ISSUES IN ACCOUNTING EDUCATION American Accounting Association

Vol. 28, No. 4 DOI: 10.2308/iace-50549

2013
pp. 873886

Livestock Valuation in a Dairy Business

Junaid Ashraf, Zeeshan Ahmad, and Imran Chaudhry
ABSTRACT: This case study deals with assessing the value of livestock in the financial
statements of a dairy farming business. With a global market predicted to reach US$494
billion by 2015 (GIA 2012), dairy farming is the largest sector of world agriculture
production. It is an important industry in many countries. For example, in the USA, dairy
farming contributes more than $160 billion in economic output and provides more than
90,000 jobs (DFT 2012).
The subject matter of the case study is a small dairy farming business in Pakistan, a
country that is the fifth largest producer of milk in the world (FAO 2009). The case study
describes a disagreement between the management and the auditors about the initial
recognition and subsequent measurement of crossbred cattle in the financial statements
of the business. The aim of this case study is to help students understand the issues
involved in assessing the value of livestock in the light of the guidance provided by the
International Accounting Standard on Agriculture (IAS 41). The case study can also be
used to help students understand the differences between the requirements of U.S.
GAAP and international accounting standards, as well as the possible reasons for these
differences.
Keywords: livestock valuation; agricultural accounting; International Accounting Stan-
dard on agriculture (IAS 41).

CASE

I
n December 2010, Mr. Shahzad Iqbal, the CEO of Jassar Farm, a dairy farming business in
Pakistan, was concerned about problems that had arisen during the annual audit of the
business, in particular with regard to the recognition and measurement of crossbred cattle at
the farm. There were two broad areas of dispute. The first involved whether certain outflows of cash
incurred for the generation of crossbred cattle should be capitalized. The management believed they
should be, but the auditors thought otherwise. The second area of dispute between the management
and the auditors concerned the valuation of crossbred cattle on the balance sheet date. As these
cattle represented a significant percentage of the total assets of the business, their recognition, initial
measurement, and subsequent valuation would have a strong impact on the financial results shown
by the farm (see Exhibit 1, Panels A and B).

Junaid Ashraf is an Associate Professor at Lahore University of Management Sciences, Zeeshan Ahmad is an
Associate Professor at Karachi School of Business and Leadership, and Imran Chaudhry is a Research
Associate at Lahore University of Management Sciences.

Published Online: June 2013

873
874 Ashraf, Ahmad, and Chaudhry

EXHIBIT 1
Jassar Farms Financial Statements
Panel A: Jassar Farm Balance Sheet as of June 30 (Pakistani Rs.)
2010 2009
Property, Plant, and Equipment 53,053,047 40,932,790
Biological Assets 60,681,336 50,160,847
Long-Term Prepayments 171,663
Non-Current Assets 113,734,383 91,265,300
Inventory 6,888,781 7,465,082
Trade Debts 286,762 227,226
Prepayments and Misc. Receivables 3,397,888 2,674,423
Cash and Bank Balances 4,982,562 291,703

Current Assets 15,555,993 10,658,474

Total Assets 129,290,376 101,923,734

Share Capital 115,800,300 115,800,300

Accumulated Loss (34,924,899) (16,200,617)
Share Capital and Reserves 80,875,401 99,599,683
Long-Term Loans 35,943,429
Short-Term Loans 7,999,995
Trade and Other Payables 4,471,551 2,324,051
Current Liabilities 12,471,546 2,324,051
Total Equity and Liabilities 129,290,376 101,413,734

Panel B: Jassar Farm Income Statement for the Period Ended June 30 (Pakistani Rs.)
2010 2009
Revenue (Milk Sales) 12,766,177 4,621,109
Cost of Sales 17,941,002 11,385,441
Gross Loss (5,174,825) (6,764,332)

Administrative and Operating Expenses 9,609,049 9,507,634

Loss from Operating Activities (14,783,874) (16,271,966)
Financing Costs 4,217,573 189,536
Other Operating Income 277,165 260,885
Loss Before Taxation (18,724,282) (16,200,617)
Taxation
Loss After Taxation (18,724,282) (16,200,617)
Accumulated Loss B/F (16,200,617)
Loss Carried to Balance Sheet (34,924,899) (16,200,617)

Source: Draft Financial Statements of Jassar Farm.

