant is conditional
but a portion of the grant is
retained according to the time
that has elapsed
 Recognize income using
straight-line method
Conceptual Framework & Acctg.
Standards (by: Zeus Vernon B. Millan)
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25. Encouraged disclosures
Disclosure of the following information is encouraged but not required:
1) Disclosure of consumable and bearer biological assets.
2) Disclosure of mature and immature biological assets.
a. Mature biological assets are those that have attained harvestable
specifications or are able to sustain regular harvests.
b. Immature biological assets are those that have not yet attained
harvestable specifications or are not yet able to sustain regular harvests.
3) Disclosure of breakdown of total “Gain (loss) from changes in
FVLCS” during the period attributable to price change and
physical change
Conceptual Framework & Acctg.
Standards (by: Zeus Vernon B. Millan)
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26. ILLUSTRATIVE
PROBLEM