Companies require assets to generate revenues. These include resources owned or controlled by a company that results in inflows of economic benefits.
In accounting, these inflows may occur through the asset’s value or use. These resources are crucial in helping companies continue their operations.
The assets companies use may differ based on their needs and activities.
Some companies’ most prevalent types of assets include fixed assets, inventories, and cash. These assets help companies with short- and long-term needs.
On top of that, they appear on almost every company’s balance sheet. The accounting for the above types is also straightforward.
Each of these falls under a different accounting standard which dictates their accounting treatment.
On top of these, companies may also own or control other assets. For example, these may include intangible assets, such as software or patents.
Some companies may also operate biological assets that can help generate revenues. However, the accounting treatment of these assets differs from others due to a specific accounting standard.
Before understanding that, however, it is crucial to study biological assets.
What are Biological Assets?
Biological assets are resources that are living. Usually, these include plants and animals that companies own or control.
Like other resources, biological assets are crucial in generating revenues. In most cases, companies obtain products from these assets.
Then, they may process those products to make them available for sale in the market. Therefore, these assets are essentially the same as other resources.
Biological assets include sentient beings that companies use for their products. For example, companies may obtain dairy products through milk produced by cows and other animals.
In this case, those animals constitute biological assets. Some people may also consider employees to be a part of those assets. However, they do not meet the criteria for the biological asset classification.
For most companies, biological assets may not exist at all. Usually, these companies benefit from other resources, including property, plants, and equipment.
However, some companies’ biological assets constitute a significant portion of overall resources. These companies rely on those assets to generate income and create revenue streams. Therefore, they must recognize them as similar to other fixed assets.
Biological assets are similar to other assets in several regards. For example, they help generate revenues or have value.
However, they can also be significantly different. For instance, these assets depreciate naturally and have a finite lifespan.
On top of that, these assets do not always produce guaranteed results. In that regard, biological assets are more unpredictable than other resources.
Overall, biological assets include living things that help generate revenues. For some companies, these assets are highly crucial in making profits. These assets are similar to other resources in various regards.
However, they also differ significantly. Sometimes, biological assets require higher maintenance expenses than other fixed assets. Nonetheless, they constitute resources that companies own or control.
What is the Accounting for Biological Assets?
The accounting for biological assets differs from other resources. Other resources have specific standards that dictate their accounting treatment.
For example, IAS 16 applies to all property, plants, and equipment, while IAS 2 is for inventories. Likewise, biological assets fall under the scope of IAS 41 Agriculture. Although the name may suggest it only relates to agricultural transactions, it covers biological assets.
IAS 41 defines biological assets as “a living plant or animal”. The accounting for biological asses differs from other assets due to the harvested product.
Usually, this product comes from the living plant or animal directly and falls under agricultural produce. IAS 41 defines agricultural produce as “the harvested product of the entity’s biological asset”.
Furthermore, IAS 41 elaborates on the definition of harvest. It defines the term as “the detachment of produce from a biological asset or the cessation of a biological asset’s life processes”.
These definitions are crucial in allowing companies to differentiate the accounting process. Furthermore, the accounting for biological assets falls into several steps.
IAS 41 defines the recognition criteria for assets. It requires companies to record a biological asset only if it meets the following criteria.
- The asset will generate future economic benefits that will flow to the entity.
- The entity can reliably measure the cost or fair value of the biological asset.
- The entity controls the asset.
If a biological asset meets the above criteria, companies can recognize it. The initial measurement occurs at the fair value less estimated costs to sell. Usually, this process results in some gains or losses in the profit or loss statement.
Any subsequent measurements occur at the same amount. However, companies must gauge the asset’s value at each reporting date.
What Are the Journal Entries for Biological Assets?
The journal entries for biological assets occur during two stages. The first includes when companies acquire or obtain those assets. Based on IAS 41 P10 to P12, companies must record or measure initially and subsequently biological assets at fair value less cost to sell those assets.
Consequently, they must also recognize any gains or losses resulting from the recognition. However, the asset must meet the recognition criteria set by IAS 41 as mentioned above.
If the company measures a loss, it will use the following journal entries.
| Date | Particulars | Dr | Cr |
| Biological asset | XXXX | ||
| Loss on biological asset (Profit or loss) | XXXX | ||
| Cash/Payable | XXXX |
If there is gain on the transaction, the accounting entries will be below.
| Date | Particulars | Dr | Cr |
| Biological asset | XXXX | ||
| Gain on biological asset (Profit or loss) | XXXX | ||
| Cash/Payable | XXXX |
Companies must measure the biological asset’s fair value less cost to sell on each reporting date. This process occurs after companies recognize it in the balance sheet.
During this measurement, companies calculate a gain or loss on the asset. Therefore, they must record it in the accounts accordingly.
The journal entries for loss-making biological assets on the subsequent measurement will be below.
| Date | Particulars | Dr | Cr | ||
| Loss on biological asset (Profit or loss) | XXXX | ||||
| Biological asset | XXXX | ||||
For biological assets making gains, the accounting entries will be as below.
| Date | Particulars | Dr | Cr |
| Biological asset | XXXX | ||
| Gain on biological asset (Profit or loss) | XXXX |
Example
A company, ABC Co., sells Woollen clothing items. For that, it needs sheep to gather the wool. ABC Co. acquires 200 1-year-old sheep during an accounting period.
The cost per unit purchased is $100. On top of that, the company also pays transportation costs of $5 per sheep.
ABC Co. pays a total of $21,000 for the transaction. It includes $20,000 fair value (200 sheep x $100 per unit).
Similarly, it contains $1,000 in transportation expenses (200 sheep x $5 per unit.
ABC Co. must recognize these biological assets at a fair value less cost to sell. In this case, the fair value of the sheep is $20,000.
On the other hand, the selling expense is $1,000. Therefore, the fair value less the cost to sell will be $19,000. ABC Co. will record the transaction as below.
| Date | Particulars | Dr | Cr |
| Biological asset | $19,000 | ||
| Loss on biological asset (Profit or loss) | $2,000 | ||
| Cash | $21,000 |
Subsequently, ABC Co. remeasures the fair value less cost to sell these sheep. The company obtains the fair value for 2-year-old sheep to be $120 per unit.
Similarly, the transportation costs to sell these sheep have remained unchanged at $5. Based on the above numbers, the fair value for the sheep will be $24,000 (200 sheep x $120 per unit). The cost to sell will be $1,000.
The company remeasures the fair value less cost to sell to be $23,000. Initially, ABC Co. recognized the sheep at $19,000.
However, the subsequent measurement resulted in a $4,000 gain. ABC Co. will record it as follows.
| Date | Particulars | Dr | Cr |
| Biological asset | $4,000 | ||
| Gain on biological asset (Profit or loss) | $4,000 |
Conclusion
A biological asset is a living plant or animal controlled by a company. The accounting for biological assets includes two stages. When companies acquire this asset, they must record it at a fair value less cost to sell.
At each reporting date, subsequently, companies must remeasure this value. For both stages, companies must also record any gains or losses.
