Biological AssetsDefined with Examples & More

Some businesses deal with the cultivation and sale of living things such as plants and animals.

We refer to these living assets as biological assets.

Unlike other assets such as property, machinery, and equipment, biological assets have a life of their own.

Because of this, it’s harder to maintain them compared to your typical asset.

They are more susceptible to the threat of change, both qualitatively or quantitatively.

For example, cows age over time.

As a cow matures, its quality increases, which positively affects its value.

They are also susceptible to diseases, which is why they require proper care.

If a cow is affected by a disease, its quality decreases, which can negatively affect its value.

Cows can also give birth to calves, which increases their quantity, thus positively affecting their value.

Finally, cows can die from old age or illness, which decreases their quantity, negatively affecting their value.

Accounting for biological assets is essential for businesses that deal with living things such as livestock and plants.

For these businesses, these assets generate a substantial portion of their revenue.

It may even be the case that these assets solely generate all of the business’s revenue.

In this article, we will discuss the definition of biological assets, as well as some of its examples.

We will also be taking a look at how businesses should account for biological assets.

Do we account for them the same way we account for other goods?

Finally, we will be having a short exercise at the end of this article so that we can apply our learnings and deepen our understanding of biological assets.

Biological Assets: What are they?

As I’ve already mentioned, biological assets are assets that have lives of their own.

They age, they grow, they die, they reproduce, they bear fruits – these are just some of the things that separate biological assets from other assets (aside from them being living things of course).  Here are some examples of biological assets:

• Livestock such as cows, poultry, and other farm animals
• Crops such corn, wheat, rice
• Fruit-bearing plants such mango trees, apple trees, etc.
• Non-fruit bearing plants such as narra, acacia, and oak trees
• Vineyards
• Herbal plants such as cannabis

Just like any other asset, the business must own the biological asset before it can record it in its books.

For businesses within certain industries, biological assets are the main contributors to their revenue.

This is why we need to give them value as they clearly have it.

For example, for businesses that deal with livestock such as farms, it is the cows, hens, and sheep that drive their revenue.

Without them, the business won’t be able to make any revenue, much less a profit.

Due to their nature, biological assets naturally depreciate more rapidly compared to any other type of goods.

Aside from that, they are more susceptible to the effects of qualitative and quantitative changes.

The demand for them changes depending on the season.

Some biological assets are more in-demand during certain seasons.

Lastly, just like any other goods, biological assets can be lost or damaged.

A disease may affect crops and livestock, and even worse, may wipe them out.

Excessive rain or an unexpectedly long period of drought can destroy certain plants.

They can also be stolen just like any other assets.

Accounting for Biological Assets

Unlike other goods or assets, we don’t record biological assets at cost upon acquisition.

As per IAS 41 – Agriculture, a business must initially recognize a biological asset at its fair value less estimated costs to sell.

Also, at subsequent reporting periods, the value of a biological asset must reflect the changes in its fair value less estimated costs to sell.  

However, there are two occasions where the value of biological assets doesn’t have to follow its fair value.

The first occasion is when at initial recognition, the fair value of the biological asset is unavailable or clearly unreliable.

In this case, the business may record the biological asset at its cost less accumulated depreciation and impairment loss.

When the fair value of the biological asset becomes reliably measurable, the business must switch its valuation to fair value less estimated costs to sell.

The other occasion is for the subsequent measurement of the asset.

If there’s very little biological transformation since the biological asset’s initial recognition, the business may approximate fair value instead.

This also applies if the effect of biological transformation on the biological asset’s price is minimal or immaterial.

The business must include the gains or losses that result from the initial recognition of the biological asset as well its subsequent measurement in its profit or loss.

For example, let’s say that a business acquires 100 cows for $10,500.

The fair value of each cow is $130 with a total estimated cost to sell of  $12.

This means that each cow has a fair value less estimated costs to sell of $118.

The journal entry to record the acquisitions of the cow will then be:

The gain on initial recognition of $1,300 will be included in the profit and loss statement of the business.

All other costs related to biological assets that are already measured at fair value less costs to sell are recognized as expenses when incurred.

Biological Assets VS Agricultural Produce

Agricultural produce, for accounting purposes, refers to the goods or products that come from biological assets.

For example, you get milk from a cow, eggs from a hen, or fruits from a fruit-bearing tree.

Agricultural produce are not biological assets but are rather like any other merchandise.

Thus, a business must recognize them as inventory rather than biological assets.

Upon initial recognition of agricultural produce, its value must be equal to its fair value less estimated costs to sell.

The gain that results from the initial recognition of agricultural produce must be included in the profit or loss of the business for the accounting period in which it arises.

A biological asset can also become an agricultural produce once it loses its defining trait: having a life of its own.

For example, when a cow is slaughtered for its meat, it becomes agricultural produce.

When a tree is cut so that it can be processed into paper, it becomes agricultural produce.

The subsequent measurement of agricultural produce is the same as any type of inventory.

That means it doesn’t have to reflect the changes in fair value (unless there is impairment).

Under normal circumstances, the book value of agricultural produce will not change from its initial recognition.

Biological Assets: Exercise

JJ Farms is a business that deals grows and sells beef cattle.

It was only newly formed on December 31, 2020.

At the time of its formation, it has 130 units of cattle, 90 of them immature, and 40 of them mature stock.

A cattle becomes mature after one year. JJ Farms acquired all of its cattle for a total of $11,600.

The following data was acquired regarding the fair value of each cattle, as well as costs to sell:

Our task is to determine the value of the biological assets upon initial recognition.

We also need to come up with a journal entry for the initial recognition of the biological asset.

First, we need to determine the fair value less costs to sell for each cattle.

There are two types of cattle, immature and mature.

Each immature cattle has a fair value of $90.

The fair value less costs to sell of each immature cattle is then:

$90 – $6 – $1 = $83

Each mature cattle has a fair value of $160.

The fair value less costs to sell of each immature cattle is then:

$160 – $6- $1= $153

Now that we have our fair value less cost to sell for each unit of cattle, we can compute the initial value of biological assets:

Biological Assets = (90 x $83) + (40 x $153)

= $7,470 + $6,120

= $13,590

As per computation, the initial value of the biological assets is $13,590.

With this in mind, the journal entry should be: