To hear the term “biological assets” we automatically imagine a living being, like cells, microorganisms, insects, animals or plants. In the field of accounting, we will focus on the management of agricultural activities.
Do we know what biological assets are in accounting terms (Table 1)? Are they presented under the heading of inventories? At what point in the life of a plant or animal should I keep an accounting record?
As agricultural activity represents an important productive sector in Mexico, it is worth pausing to review its financial regulations. The Consejo Mexicano de Normas de Información Financiera, A.C. (Mexican Board of Financial Reporting Standards) (CINIF), an independent body that began operations in 2003 and collaborates with public and private sector agencies, aims to issue accounting standards in Mexico, which are transparent, objective and reliable and, as far as possible, in alignment with the International Financial Reporting Standards (IFRS).
Financial reporting standards are mandatory and help organize the accounting processes, as they give us the basis for assessing, presenting and disclosing financial information that is useful for decision making. In general terms, “to appraise” is to assign or give a value to the concepts of the financial statements, “to present” refers to the way to correctly display the items in the financial statements, and “to disclose” is to expand or break down the content of theses concepts in the notes to the financial statements.
The International Accounting Standard 41 must be applied for the recognition of biological assets. Its equivalent in Mexico is the Norma Mexicana de Información Financiera (Mexican Financial Reporting Standards) E-1 (NIF E-1).
According to NIF E-1: “A biological asset is a living animal or plant. A group of biological assets is a grouping of similar living animals or plants.” Specifically, the standard applies to biological assets that because of qualitative or quantitative changes are capable of undergoing a biological transformation, that is, they go through a process of: a) growth, those that have not completed the process of biological development; b) degeneration, a decrease in quantity or deterioration in the quality of an animal or plant; c) production and procreation, those that have completed their development process and are able to bear fruit; and d) completion, specifically those that have completed their biological development process and are in condition to be sold, transformed into agricultural products or used in other productive processes.
To understand the steps of recognition, registration and valuation of biological assets, let us consider the example of livestock, for which it will first be necessary to explain certain terms and provide some definitions contained in the NIF E-1.
The evolutionary periods of livestock are as follows:
Birth: From birth to 8 days
Growth: From 8 days to 6 months
Development: From 6 months to 14 months
(Operation) Exploitation: From 2 years
Discard: After 4 or 5 births
In addition, the biological cycles of livestock are defined in the following five stages
Breast feeding calf: From 1 day to 2 months
Weaned calf: From 2 to 6 months
Developing heifer: From 6 months to 12 months
Gestating herd *: From 14 to 17 months
Herd in production: From the first birth
* Herd: A number of animals of the same species or the same characteristics.
Agricultural activity. It will be so regarded when living plants and animals are able to have biological transformations, when the same management facilitates and promotes the conditions to carry out the biological transformation and when these qualitative and quantitative changes are measurable and verifiable.
Harvest. Separation or detachment of a product or a biological asset, or the cessation of the life process of a biological asset. The process of the asset after the harvest is not subject to regulations by the NIF E-1, but must be guided with the NIF C-4 Inventories standard..
Agricultural product. A product harvested from a biological asset, property of an entity. Fruits obtained from biological assets or the completion of the biological process. They will be taken into account until their disposal or until they are used as input for another production process.
Fair value. The price that market participants would be willing to receive when selling an asset or paying to transfer a liability between interested and informed parties in a free market transaction.
An active market. . Markets in which items that are traded are homogenous and in which buyers and sellers can be found at any time with the prices available to the public.
Accounting Policies
It should be clear that for a biological asset or an agricultural product to be recognized as accountable as such, it must meet three requirements established by the standards: 1) the entity controls the asset as the result of past events; 2) it is probable that the future economic benefits associated with the asset will flow to the entity; and 3) the fair value or the cost of an asset can be determined in a trusted, verifiable and objective way. This fair value should decrease in the estimated costs up to the point of sale. If it is not possible to determine the fair value because it is not reliable or in the absence of an active market, then it will be registered at the cost of production less depreciation or accumulated wear and any loss due to deterioration of the same asset.
