Biological Assets

Publication Date :

15 Mar, 2025

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Table of Contents

What Is Biological Assets?

Biological assets are the living plants and livestock owned by a business. In any company's balance sheet, they are mentioned as per their type and attribute value. As per the International Accounting Standard 41, their valuation involves subtracting selling costs from the fair value.

Any living animals and plants contributing to the company through their products, like goats, cows, fish, poultry, and fruits like grapevine, apples, and cannabis, are examples of such assets. Many companies take advantage of these assets in their profit-generation operations.

Key Takeaways

Biological assets represent the living plants and animals a company owns, generating revenue or contributing to the business.
Its accounting treatment involves recording them as separate items between fixed and current assets.
They are prone to rainfalls, droughts, floods, sickness, and climate change and, therefore, require extensive care from the business point of view.
It constitutes a major portion of businesses’ revenue and earnings when invested at the right time and harvested at the peak demand.

Biological Assets Explained

Biological assets, as defined by International Accounting Standards, are any living plants or animals owned by a corporation. These assets contribute to producing consumable products that the company sells and add to the earnings through periodic harvests.

From fish to trees, crops to fruits, any biologically owned entity adds value. The importance of these assets resides primarily in income and revenue, often serving as a separate identifiable asset. When a company invests in tree estates, forest land, and animal farms, they all become sources of multiple incomes for the business. Apart from the main business, a large portion of a business's annual revenue comes from such assets, sometimes equal to or more than the central business model. All the natural products harvested from trees and living animals support a huge industry, like livestock, vineyards, cannabis, and silviculture.

One of the most consistent problems with the accounting of biological assets and lifecycle is that they depreciate faster and naturally with time. Also, there is always a varying high or low demand for its products in the market. After implying the fair value method to subtract the point of sales costs, the amount is entered into the company balance sheet.

Valuation Process

A fair value determines the valuation of biological assets. As per the International Accounting Standard, the fair value of any biological asset is measured as the price obtained from an asset when its liability is transferred or the asset is sold within a proper time.

There are three primary valuation methods:

Market Approach - This approach is applied to livestock if there is a good market demand for a particular agricultural product. The associated byproducts with the commodity are included in the valuation.
Cost Approach - In this approach, the primary cost incurred by the company concerning biological transformation is accounted for. For example, the cost incurred to plant seeds of a particular tree just before or after the reporting period influences the transformation, cost, and subsequent valuation.
Income Approach - A particular amount or quantity is forecasted and, based on the prevailing market price at the harvest, is expected to be the company's income from the biological commodities and products. The valuation of biological assets and prices also depends on market conditions and competitiveness.

Examples

Example #1

Suppose a technology company has a well-spread business and deals in multiple products, including laptops, smartphones, televisions, and home appliances. They invest in a poultry farm and buy a large piece of land and a mango farm estate from their profits.

Alongside selling laptops, smartphones, televisions, and home appliances, the firm also sells eggs from poultry farms. During the peak season of mango harvest, a significant number of mangoes are sold to different buyers, including international companies. Apart from the main business, all the trees and livestock in the poultry are also assets bought by the company, enriching their overall profitability and fostering sustainability.

Example #2

With new loans and easy lending, China's HengFeng Bank offered mortgage debts for 160 heads of beef cattle. It is a first-of-its-kind initiative in the country, and it is a great example of digital finance for the world. Using a technology platform, the bank lent RMB 1.75 million yuan to a cattle producer. With the help of camera equipment and smart ear tags, the platform collects real-time dynamic data monitoring beef cattle's growth and life cycle.

According to the IDC report, the digitalized supervision and usage of financial products is a significant step towards bringing financial stability to rural areas. Beyond facilitating loans, the platform helps banks lower the insurance threshold, and governments distribute subsidies to the farmers efficiently.