Panel B: The Income Statement for the Year 2009 represented operations since the inception of the company on January
14, 2009.

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EXHIBIT 2
Map of Pakistan

Coordinates of District Narowal: 3286 0 2600 N 74852 0 7 00 E

BACKGROUND
Jassar Farm is an industrial cattle-breeding farm situated in the village of Jassar in the
agricultural area of Narowal, Pakistan.1 The farm, which covered 200 acres, was equipped with
modern infrastructure facilities and had a workforce of 75. The farm was established by Mr.
Shahzad Iqbal, who resigned as a director of consumer business at a reputable international bank in
2006 in order to set up the farm with the aim of promoting the economic development of his
ancestral village. As a cattle-breeding farm, Jassar was the first of its kind in Pakistan.
By the summer of 2007, Mr. Iqbal had succeeded in setting up this medium-sized farm. He did
so by selling his personal assets and obtaining several private loans. In the bid to take the project
forward, he contacted various investors around the world. His efforts finally paid off in January
2009. An investment of approximately Rs. 110 million2comprising equity and subsidized debt by
a leading American venture capital fundmarked the inception of a limited liability company,
Jassar Farm. The business had a five-member board with two executive and three non-executive
board members. Two of the three non-executive members of the board were nominated by the
venture capital firm that provided the finance. Mr. Iqbal became the chief executive officer of the
business. His management team comprised two business graduates, a professional accountant, and

1
Pakistan is located in South Asia and has India, China, Afghanistan, and Iran as its neighbors. It has four
provinces: Punjab, Sindh, NWFP, and Balochistan. Narowal is situated in the Punjab (see Exhibit 2).
2
Exchange Rate, June 30, 2010: 1 USD 85.4665 Rs.

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876 Ashraf, Ahmad, and Chaudhry

several technical specialists. In order to ensure transparency, a large international accounting firm
(one of the Big 4) was appointed as the auditor of Jassar Farm.

THE BUSINESS MODEL OF JASSAR FARM

In 2009, Pakistan was the fifth largest milk-producing nation in the world, with an estimated
annual production of 42 billion liters and with its dairy industry contributing 11 percent of
Pakistans GDP (Ministry of Finance 2009). However, Pakistans dairy industry differs from dairy
industries in the developed world in that it is conducted on a very small scale. Thus, in 2010 more
than 70 percent of dairy farmers in Pakistan had an average holding of two to three dairy animals
and less than two hectares of land. This is in sharp contrast to developed countries where milk
production is carried out on a much larger and industrial scale (Garcia et al. 2003). The milk yields
of dairy cattle in developed countries are also much higher than dairy cattle in Pakistan due to
research and systematic crossbreeding, which began in the early 20th century and changed the
economics of dairy farming in the developed world.
The business model of Jassar Farm was based on upgrading the genetic potential of the local
dairy livestock in order to increase their milk yield. To achieve this objective, indigenous breeds
were crossbred with foreign breeds by means of artificial insemination (AI). The idea was that
crossbreeding the local breeds with foreign breeds would produce calves with a superior genetic
structure capable of producing higher milk yields and with the capacity to withstand local climatic
conditions. The resulting offspring (the F1 cattle) would theoretically inherit a milk production
potential equivalent to the average of their parents, with 50 percent foreign genes (annual milk
production of approximately 8,000 liters) and 50 percent local genes (annual milk production of
approximately 2,000 liters). Moreover, the F1s would begin milk production approximately 25
months after their birth, as compared to 42 months for local breeds, thereby resulting in significant
cost savings. This gradual process of breed improvement would continue for three generations. By
this time, the local breeds would be transformed into hybrid varieties producing up to 6,000 liters of
milk annually. However, as the pace of breed improvement would be governed by the life cycle of
the cattle, it would take up to seven years to complete the three cycles of breed development.

