Biological Assets
These are organic resources utilized by agricultural-based companies to generate organic products.
What are Biological Assets?
Biological assets are organic resources utilized by agricultural-based companies to generate organic products. Companies operate across various industries, each catering to specific customers and establishing a unique market presence.
In every industry, including agriculture-based companies, materials are essential for production. Agricultural firms specialize in creating products related to plants and plant-derived items, such as wheat, barley, and livestock.
To sustain production, these companies require input materials, like bone feed for crop fertilization. These essential resources are referred to as Biological Assets.
Agro-based companies holding biological assets include companies belonging to various industries, such as:
- Livestock and Diary
- Fishery and Poultry
- Agriculture
- Biogas
- Psychoactive drugs
- Forestry and Paper
Biological assets are a trivial part of a company's Statement of Financial Position, especially when the company is agro-based. The IAS 41, set by the IASB, sets the standard in dealing with biological assets, as these assets are difficult to record due to their recurring maintenance.
Key Takeaways
- Biological assets are living assets, such as plants and livestock, crucial for agriculture-based companies.
- These assets require significant care, making them costly to maintain, especially livestock.
- Unlike conventional assets, biological assets have expiration dates, necessitating inventory investment.
Understanding The Nature Of Biological Asset
Biological assets or agricultural produce, as obviously as it is a tangible asset, is a trivial component of the business model of agro-based enterprises or individuals such as farmers, weavers, or anyone involved in agro-business.
That being said, biological assets, as it may look like a fantastic business model since humanity depends on them no matter where on earth, is still a difficult venture to pursue.
It require constant care, which is both time-consuming and resource-extensive, making the business quite expensive to maintain, especially the livestock, which requires cattle feed, care, and shelter to ensure the quality of life and produce.
And we haven’t even touched the pressing matter for any manufacturing-based or goods-based businesses, which is inventory.
Unlike conventional manufacturing, where the asset has a good shelf life that can be used when required, agro-based products have an expiration date and require heavy investment in inventory facilities such as silos and warehouses.
Note
The International Accounting Standards (IAS) 41 states that the fair value of biological assets or agricultural products is derived from its market price less any costs of goods sold (including transferable taxes and customs duties, commission, and levies).
To learn more about the IAS 41 standard issued by the IASB, which regulates the accounting practice revolving around agriculture, kindly visit Deloitte IAS Plus - IAS 41 Agriculture, as Deloitte explains the standard professionally.
The Importance Of Biological Assets
As mentioned above, biological assets play a trivial role in the day-to-day operations of agro-based industries, just like any assets would to their respective industries. Still, the only difference is that qualitatively, the biological assets are typically alive as in living.
Therefore, such biological assets are recorded in the Statement of Financial Positions (Balance Sheet) of agro-based companies as assets that bring them substantial revenue.
Even though agricultural products bring in a substantial amount of revenue, there is a con to that. Since biological assets are technically living. Living organisms don't remain the same; they depreciate as they age (basic biology).
Due to the aging factor, the product’s freshness and quality fall, leading to the expiration date and becoming unfit for consumption. And, of course, the demand: not everyone consumes the same thing day in and day out, due to which the agricultural consumption remains seasonal.
Therefore, running an agro-based business is no small fleet as maintaining the agro-based business is qualitatively challenging (age, demand, damage, or theft) and quantitatively exhausting (expensive), but, in the long run, with the right strategy, it is substantially rewarding.
The IASB set the standard of IAS 41 as the term “biological assets” is quite new to the accounting field and must be recorded in the financial statements due to the trivial role it plays in agro-based enterprises' ongoing operations and growth.
Accounting Treatment Of Biological Assets
The accounting treatment differs for various assets, such as IAS 16 for Property Plant and Equipment, IAS 2 for inventories, and IAS 41 for biological assets based on agriculture. After all, such assets are considered inventories for an agri-based company.
“Harvest” is an important term, as IAS 41 recognizes the final products of agri-based companies by defining them as “the harvested products of the entity’s biological assets.”
Harvested products can either be a plant or a living animal (livestock). These products are only recognized when they meet the criteria set by the IAS 41. The assets are only recognized if the asset
- Can generate future economic benefits.
- Can be reliably measured for its cost or fair value by the entity.
- Is controlled by the entity.
When the above criteria are met, the entity can conduct an initial measurement at a fair value less than the estimated selling cost of the biological asset. To maintain accuracy, the entity should gauge the assets’ value at each reporting date.
Biological Assets FAQs
Biological assets are those organic assets that agro-based companies/individuals utilize to produce agricultural-based products.
Biological assets can be different depending on the agricultural products themselves. Generally, some biological assets are poultry, fishery, crops, and dairy.
Finished biological assets such as dairy and crops are considered as an inventory for the agro-based industry.
The International Accounting Standards Board (IASB) issues standards that help the recording processes be consistent and accurate; the same goes for agriculture companies. Therefore, IASB issued the International Accounting Standard (IAS) 41 to deal with biological assets.
Biological assets are organic assets that diminish in quality over time due to various factors such as aging and damage. Thus, biological assets depreciate over time.
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