2-Step Valuation Process of Biological Assets

Biological assets valuation

Biological assets valuation

A two-step valuation process of biological assets

According to International Accounting Standard, a biological asset is any living plant or animal owned by the company, and it is typically valued at fair value. Fair value is described as the price earned if an asset were sold or liability was transferred on time.

At the time of calculation, there was a trade between market participants.Biological properties include animals like cows, goats, sheep, pigs, and fish.Farmers’ crops, such as corn and tomatoes, and grapevines, plants, and fruit trees, such as oranges and apples, are also considered biological properties.

The price at which a biological commodity may be sold to a competent and willing individual or group is its fair value. This is typically the market value of a biological commodity in a specific and trustworthy active market.

Importance of biological assets

Income/revenue generation:

For businesses in industries like livestock, silviculture, vineyards, cannabis, and other similarindustries, biological assets provide them with multiple streams of income or substantialrevenue. Companies in these industries typically have this kind of asset on their balance sheet. In terms of the generation of revenue for sellers and bearing the responsibility for any loss ongoods either damaged or stolen, they are no different from the goods produced by othercompanies that make products from plastic, paper, and other items. The only difference is intheir kind assets—they have live assets

For categorization and identification of assets:

In the field of accounting, the biological asset is a unique term for categorization andidentification of assets that are owned by businesses—assets such as farms, or a product thatis the company’s main source of income.In various industries and sectors, businesses can grow plants and raise animals for severalreasons. Their classification as biological assets shows their nature and value to the business.

Biological assets more than any other goods can change and depreciate naturally and faster.Just like any other goods, the different types of biological assets can be in high or low marketdemand, this, however, depends on the season.There can also be a case of loss or damage of a particular kind of goods, also depending onseasons. The loss or damage usually can be due to unexpected rainfall or drought period, coldweather, or a spread of disease that could damage, infect, or kill crops and/or livestock.

Types of Biological assets

In terms of accounting, there are a few different forms of assets involved in agriculture, and the main objective is to figure out which one you have.

Biological assets may include consumables such as those harvested as agricultural produce and those sold as biological assets such as fruit trees.

Agricultural produce in this context is the harvested produce of the entity’s biological assets such as meat, eggs, and milk. Agricultural products must be valued at fair market value minus the sale cost at the time of harvest. Keep in mind that products made from agricultural produce are no longer agricultural produce; instead, they are inventories, such as fruit juice and cheese.

Agricultural land for agricultural purposes s valued using a cost or revaluation model.

How to measure Biological assets?

Here are three commonly used valuation methods of biological assets.

The market approach – All Business Valuation Livestock is an example of a sector where this approach is applicable. Similarly, if there is an active demand for an agricultural product, the argument could be expanded to include the biological commodity associated with it. The presence of an active market for green leaves, for example, could decide the future fair value of the leaves’ underlying biological asset.

The income approach – This is one of the most important techniques used for biological asset valuation. A prediction of the number of products expected to be harvested and the market price of the crop at the time of harvest will be conventional cash inflows.

 The cost approach – Fair value in some situations where the initial costs were incurred, and little biological transformation has occurred – for example, you plant tree seedlings just before the reporting period ends or when trees with a long production period right after planting do not have a significant impact on price due to biological transformation.

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In a nutshell, it’s important to remember that the word “biological asset” is specific to the field of accounting and is used to categorize and describe properties owned by companies, such as farms and vineyards, or produce that is a significant source of revenue.

Valuation of biological assets can be very tough work for investors to handle due to thecomplexity and diverse range of biological assets available. The fact that biological assetschange both qualitatively and quantitatively and depreciate naturally and more rapidly thansome kinds of goods, also makes their valuation difficult.

However, the value team, among the pioneers in asset and business valuation, modeling,economic consulting business valuation, etc, has professionals who employ innovativetechniques that can be used to measure value in the real world and perform high-qualitybusinessvaluationservicesincluding aquick business valuation reviewfor companies andindividual assets.They understand that biological assets due to their nature are of utmost importance toindividuals whose main source of income is generated from the sales of such goods, as well ashow significant the fair value is in a company’s financial position. Hence, they work hard in theirvaluation businessensuring that they provide the best valuation of biological assets forcompanies and individuals.