OPERATIONAL ACTIVITIES
The breed improvement process started with the purchase by Jassar Farm of local dairy breeds.
These breeds were purchased from different local livestock markets by agents after visual
inspections to determine the purity of the gene pool, expected milk yield, and overall health of the
cattle. In the absence of any yield certification, buying local animals was a risky exercise. The local
breeds were subsequently vaccinated and artificially inseminated until the successful conception of
an F1 fetus. The process of impregnation was usually completed in three months. Thereafter, the
pregnant local breeds were reared for a period of nine months. Two to four months before the birth
of an F1 calf, a cow would stop producing milk (the dry period). At the end of the nine-month
gestation period, the F1 calf was born. The crossbred calf was reared and fed for six months to
convert her into an F1 heifer. The F1 heifer was artificially inseminated approximately 16 months
after birth. The gestation cycle of F1 heifers was the same as local animals (nine months). At the
end of this period, the F1 heifer would be transformed into an F1 cow by giving birth to an R1 calf
(with 75 percent foreign and 25 percent local genes) and would enter the milk production cycle. On
average, the F1 cow was expected to produce milk for ten months, followed by a dry period of two
months.
The management of Jassar Farm expected the first batch of F1s to produce less than the
theoretical annual yield of 5,000 liters due to environmental factors. Although the F1 breed had a
productive life of nine years, it would remain in the aforementioned cycle at Jassar Farm for only

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EXHIBIT 3
Herd Position and Equivalent Units for the Capitalization of Rearing Costs
June 2010 June 2009
Equivalent Equivalent
Units for the Units for the
Capitalization Capitalization
Number of Rearing Costs Number of Rearing Costs
Local Cows (Milking) 158 158 177 177
F1 Cows (Milking) 11 11 0 0
Total Milking Cows (A) 169 169 177 177
Local Dry Cows 45 45 89 89
Local Heifersa 42 29a 32 22
F1 Heifersa 73 51a 55 39
Total Large Non-Milking Herd (B) 160 125 176 150

F1 Calvesa 164 41a 72 18

Local Calvesa 31 8a 27 7
Total Young Herd (C)a 195 49a 99 25
Total Non-Milking Herd (B C) 355 174 275 175
Total Herd Size (A B C) 524 343 452 352
Ratio of Milking Animals in Equivalent 49% 50%
Units to Total Herd Size in
Equivalent Units (A/A B C)

Source: Official Records of Jassar Farm.

a
For the purpose of capitalizing the rearing costs, it was assumed by the management that heifers and young herds
consumed 70 percent and 25 percent of rearing costs, respectively, as compared to mature herds.

seven years before being sold at the local market. The herd position at Jassar Farm on June 30, 2010
is shown in Exhibit 3. During the year 2010, 11 F1 heifers matured into F1 cows. This was the first
generation of crossbred cows to enter the milk production cycle at Jassar Farm. Based on the initial
milk yield of these cows, the management established that an annual yield of approximately 4,000
liters was a reasonable estimate. This was significantly more than the annual milk yield of local
cows at Jassar Farm, which was approximately 1,750 liters.

ACCOUNTING FOR CROSSBREEDS

The unique nature of the cattle-breeding operations at Jassar Farm attracted the attention of
international donor agencies interested in investing in Pakistans livestock sector.3 Mr. Iqbal, the
CEO, personally led the fundraising activities by contacting various governmental and non-
governmental investors. In order to attract investors, the credibility of the financial statements
produced by Jassar Farm was crucial. Hence, a Big 4 audit firm was appointed as the external
auditor for the first annual audit. The materiality of the biological assets in the balance sheet of

3
During 2009, USAID was actively seeking partnerships with private organizations to implement reforms in
Pakistans dairy sector as part of its Global Food Initiative Program (Weidemann Associates 2009).

