Agriculture in Indonesia is one of the key sectors within the Indonesian economy. Currently, approximately 30% (thirty percent) of Indonesia’s land area is used for agriculture. The agricultural sector of Indonesia consists of large plantations, either owned by state or private companies, and small-holder production modes, mostly family owned and run by traditional agricultural households.
At present, Indonesia is the world’s largest producer of palm oil, cloves, and cinnamon, the 2nd largest producer of nutmeg, natural rubber, cassava, vanilla, and coconut oil, the 3rd largest producer of rice and cocoa, and among the largest producers of coffee, tobacco, and tea. Therefore, there is a need for agriculture companies audit.
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When conducting agriculture companies audit, auditors are expected to exercise a high degree of professional scepticism, especially on the audit of its biological asstes – an area where subjectivity, judgments and estimates exist. The classification, recognition and measurement of biological assets, among others, need to be carefully reviewed and properly assessed.
Due to advent of Agriculture Industries, the International Accounting Standards Board introduced International Accounting Standard (IAS) 41 Agriculture in April 2001. The objective of this standard is to prescribe the accounting treatment and disclosures related to agricultural activity of companies.
Agriculture Companies Audit: Classification and Recognition
IAS 41 Agriculture shall be applied to (a) biological assets, except for bearer plants; (b) agricultural produce at the point of harvest; and (c) government grants when they relate to agricultural activity. The Standard define agricultural activity as 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, where in a biological asset is defined as a living animal or plant.
It is noteworthy to highlight that agricultural produce growing on bearer plants such as tea leaves, grape, oil palm fruit, and latex, which is the harvested produce of the entity’s biological assets, at the point of harvest, is within the scope of this Standard. Thereafter, IAS 2 inventories or another applicable Standard is applied. Accordingly, this Standard does not deal with the processing of agricultural produce after harvest (for example, the processing of milk into cheese or picked leaves into tea).
Differentiating Biological Assets and Inventories
Certain biological assets such as livestock (for example, broilers raised for sale at maturity) and aquaculture stocks such as fishes farmed in ponds, among others are often not recognized as biological assets, but as inventories. Auditors should challenge the proper classification and recognition with respect to agricultural activity of the companies as the applicable accounting standards, its measurement, and disclosures will be different. Inventories are measured at the lower of cost and net realisable value, while biological assets shall be measured on initial recognition and at the end of each reporting at its fair value less cost to sell.
Auditors are required to document our consideration and judgment made in evaluating management’s assessment on whether an agricultural activity falls within the scope of biological assets. It is critical for auditors to recognize and communicate to management, that the adoption of IAS 41 Agriculture is not a matter of choice when the criteria for recognition of biological assets and agricultural produce at the point of harvest are fulfilled.
Measurement of Biological Assets
As mentioned above, biological assets shall be measured on initial recognition and at the end of each reporting period at its fair value less cost to sell. Paragraph 30 of IAS 41 states that there is a presumption that fair value can be measured reliably for a biological asset. However, that presumption can be rebutted only on initial recognition for a biological asset for which quoted market prices are not available and for which alternative fair value measurements are determined to be clearly unreliable.
In such a case, that biological asset shall be measured at its cost less any accumulated depreciation and any accumulated impairment losses. Once the fair value of such a biological asset becomes reliably measurable, an entity shall measure it at its fair value less costs to sell.
Determining Fair Value and IFRS 13 Guidelines
The determination of whether fair value can be reliably measured is a point of subjectivity at initial recognition and we as auditors are required to critically evaluate the management’s decision to measure biological assets at cost less any accumulated depreciation and any accumulated impairment losses, instead of using fair value accounting. Management’s judgments that fair value measurements are not available or clearly unreliable must be clearly demonstrated and auditors must ensure that sufficient appropriate audit evidence is obtained to support that fact.
The presumption in paragraph 30 can be rebutted only on initial recognition. An entity that has previously measured a biological asset at its fair value less costs to sell continues to measure the biological asset at its fair value less costs to sell until disposal. In all cases, an entity measures agricultural produce at the point of harvest at its fair value less costs to sell. This Standard reflects the view that the fair value of agricultural produce at the point of harvest can always be measured reliably.
Fair Value of Biological Assets
IFRS 13: Fair Value Measurement set out the guidance on how to determine fair value. Various fair value models are available to measure biological assets, depending on whether there exists an active market, whereby the quoted price is used; if an active market does not exist, other fair value techniques to be considered include the most recent market transaction price, market price for similar assets, sector benchmarks and the discounted present value of expected net cash flows from the asset. It is the management’s role to determine the best-fit fair value measurement model for their biological assets.
Auditing the Fair Value of Biological Assets
Our role as auditors is to audit the fair value of biological assets determined by management, including among other things, the appropriateness of the fair value technique used, the assumptions made by management and inputs injected into the fair value model. Auditors should obtain sufficient appropriate audit evidence to substantiate their review of the fair value determined by management, as required by ISA 540: Auditing Accounting Estimates, Including Fair Value Estimates and Related Disclosures.
Auditor’s role does not end when valuation experts are engaged by the management to determine fair value – it is imperative for auditors to evaluate the competence, capabilities and objectivity of the experts, on top of assessing the appropriateness of the valuation methods and inputs used by the valuation experts pursuant to ISA 500: Audit Evidence. Under circumstances where the auditor decides to use an auditor’s expert to determine the fair value of biological assets, the auditor’s responsibilities are stipulated in ISA 620: Using the Work of an Auditor’s Expert.
Other audit procedures include:
SW NIHAO Newsletter Edition no.8 December 2022
1. Check additions of biological assets, such as the costs incurred in the breeding of livestock and cultivation of palm oil plantations.
2. Review capitalisation of costs prior to maturity or harvesting of biological assets, such as direct labor, maintenance costs and borrowing costs.
3. Verification of the existence of biological assets (i.e., observation of physical count of livestock).
4. Check derecognition of biological assets resulting from harvest.
5. Inquire from management on the existence of any subsequent events, be it adjusting or non-adjusting events that may require adjustment of or disclosure in the financial statements.
6. Review disclosures of biological assets in the financial statements in accordance with the applicable financial reporting framework.
Kindly note that audit of agricultural companies should be designed and conducted in the same manner as audit of other companies, considering the size and the nature of the company and the system of internal accounting controls. The auditing procedures suggested above are presented to provide guidance on matters that are unique or significant to the industry, but they may not apply to all situations and are not intended to replace or limit the use of judgment in determining the nature, timing and extend of audit procedures to be applied in a particular audit.
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