Audit Considerations for Agriculture Entities

What makes agricultural audits different

Agriculture entities present an audit risk profile defined by two characteristics: assets that change biologically (they grow, degenerate, produce, and procreate) and the requirement under IAS 41.12 to measure those assets at fair value less costs to sell. In a standard commercial audit, most assets sit on the balance sheet at historical cost. In an agriculture audit, a significant portion of assets must be remeasured at each reporting date, with gains and losses from fair value changes running through profit or loss.

IAS 41 applies to biological assets (living animals or plants), agricultural produce (the harvested product), government grants related to agricultural activity, and the disclosures required for each of these categories. The standard does not apply once the produce has been harvested and enters further processing. A dairy farmer’s herd of cows is a biological asset under IAS 41. The milk in the tank is agricultural produce at the point of harvest, measured at fair value less costs to sell under IAS 41.13. Once that milk enters the pasteurisation plant, IAS 2 applies from that point forward.

The concentration of audit risk sits in the fair value measurement. For biological assets with an active market (mature cattle in the Netherlands, wheat at harvest, unprocessed cotton), fair value is observable and audit evidence is straightforward. For biological assets without an active market (immature livestock, growing crops mid-season, specialised horticultural products), the entity must use a valuation technique under IFRS 13, and that technique involves significant estimation. ISA 540.13 requires you to identify these estimates and assess the risk of material misstatement for each one.

IAS 41 fair value measurement for biological assets

IAS 41.12 states the principle: a biological asset shall be measured at fair value less costs to sell on initial recognition and at each reporting date. IAS 41.30 provides a single exception: if fair value cannot be measured reliably on initial recognition for a biological asset where market-determined prices are not available and alternative estimates are determined to be clearly unreliable, the entity measures at cost less accumulated depreciation and impairment. This exception is narrow. IAS 41.30 explicitly states that the presumption is that fair value can be measured reliably, and the exception applies only on initial recognition.

Your audit procedure starts with the classification. Every biological asset on the balance sheet needs to be categorised: does an active market exist for this asset in its current condition and location? If yes, the quoted price in that market is the appropriate basis (IAS 41.17). If no active market exists, IAS 41.18–21 direct the entity to use market-determined prices for recent transactions, sector benchmarks, or the present value of expected net cash flows.

The present value approach (IAS 41.21) is where audit risk concentrates. The entity builds a model projecting future cash flows from the biological asset: expected yield, expected selling price at harvest, remaining costs to bring the asset to harvest, and a discount rate. Each input is an estimate, and ISA 540.18 requires you to test them.

For the expected yield, ask what evidence supports it. A tomato grower’s yield assumption of 55 kg per square metre should be compared against the entity’s historical yield data (two to four years, adjusted for variety changes) and, where available, sector data from organisations like Wageningen University & Research’s greenhouse horticulture benchmarks or the LEI Wageningen UR agricultural reports. If the entity’s assumption exceeds its own historical average by more than 10%, document why.

For expected selling prices, compare the entity’s assumption against forward contract prices (if hedged), recent transaction data from agricultural auctions (Greenery, Royal FloraHolland for ornamental products), or published market reports. The audit evidence is the comparison: entity assumption versus observable data, with the variance explained.

For the discount rate, IFRS 13.B14 requires a rate consistent with the uncertainty in the cash flows. Agriculture carries specific risks (weather, disease, pest infestation, market price volatility) that should be reflected either in the cash flows or in the discount rate, but not in both. Document which approach the entity uses and verify that risks are not double-counted.

The harvest boundary: where IAS 41 ends and IAS 2 begins

IAS 41.3 defines agricultural produce as the harvested product of the entity’s biological assets. The standard is explicit: IAS 41 applies only up to the point of harvest. After harvest, IAS 2 Inventories or another applicable standard takes over. This boundary matters because the measurement basis changes. Under IAS 41, the produce at harvest is measured at fair value less costs to sell. That fair value becomes the deemed cost under IAS 2.14 from that point forward.

Getting the harvest point wrong has a direct financial statement impact. If the entity continues to measure processed goods at fair value when IAS 2 should apply, unrealised gains are recognised in profit or loss that have no basis under the standard. If the entity applies cost to unharvested produce that should still be under IAS 41, it understates the asset.