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EXHIBIT 4
Details of Rearing Costs and Its Capitalization
(Pakistani Rs.)
Total Rearing Costs for the Year
Ended June 30, 2010
Feed Cost 8,694,689
Fodder Cost 14,979,034
Overheads 6,470,284
Depreciation of PPE 1,445,507
Depreciation of Livestock 579,203
Animal Care Expenses 4,445,574
36,614,291

Total costs were allocated based on equivalent units calculated in Exhibit 3. The ratio of milking animals as a percentage
of total animal units was 49 percent (169/343). Hence, 51 percent of total costs, i.e., Rs. 18.6M, were capitalized (Exhibit
5, note b) and the remaining Rs. 17.9M were charged to the income statement as cost of sales (Exhibit 1, Panel B).

Jassar Farm, along with the complexity involved in the accounting of the livestock, inevitably made
the crossbred cattle (the F1s) the primary focus of the audit. There were two accounting policies,
with regard to the F1s, where the management and the auditors had different views: (1) the
capitalization of certain costs incurred with respect to the production of crossbred cattle; and (2) the
valuation of crossbred cattle on the balance sheet date.

The Capitalization of Costs Incurred with Respect to the Production of Crossbred Cattle
The most significant costs of the business were the cost of artificial insemination and the cost of
rearing (see Exhibits 4 and 5). However, the management and the auditors had different views
about how these costs should be accounted for.
The capitalization of cost of AI doses was the first issue (Exhibit 5). These were imported from
the United States, stored in liquid nitrogen, and later injected into the local breeds by a professional
veterinary team. Historically, four out of every ten injected AI doses resulted in a successful
conception at Jassar Farm. Each dose cost around Rs. 8,000, and the management capitalized the
entire cost of the AI doses used in the financial year. This in turn meant that the capitalized AI cost
for each F1 cow was equivalent to 2.5 doses or Rs. 20,000 (Exhibit 6). However, cattle that did not
conceive within three AI attempts were culled, and the corresponding cost of the AI doses was
charged to the income statement. Historically, less than 5 percent of the cattle in the base herd at
Jassar Farm were culled. The auditors challenged the rationale of managements capitalization
policy on the basis that the rate of capitalization was not directly related to the future economic
benefits accruing to the business. Thus, the auditors wanted to expense the entire cost of the AI
doses retrospectively.
The second capitalization issue in dispute concerned the question of rearing costs (Exhibit 4).
These costs comprised all the direct and indirect costs at the farm, other than insemination costs.
The management was of the view that the portion of the rearing costs incurred to produce milk
should be charged to the income statement, and the other portion should be attributed to the breed
improvement program and hence be capitalized. Thus, according to this policy the herd was
calibrated into cattle units, and thereafter, the weighted average ratio of milking and non-milking
cattle was determined (Exhibit 3). This ratio was used to capitalize the cost that related to non-

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EXHIBIT 5
Details of Biological Assets
(Pakistani Rs.)
Panel A: Biological Assetsa
June 30, 2010 June 30, 2009
b
Operating Assets (mature milk-producing animals) 15,563,697 23,646,410
Reproduction Costsc 41,554,681 17,611,035
Advance Against Purchase of Biological Assets 9,518 1,834,857
Stock Held for Capital Expenditure (stock of AI doses) 3,553,440 7,068,545
60,681,336 50,160,847

Source: Official Records of Jassar Farm.

a
See Exhibit 1, Panel A.
b
See Panel B.
c
See Panel C.

