Agriculture is a significant sector that contributes to the world’s GDP. According to the World Bank, agriculture contributed 10.39% to total GDP in 2018. This is a huge number. All of us need to eat. Agriculture is a vital industry. It’s an important industry. However, accounting can be interesting even for UAE audit services.
We deal with life. They can be called animals, plants or biological transformation. Dubai audit firms also aim to capture the accounts’ life.
Many pressing questions and problems arise from the details of daily life. We tries answer some of these questions in this article. Many people ask us about the valuations of agricultural assets.
How are financial auditor specialists able to measure them?
How does an audit team determine fair value?
Two steps can summarize the entire process of valuation:
Identify the type and value of your agricultural assets.
It should be measured according to the requirements.
What Type Of Agricultural Asset Are You?
Accounting can enable an entity to have multiple types of agricultural assets. Internal auditors are tasked with determining which type. It is very similar to financial instruments. First, you need to classify the item. Then you will need to apply the appropriate standard and measure it accordingly.
How do Audit Firms in Dubai Measure Different Assets in Agriculture?
A biological asset is defined by IAS 41 as a living animal, plant or other living creature. However, IAS 41 does not apply to all living creatures or plants.
Ask this critical question first.
Is the asset used in agriculture?
How can companies in UAE manage harvesting and biological transformation of biological resources for specific purposes? If yes, the biological asset is covered by the IAS 41 scope. For example, you could grow fish on a farm.
If this is the case, the asset is outside IAS 41’s reach. One company may be able to harvest fish from the ocean but not transform wild ocean fish into something biologically.
The second question you should ask is:
Is the biological asset a bearing or consumable?
These biomaterials can be eaten. These biological resources can be considered consumable. These biological resources can be used for agriculture, including farmed fish, hogs and trees for timber. Sold as biological assets such as apple tree seedlings and puppies. IAS 41 also includes consumable assets. They will be valued at their fair value less the selling price.
Read also : Top differences between IAS 23 and US GAAP
Bearer of biological assets
Bearer biological assets, which are not consumable biological resources but can be used to grow apple trees and milk cows, are also available. IFRS differentiates between bearer plants or bearer animals:
IAS 16 does not include bearer plants. IAS 41 includes bearer animals.
Conclusion: All animals are included in IAS 41 regardless of whether they bearers or consumable. They must be measured by financial audit professionals at a fair price and at a lower cost than you would like to sell them. Dubai audit services are required to accurately and correctly assess the characteristics of plants.
IAS 16 includes bearer plants so that they can be measured with either a cost model, or a valuation model.
The entity’s biological assets that have been harvested are known as agricultural produce. We can use milk, eggs, and apples as examples. Not all products made from agricultural produce are considered agricultural produce. These are inventories.
People sometimes get confused about the existence and value of living animals. Imagine you have a chicken farm and you raise chicks for sale. These chicks do not qualify as an agricultural product. These chicks are biological assets, since they are living animals. This is why they qualify as biological assets. The fair value of agricultural produce must be less than what it costs to harvest. After this, you will have your agricultural produce in stock. The IAS standard is required by Dubai’s auditing professionals.
This asset is only being mentioned to clarify. IAS 16 includes agricultural land that is used for agricultural activities. It is calculated using either the cost or revaluation method. It is not permitted to be used by audit services as an investment property under IAS41 if it is being used in agriculture.
How to determine fair value of agricultural assets
Once we have determined what fair value is more expensive to sell, and when it should not be measured, then we can examine the IFRS13 Fair Value Measurement standard. Yes, IFRS13 is applicable in this context. IFRS 13 also includes fair value hierarchy. This classification identifies inputs to be used for setting fair value and prioritizing.
Level 1 inputs: The quoted price in active markets at the measurement date for identical assets. This is the most widely accepted and popular method. This method can only be used for assets with similar assets in the same condition.
It is fine to produce agricultural products such as raw milk, eggs, and meat. These assets are usually valued fairly by the active market. Problems with biological assets that are near harvest or sale dates do not exist.
Level 2 inputs refer to prices that can be observed directly or indirectly for an asset but not the Level 1 quotes.
These are market-determined prices that have been determined by the market, even though there is no active market. Imagine an asset that hasn’t been traded in a long time. Fair valuation can be achieved using the most recent price, which is basically level 2.
Level 3 inputs: Unobservable inputs into the asset.
In agriculture, Level 3 is when the asset isn’t on the market. age, height, weight). As Level 3 input, companies use the cash flow generated by the asset’s present value as a basis for valuation.
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Umapathy Anuruthan, is a Senior Auditor at the firm, holds a Business Management Degree and carries with him an experience of 6+ Years, having worked in two of the Big 4 audit firms. He has a ‘hands-on’ understanding of external audits and financial reporting and is well-known for his approach to ensuring the highest quality and accuracy in audits for clients of numerous industries.