Under assets on your balance sheet, you typically list things like cash, inventory and short-term investments. However, if your business is a farm or cattle ranch, your crops or cattle would be your biological assets. Biological assets have to be “bearing” or consumable, so pet dogs, cats, fish and ferrets don’t count.
Biological assets is an accounting term referring to the value of living plants and animals as assets on your balance sheet.
“Bearing” applies to crops, such as apples from apple trees and leaves from cannabis plants. For carnivores, pigs and cattle would be consumable, so they count.
The concept of biological assets originated in India in 1977 as Indian Accounting Standard 41, or Ind AS 41. Prior to it being implemented, there were no standardized accounting procedures in India let alone a way to account for living assets.
Ind AS 41 was adopted by the International Accounting Standards Board in 2000 as International Accounting Standard 41, or IAS 41. Although the International Financial Reporting Standards Foundation now manages most international accounting standards, IAS 41 remains relatively intact as the final word on how to handle biological assets.
IAS 41 describes how agricultural activity is handled for accounting purposes on financial statements. It also applies to any disclosures a company is required to issue, such as to stock holders.
It says that biological assets are to be measured at their fair value less selling costs. Selling costs include things like marketing, advertising and distribution of the biological asset. So, the cost of getting fruits, vegetables and meat to market would all be subtracted from their biological value.
IAS 41 applies to biological assets while they’re growing and up to the point when they’re harvested. Anything that happens after that is not covered by IAS 41. So, while grapes are growing, they would be treated as assets under IAS 41. Once they’re headed to the winery, they are considered agricultural produce, and IAS 41 no longer applies.
While the fair value (less costs) of fruits and vegetables themselves are accounted for per IAS 41, the trees, vines and stalks on which they grow are not. For accounting purposes, these things are considered “bearer biological assets” and fall under IAS 16 — property, plant and equipment. On the other hand, say you have a national champion mare that is retired from the show ring and now produces beautiful babies that you sell for a small fortune. Although she bears foals, she is not considered a bearer biological asset.
Regardless of their use, livestock, even those kept just for breeding, are always managed under IAS 41. While livestock kept for breeding are less likely to be sold, there is a market for them. So, it’s easy to figure out their fair value and list them on your balance sheet per IAS 41 guidelines.
Like trees, plants that have more than one use are accounted for under IAS 41. So, an apple tree’s apples are one biological asset. If you chop down your old apple trees, throw them in the wood chipper and sell the chips to high-end barbecue stores, those trees could be a second biological asset.
Consider these common questions about the treatment of biological assets under IAS 41:
- What if my orange crop was hit by an early freeze and is a total loss? You still value your oranges as a biological asset but record the loss in your profit and loss statement for the period in which the loss occurred.
- Does it change anything if I received a grant for my farm? If you received a grant to start an alpaca farm, for instance, your alpacas are your biological assets. The grant is treated as income when you receive it. If you’ve been given a conditional grant, it’s counted as income when all its conditions have been met.
- Can I include the value of the land on which my crops are grown? No. If you own the land, it goes under property, plant and equipment. If you lease it, the owner will probably list it on her balance sheet as investment property according to IAS 40. You would list the rent you pay as a fixed operating cost or possibly an absorption cost. Your accountant can advise you on which is best.