Panel B: Operating Assets

Net
Additions/ Gross Accumulated Depreciation Accumulated
Opening Gross (Deletions) Book Value Depreciation for the Depreciation Net Book
Book Value during the as at as at Period ended as at Value as at
June 30, 2009 Period June 30, 2010 June 30, 2009 June 30, 2010 June 30, 2010 June 30, 2010
24,744,600 (7,503,510) 17,241,090 1,098,190 579,203 1,677,393 15,563,697

Panel C: Reproduction Costs

Description June 30, 2010 June 30, 2009
Opening Balance of Reproduction costs 17,611,035
Cost of AI Doses Used 7,360,358 6,672,155
Capitalization of Rearing Costs 18,673,288 10,938,880
F1 Heifers converted into F1 Cows (transferred to (2,090,000)
operating assets-bearer)
41,554,681 17,611,035

EXHIBIT 6
Year-End Balance Sheet Value of F1 Cows
(Pakistani Rs.)
Insemination Cost (Rs. 8,000 3 2.5 average doses per animal): 20,000
Rearing Cost per Animal (Rs. 29,612,168a /174b) (Exhibit 5, note b): 170,000
Total Cost of 1 F1 Cow Transferred to Operating Fixed Assets: 190,000
Cost of 11 F1 Cows Transferred (11 3 Rs. 190,000) (Exhibit 5, note b): 2,090,000

a
Rearing Cost Pool comprising rearing cost of 2009 and 2010 (Rs. 18,673,288 Rs. 10,938,880).
b
Equivalent units calculated in Exhibit 3.

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EXHIBIT 7
International Accounting Standard on Agriculture
(IAS 41), paras. 1030
IAS 41 classifies agricultural assets into two categories: biological assets (i.e., living animals and
plants) and agricultural produce (i.e., harvested output). For the purpose of this case study, only
biological assets are relevant.
Initial Recognition and Measurement
An entity shall recognize a biological asset . . . 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.
A biological asset shall be measured on initial recognition at its fair value less costs to sell, except . . .
where the fair value cannot be measured reliably. A gain or loss arising on initial recognition of a
biological asset at fair value less costs to sell . . . shall be included in profit or loss for the period in
which it arises. In such a case [where fair value cannot be reliably measured], that biological asset
shall be measured at its cost less any accumulated depreciation and any accumulated impairment
losses.
Subsequent Valuation
A biological asset shall be measured at the end of each [subsequent] reporting period at its fair value
less costs to sell, except for the case where the fair value cannot be measured reliably. A gain or loss
arising from a change in fair value less cost to sell [in subsequent periods] of a biological asset shall
be included in profit or loss for the period in which it arises. The fair value less costs to sell of a
biological asset can change due to both physical changes and price changes in the market. If a
biological asset is initially measured at cost, then it should subsequently be valued at cost less
accumulated depreciation and any applicable amortization.
Fair Value Measurement
The fair value of an asset should be measured preferably by using a quoted price in an active market of
the biological asset in question (first preferred choice). If an active market does not exist, then fair
value can be determined using the latest market price of the concerned biological asset or the market
price of another similar and comparable biological asset (second preferred choice). If this is not
possible, then fair value can be determined using the present value of future cash flows associated
with the biological asset discounted at appropriate discount rates (third preferred choice). For the
purpose of this standard, the term active market means a market of homogenous products with
enough willing buyers and sellers all the time and where the price of the product is well-known to all
parties.

milking cattle. However, the auditors questioned this policy of capitalizing the rearing costs. They
were of the view that the rearing costs did not meet the criterion for capitalization.
The biological asset classification scheme of Jassar Farm made a distinction between
reproduction costs and milk-bearing mature cattle (Exhibit 5). All capitalized costs were lumped
into the reproduction cost pool. Once an F1 heifer became an F1 cow, all capitalized costs
attributable to the heifer were transferred from the reproduction cost pool to the milk-bearing
mature animals. In the year 2010, 11 F1 heifers matured into F1 cows, and the corresponding costs
were transferred to milk-bearing operating assets (see Exhibits 5 and 6).