The practical difficulty arises with continuous harvest operations. A dairy operation harvests milk daily. Forestry operations harvest timber on a rolling schedule. A fruit grower picks over a six-week window. Your audit procedure needs to verify that the entity draws the line consistently and that the measurement basis switches at the correct point. For a dairy client, confirm that raw milk in the holding tank is measured at IAS 41 fair value, while milk that has entered the processing line is measured at IAS 2 cost.

Bearer plants: the 2014 amendment that changed classification

The 2014 amendments to IAS 16 and IAS 41 removed bearer plants from the scope of IAS 41 and placed them under IAS 16. A bearer plant is a living plant used to bear produce over multiple periods that is not expected to be sold as agricultural produce (IAS 41.5A). Apple trees, grape vines, oil palms, and rubber trees are bearer plants. The fruit, grapes, palm oil fruit bunches, and latex they produce remain biological assets under IAS 41 until harvest.

This means a vineyard client accounts for the vines under IAS 16 (at cost less depreciation) and the grapes on those vines under IAS 41 (at fair value less costs to sell). The audit risk is in the split. When does a grape stop being part of the vine (IAS 16) and become a separate biological asset (IAS 41)? The answer under IAS 41.5A is that the produce is a separate biological asset once it is growing on the bearer plant. In practice, this means the entity recognises a biological asset for the growing grapes from the point of fruit set.

Your procedure: verify that the entity’s accounting policy correctly classifies bearer plants under IAS 16 and that depreciation reflects the productive life of the plant (not the licence period or lease term of the land). For the biological produce, verify that fair value measurement begins at the point of fruit set (or equivalent for other crops) and that the IAS 41/IAS 16 boundary is applied consistently across reporting periods.

Fair value hierarchy under IFRS 13 for biological assets

IFRS 13.72 requires the entity to disclose the level of the fair value hierarchy for each class of biological asset. The hierarchy matters for audit because it determines the nature of your evidence.

Level 1 inputs (IFRS 13.76) are quoted prices in active markets. Mature cattle traded at regulated livestock markets in the Netherlands (Vee & Logistiek Centre Leeuwarden, for example) have Level 1 inputs. Your procedure: obtain the market price at or near the reporting date, adjust for costs to sell (transport, auction fees), and compare to the entity’s carrying amount.

Level 2 inputs (IFRS 13.81) are observable inputs other than quoted prices. Timber priced using state forest administration rates (Staatsbosbeheer price lists in the Netherlands, Bayerische Staatsforsten in Germany) or agricultural commodity prices adjusted for quality and location fall here. Your evidence is the price source and the adjustments the entity applies.

Level 3 inputs (IFRS 13.86) are unobservable inputs. Growing crops mid-season, immature livestock, specialised horticultural products with no comparable market data, and forestry assets in regions without published stumpage rates all use Level 3. IFRS 13.93 requires the entity to disclose the valuation technique, the significant unobservable inputs, a sensitivity analysis, and a narrative explanation of the sensitivity to input changes. ISA 540.20 requires you to evaluate the reasonableness of those inputs and test the sensitivity. Most audit effort on an agriculture engagement concentrates here.

Physical verification and ISA 501 considerations

ISA 501.3 requires you to attend the physical count of inventory where inventory is material. Biological assets are not inventory under IAS 2, but ISA 501.4 extends the principle: when the auditor determines that physical inspection is necessary to obtain sufficient appropriate audit evidence, the same approach applies. For an agriculture entity, that means attending livestock counts, observing crop measurement procedures, inspecting storage facilities for harvested produce, and verifying that the entity’s biological asset register reconciles to physical quantities.

The practical challenge with biological assets is that they move, grow, reproduce, and die between the count date and the reporting date. A livestock count performed on 15 December for a 31 December reporting date requires a rollforward procedure: reconcile the count to the year-end balance using records of births, deaths, purchases, and sales in the intervening period. The entity should have movement registers. Your job is to test them.

For growing crops, physical inspection serves a different purpose. You aren’t counting items. You’re evaluating the condition and stage of growth that underlies the fair value estimate. If the client’s model assumes mature plants ready for harvest and you observe plants that are clearly immature, the model’s yield timing assumption is wrong. Photograph the inspection with date stamps. Record the growth stage for the blocks or greenhouses you inspect. This evidence supports your ISA 540.18 evaluation of management’s assumptions.