The Valuation of Crossbred Cattle on the Balance Sheet Date

The International Accounting Standard on Agriculture (IAS 41) lists and ranks the valuation
methods for agricultural assets (see Exhibit 7). The management of Jassar Farm adopted the least

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preferred valuation method laid down in IAS 41 (i.e., the cost method). The management
believed that the more preferred valuation methods were not applicable because of the lack of
availability of relevant data. According to the cost method, all the relevant costs described above
were capitalized, and subsequently, mature milk-bearing animals were valued at capitalized cost
less accumulated depreciation. According to this model, 11 F1 cows that entered the milk
production cycle in 2010 were valued on the basis of initial capitalized cost less depreciation for the
year (Exhibit 6).
The auditors, on the other hand, were concerned with the relatively higher value that was
assigned to the crossbred cattle. The case in point was the first-generation 11 F1 cows. Each of
these cows was valued in the balance sheets of Jassar Farm on June 30, 2010 at Rs. 190,000. The
auditors compared the value of the F1 with the price and milk yield of local cows (Exhibit 8). They
felt that this inflated value was a function of costs that were unjustifiably capitalized by the
management. While they agreed with the cost valuation method suggested by the management, they
were of the view that the value of F1 cows needed to be reduced. However, the CEO, Mr. Iqbal,
was of the view that the accounting value assigned to crossbred cattle in the balance sheet
accurately reflected their economic value. While he accepted that similar-yielding dairy cattle, albeit
with varying gene pools, were available in the local livestock markets, he nevertheless contended
that the sellers operating in fragmented livestock markets provided no yield guarantees. Hence, he
believed that making a price comparison between local breeds and F1 cows was unjust. He
maintained that F1 cows were comparable with imported dairy cattle, because of the reliability of
their yield. However, the auditors did not accept the market values of imported cattle as a valid
proxy for the market value of the F1s. The cattle imported from abroad would have an exaggerated
net landed cost due to the extra transportation costs. In addition, these imported cows were known
to have a high mortality rate due to shock caused by habitat change (Exhibit 8).

ASSIGNMENT QUESTIONS
1. What is the business model of Jassar Farm? What financial challenges does the business
face? Based on your assessment of the business model and the financial situation of Jassar
Farm, what, in your view, would be the immediate concern(s) of the managers and auditors?
2. With reference to the requirements of the International Accounting Standard on Agriculture
(IAS 41), what is your view with respect to the capitalization of:
a. the artificial insemination costs, and
b. the different components of the rearing costs?
How will your view with regard to the capitalization of these costs affect the valuation of the 11 F1
cows (Exhibit 6)?
3. What, in your view, is the preferred valuation method for assessing the value of the
crossbred cattle? What value would you assign to the 11 F1 cows in Jassar Farms balance
sheet? For the purpose of this valuation, you may find it useful to consider the information
given in Exhibits 8 and 9.
4. (Optional question) How would the accounting treatment of the crossbred cattle differ if the
financial statements of Jassar Farm were prepared applying the provisions of U.S. GAAP?

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 882
EXHIBIT 8
Livestock Markets
Feed and
Annual Milk Market Price Reliability of Transportation Vaccination Mortality
Market/Region Yield (Rs.) Breed Certification Costs Costs Risk
Bahawalpur 1,500 50,000 to 65,000 Local Pure Moderate Low Moderate Low
Mureed Kay 2,000 60,000 to 90,000 Local Cross/Non-Descript Moderate Low Low Low
Okara 2,500 80,000 to 150,000 Local Cross/Non-Descript Low Low Low Low
Sargodha 2,750 100,000 to 180,000 Local Cross Low Low Low Moderate
Australia 6,500 275,000 to 325,000 Foreign Pure High High High High
USA 9,000 350,000 to 400,000 Foreign Pure High High High High
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EXHIBIT 9
Discounted Cash Flow (DCF) Value of F1 Cow
Managements Assessment of the DCF Value of an F1 Cow: Rs. 210,000
This value is based on the following assumptions:
Annual milk production 4,200 liters
Price per liter of milk Rs. 40 per liter
Annual feeding costs of an F1 cow Rs. 100,000
Rearing cost before commencement of milk Rs. 66,000
Time to milk production from birth 26 months
Time in milk production 5 years
Culled value at the end of 5 years Rs. 150,000
Discount rate 20 percent
Karachi Interbank official rate 12 percent

REFERENCES
Dairy Farming Today (DFT). 2012. The US dairy industry, a vital contributor to economic development.
Available at: http://www.dairyfarmingtoday.org/Learn-More/FactsandFigures/Pages/FactsFigures.aspx.
Food and Agricultural Organization of the United Nations (FAO). 2009. Global Statistics. Rome, IT: FAO.
Garcia, O., Mahmood, K., and Hemme, T. 2003. A Review of Milk Production in Pakistan with Particular
Emphasis on Small-Scale Producers. Working paper 23782, Food and Agriculture Organization of
the United Nations, Pro-Poor Livestock Policy Initiative.
Global Industry Analysts, Inc. (GIA). 2012. Dairy products. Available at: http://www.just-food.com/
market-research/dairy-products_id154664.aspx?lksup
Ministry of Finance, Government of Pakistan. 2009. Economic Survey of Pakistan 2009. Available at:
http://www.finance.gov.pk/survey_0910.html
Weidemann Associates, Inc. 2009. Pakistan Food and Agriculture Project report to USAID/Pakistan.
Available at: http://egateg.usaid.gov/sites/default/files/Pakistan%20Food%20and%20Agriculture
%20Project.pdf

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CASE LEARNING OBJECTIVES AND IMPLEMENTATION GUIDANCE

Introduction and Background

The idea for this case study came from one of the authors while he was working at Jassar Farm
as deputy manager of operations. This case study highlights the issues that arise in measuring and
valuing livestock in the light of guidance provided by the International Accounting Standard on
Agriculture (IAS 41). The unique nature of the case study, which involves a new business entity
operating with new technology and a new product (F1 cows) in a developing country, provides an
interesting empirical setting to explore these measurement and valuation issues. The case study can
also be used to explore the differences between IAS 41 and U.S. GAAP, and the reasons for these
differences.

Teaching Objectives
The general teaching objective of the case study is to help students to understand the
requirements of IAS 41 with regard to the measurement and valuation of biological assets. The
specific teaching objectives of the four assignment questions are as follows:

Question 1
This question will enable students to understand the basic business model of Jassar Farm and
the nature of its operating assets. At the same time, it will help them to understand the financial
condition of the business and its likely impact on the behavior of the management and auditors.

Question 2
International accounting standards provide general principle-based guidance on how to account
for certain transactions. In accordance with the spirit of international accounting and financial
reporting standards, there is no specific guidance in IAS 41 on, for example, how to account for
insemination and rearing costs. As a result, there is scope for subjective judgment and different
interpretations. The specific facts of the case study (a new business with precarious financial
conditions, new technology, and a product with uncertain future economic benefits) also provide
greater scope for interpretation of the provisions in IAS 41. The combination of principle-based
accounting regulation and the uncertain business situation of Jassar Farm may have been
responsible for the different interpretations of the auditors and the management.
Question 2 will give students the opportunity to learn about such differences in interpretations.
During the discussion, students will draw principles from different international accounting
standards and combine these with their own reading of the situation to suggest alternate
accounting treatments. Instructors should encourage students to identify and analyze the issues, and
to draw their own reasoned conclusions. At the same time, they should be encouraged to understand
other students reasons for reaching a different conclusion. This is perhaps the essence of learning
in this question.

Question 3
IAS 41 provides a hierarchy of valuation methods. In this hierarchy, the fair value method is
at the top. Perhaps this is consistent with the recent standard-setting trend of the International
Accounting Standards Board (IASB) to move toward the relevance end of the relevancereliability
continuum. Question 3 will help students understand the practical problems that can arise,
particularly in developing countries, with regard to applying a fair value method to the agricultural

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sector. As many developing countries have strong agricultural economies, valuation problems like
those evidenced in the case study may arise elsewhere.

Question 4
Although Question 4 only asks students to identify the differences between IAS 41 and U.S.
GAAP in the context of agricultural assets, the deeper learning objective of the question is to help
students understand the reasons for these differences. Instructors can use this question to help
students understand the advantages and disadvantages of rule-based (U.S. GAAP) and principle-
based (IFRS) accounting regulations.