Use the ciferi Financial Ratio Calculator to benchmark an agriculture client’s margins and turnover ratios against sector data when evaluating overall reasonableness of fair value gains.

Government grants for agricultural activity under IAS 41.34–38

Agriculture entities, particularly in the EU, frequently receive government grants tied to agricultural activity. IAS 41.34 requires an unconditional government grant related to a biological asset measured at fair value less costs to sell to be recognised in profit or loss when the grant becomes receivable. A conditional grant (IAS 41.35) is recognised only when the conditions are met.

EU Common Agricultural Policy (CAP) payments, environmental stewardship scheme payments, and national agricultural subsidies each have different conditionality. Your procedure: obtain the grant agreement, identify the conditions, and evaluate whether those conditions have been met at the reporting date. For CAP basic payment scheme entitlements, confirm the entity holds the entitlements, that the eligible hectarage is correctly declared, and that the payment has been calculated correctly based on the national rate.

The audit risk is that entities recognise conditional grants before the conditions are satisfied (premature revenue recognition) or fail to recognise unconditional grants in the correct period. Test the grant register against the grant agreement terms and the payment confirmations from the Rijksdienst voor Ondernemend Nederland (RVO) in the Netherlands or equivalent paying agency.

Worked example: Groenhart Tuinbouw B.V.

Client profile: Groenhart Tuinbouw B.V. is a greenhouse horticulture company in the Westland region of South Holland, growing bell peppers and tomatoes on 12 hectares of heated greenhouse. Annual revenue is €14M. The entity’s biological assets (growing crops at various stages) are carried at €1.6M fair value less costs to sell. Bearer plants (greenhouse structures are separate; the plants themselves are replanted annually, so no bearer plant classification applies). The entity receives CAP and provincial environmental grants totalling €180K per year. Total assets: €22M. Bank debt: €9M with a current ratio covenant of 1.2x.

1. Set materiality

Overall materiality: 1% of revenue (€140K). The choice of revenue rather than PBT reflects the volatility of PBT in agriculture entities where fair value gains can swing profit significantly between periods (ISA 320.A4). Performance materiality: 65% of overall, so €91K. The lower percentage reflects the estimation uncertainty inherent in the biological asset balance.

2. Classify biological assets and identify the measurement basis

Groenhart’s biological assets consist of growing bell pepper and tomato plants at various stages. No active market exists for unharvested greenhouse vegetables on the vine. The entity must use a Level 3 valuation technique under IFRS 13.

Procedure: confirm that the entity does not apply the IAS 41.30 cost exception (it shouldn’t, since the entity has been using the DCF approach for years and the fair value is reliably measurable). Confirm that the bearer plant amendments do not apply (the plants are replanted each season, so they do not meet the IAS 41.5A definition of a bearer plant).

3. Test the fair value model

Groenhart’s model projects the remaining yield for each crop at the reporting date, multiplied by the expected selling price, minus remaining costs to harvest and sell, discounted to present value. Key assumptions at year-end: remaining bell pepper yield of 18 kg/m² (out of a full-season projection of 32 kg/m²), expected selling price of €0.95/kg (based on Greenery auction averages), remaining growing costs of €320K, and discount rate of 6%.

Procedure for yield: compare 32 kg/m² full-season projection to Groenhart’s historical data. Average over the past four years: 30.5 kg/m². The entity’s projection is 5% above its own average. This is within an acceptable range given the entity planted a higher-yielding variety this year (documented in the agricultural plan). Confirm the variety change with the seed purchase invoices.

Procedure for price: compare €0.95/kg to the year-to-date average at Greenery for class 1 bell peppers. Year-to-date average: €0.91/kg. Entity assumption is 4% above. Evaluate: the entity’s argument is that late-season prices are historically higher (November through February). Check by obtaining the monthly price data from Greenery for the prior two years for the same period. If the data supports the claim, the assumption is reasonable. If not, the €0.04/kg difference applied to the remaining 216,000 kg of projected yield is €8.6K, below performance materiality. Document and move on.