Target Audience
The target audience of the case study includes:
1. Third- and fourth-year B.Sc. Accounting and Finance students taking an advanced course in
Corporate Financial Reporting or Audit and Assurance. Given the focus of the case study, it
should be used to teach students about accounting for agricultural assets. The case study
addresses concepts related to several accounting standards. It can also be used as a capstone
case to provide closure to an advanced accounting course in an interesting business setting.
2. Students in an M.B.A. program, to make them aware of basic accounting concepts such as
matching, conservatism, and relevance, versus reliability of accounting
information.

Teaching Strategy and Authors Experience

The case study exercise is designed to be completed in one 90-minute session. The case study
has been run five times by different instructors with sophomore and junior B.Sc. (Accounting and
Finance) students. One class was conducted by one of the authors, and the other four were run by
colleagues. At least one of the authors was present at the five sessions and observed the discussion.
One instructor (a visiting faculty member), an audit and assurance services partner in one of the top
four accounting firms, found the exercise extremely useful for highlighting the real-life practical
problems that can be experienced by auditors. Not surprisingly perhaps, he found himself more
sympathetic toward the auditors viewpoint in the case. In his view:
A young firm with new technology is bound to generate suspicions in the auditors minds
about future inflows of economic benefits. The scenario becomes even more uncertain
when the firm is facing going-concern problems. It is understandable that auditors choose
the most conservative approach in this situation, thus not allowing any expenses to be
capitalized.
On the other hand, another colleague who used the exercise (a full-time academic) was of the
view that the auditors position was too conservative. These two different perspectives led us to
adopt a different strategy in the next session. Thus, when the case study was run in the next session,
two of the case study authors were present in the class, sitting at the back. As part of the strategy,
one of us became pro-auditors and the other pro-management. During the discussion, when we felt
that the students were running out of arguments, we would intervene and forcefully argue either in
favor of the management or the auditors. This encouraged and stimulated a deeper and more
interesting discussion.
The case study in its present form has been used twice in two courses (Corporate Financial
Reporting I and II). Both these courses were taught by the same instructor. In Corporate Financial
Reporting I, IAS 41 was not a part of the curriculum, but the instructor used the case study to make

Issues in Accounting Education

Volume 28, No. 4, 2013
886 Ashraf, Ahmad, and Chaudhry

students aware of the considerations and complexities that arise in making accounting choices, e.g.,
capitalization of certain expenses. In Corporate Financial Reporting II, the case study was used
specifically to teach IAS 41. In both courses, the case study proved to be useful for instructor and
students.
In Corporate Financial Reporting I, while a significant number of students were able to answer
the assignment questions given in the case study, Question 3 did pose a computational challenge for
a few students. When the same exercise was used for Corporate Financial Reporting II, the
instructor also provided the following advice to students when considering Question 3:
1. For the insemination costs, determine the extent to which the costs should be capitalized,
i.e., the entire cost, the cost of successful conception only, or no capitalization at all. Then,
on the basis of this decision, determine the capitalized value of an F1 cow given in Exhibit 6
(Rs. 20,000 / Rs. 8,000 / Rs. Nil).
2. For the rearing costs, follow the three steps below:
Step 1: Determine the extent to which the different components of the rearing costs are
eligible for capitalization (Exhibit 4).
Step 2: Fifty-one (51) percent of these eligible costs should be capitalized, as this is the
ratio of non-milking cattle in the total herd (Exhibit 5).
Step 3: Divide the total capitalized cost (in Step 2) by the number of equivalent units of
non-milking cattle given in Exhibit 3 (i.e., 174) to determine the capitalized cost
per cow (Exhibit 6).
This advice made it much easier for students to answer Question 3 and to make sense of
Exhibits 36.
The instructor had the following to say about the case study:
This case study has become a permanent feature of my course material for the foreseeable
future!

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Issues in Accounting Education

Volume 28, No. 4, 2013
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