Procedure for discount rate: 6% against a risk-free rate of approximately 2.8% (Dutch 1-year government bond). The premium of 3.2% reflects crop risk (disease, weather) and price risk. Compare against rates used by other agriculture entities where disclosed or against academic benchmarks from Wageningen UR agricultural economics papers.

4. Test government grants

Groenhart received €180K in grants: €120K from CAP basic payment scheme (unconditional, based on eligible hectarage) and €60K from a provincial environmental grant (conditional on maintaining reduced pesticide usage for the full calendar year).

Procedure for CAP payment: confirm eligible hectarage per the RVO declaration matches the entity’s records (12 hectares). Confirm the per-hectare rate. Confirm the payment was received (bank statement). Recognition under IAS 41.34: correct.

Procedure for provincial grant: obtain the grant conditions. The condition requires a full calendar year of reduced pesticide usage, verified by a post-year inspection. At the reporting date, has the inspection occurred? If yes, the condition is met, and recognition under IAS 41.35 is appropriate. If the inspection is scheduled for February, the condition is not yet met, and the €60K should be deferred. Evaluate: this is a subsequent events consideration under ISA 560.

The completed file links every biological asset assumption to external evidence, documents the harvest boundary, and traces each grant to its agreement terms.

Practical checklist for your next agriculture engagement

1. Evaluate specialist needs before accepting. Confirm whether any biological assets require Level 3 fair value measurement. If yes, evaluate whether your team has the expertise to audit the valuation model or whether ISA 620.7 requires a specialist (agronomist, livestock valuator, forestry expert, or agricultural economist).
2. Classify every biological asset. Obtain the entity’s biological asset register and classify each asset: bearer plant (IAS 16) or biological asset (IAS 41). For any asset classified as a bearer plant, verify it meets the IAS 41.5A definition and that depreciation is based on the productive life of the plant.
3. Test every Level 3 fair value model. Identify each significant assumption (yield, price, costs to complete, discount rate) and design a procedure for each one. Compare assumptions against the entity’s own historical data, independent sector benchmarks, forward market data where available, and published agricultural research from bodies like Wageningen UR or national statistics agencies.
4. Attend physical inspection. For livestock, perform a count and reconcile movements to year-end. For growing crops, document the growth stage and condition in the blocks or sections you inspect, with photographs.
5. Map every government grant. Identify the conditions and test whether those conditions were met at the reporting date. Separate conditional grants (IAS 41.35) from unconditional grants (IAS 41.34) and verify the recognition timing for each.
6. Verify the harvest boundary. Confirm that assets measured under IAS 41 switch to IAS 2 at the correct point and that the fair value at harvest becomes the deemed cost going forward. Test one or two product lines end-to-end from biological asset to finished inventory.

Common mistakes regulators flag

• Applying IAS 41 fair value measurement to processed agricultural products that should be under IAS 2. The FRC’s 2021–22 inspection cycle found that entities in the food production sector inconsistently applied the harvest-point boundary, resulting in fair value gains being recognised on products that had already entered processing (FRC Annual Inspection Results 2022).
• Failing to attend physical inspection of biological assets when they are material to the financial statements. ISA 501.4 applies to biological assets by extension, and the PCAOB’s 2022 inspection findings noted insufficient physical evidence for biological asset balances in 27% of agriculture-sector files reviewed (PCAOB Inspection Observations, 2022).

Related content

Frequently asked questions

Further reading and source references

• IAS 41, Agriculture: paragraphs 12–30 on fair value measurement, paragraphs 34–38 on government grants, and paragraph 5A on bearer plants.
• IFRS 13, Fair Value Measurement: paragraphs 72–93 on the fair value hierarchy and Level 3 disclosures.
• IAS 2, Inventories: paragraph 14 on deemed cost at harvest point.
• IAS 16, Property, Plant and Equipment: as amended in 2014 for bearer plants.
• ISA 540 (Revised), Auditing Accounting Estimates and Related Disclosures: the framework for testing biological asset valuations.
• ISA 501, Audit Evidence—Specific Considerations for Selected Items: paragraphs 3–4 on physical inspection of inventory and biological assets.
• FRC Annual Inspection Results 2022: findings on harvest-point boundary application in food production.
• PCAOB Inspection Observations, 2022: findings on physical evidence for biological asset balances.