In the case of livestock, biological assets originate from purchase, birth in the deliveries of the heifer or livestock in production. They should be appraised each time that a statement of financial position is submitted at fair value, or in the specific case of initial recognition, if it is not possible to obtain the market prices or they are not reliable, then they will be appraised at the production cost less the accumulated depreciation and if there is any loss due to deterioration. It must be clear that this would be only in the initial recognition. After, when the fair value of the asset is determined, it will always be at that value less the estimated costs of the point of sale, as a biological asset will be appraised.
The accounting recognition must be carried out during the period in which the biological transformation is performed; for example, for the birth of a bovine, the recognition will be made at the fair value of a bovine eight days after birth. The fair value of the bovine must be determined on the basis of the market price of livestock of the same age, species and genetic characteristics.
The initial accounting record by birth will be as follows:
Debit: Biological assets in growth and development
Credit: Income
If the initial recognition is by purchase of the livestock, the registration will be as follows:
a) Livestock purchased newborn:
Debit: Biological assets in growth and development
Credit: Banks/Suppliers
b) Livestock bought for production or exploitation:
Debit: Biological assets in production
Credit: Banks/Suppliers
After this initial recognition, costs (such as food, vaccines, medicine and others) must be accumulated during growth and development, and earnings or losses are recognized when presenting the financial statement, depending on whether the value is greater in the books or the fair value of the asset. The same thing occurs if one has livestock in production; then, one must compare the value in the books with the fair value and determine the gain or loss.
In Mexico, in general those who are dedicated to the breeding and development of biological assets are family businesses, ranches that are inherited, which although they have accumulated knowledge, they do not rely on the best practices for the purposes of accounting recognition. In addition, in most cases, they do not know the operating expenses, the real value of their assets, how to assess them and present them in a financial statement and even how to declare them, so they lack information in order to make good decisions and they do not understand the risks they face.
In this situation, family businesses are unaware of their real gains or losses. If we are able to train the owners or managers of these family businesses even on a small scale, we would contribute so that this sector would see their business from another perspective, so that with the financial information that is issued, it will know how to determine profit or loss and know the amount of the flows generated by their operation to make better decisions.
Table 1. Examples of biological assets, agricultural produce and products that are the result of a process after the harvest.
Initial Recognition of Biological Assets
ITAM
To hear the term “biological assets” we automatically imagine a living being, like cells, microorganisms, insects, animals or plants. In the field of accounting, we will focus on the management of agricultural activities.
Do we know what biological assets are in accounting terms (Table 1)? Are they presented under the heading of inventories? At what point in the life of a plant or animal should I keep an accounting record?
As agricultural activity represents an important productive sector in Mexico, it is worth pausing to review its financial regulations. The Consejo Mexicano de Normas de Información Financiera, A.C. (Mexican Board of Financial Reporting Standards) (CINIF), an independent body that began operations in 2003 and collaborates with public and private sector agencies, aims to issue accounting standards in Mexico, which are transparent, objective and reliable and, as far as possible, in alignment with the International Financial Reporting Standards (IFRS).
Financial reporting standards are mandatory and help organize the accounting processes, as they give us the basis for assessing, presenting and disclosing financial information that is useful for decision making. In general terms, “to appraise” is to assign or give a value to the concepts of the financial statements, “to present” refers to the way to correctly display the items in the financial statements, and “to disclose” is to expand or break down the content of theses concepts in the notes to the financial statements.
The International Accounting Standard 41 must be applied for the recognition of biological assets. Its equivalent in Mexico is the Norma Mexicana de Información Financiera (Mexican Financial Reporting Standards) E-1 (NIF E-1).
According to NIF E-1: “A biological asset is a living animal or plant. A group of biological assets is a grouping of similar living animals or plants.” Specifically, the standard applies to biological assets that because of qualitative or quantitative changes are capable of undergoing a biological transformation, that is, they go through a process of: a) growth, those that have not completed the process of biological development; b) degeneration, a decrease in quantity or deterioration in the quality of an animal or plant; c) production and procreation, those that have completed their development process and are able to bear fruit; and d) completion, specifically those that have completed their biological development process and are in condition to be sold, transformed into agricultural products or used in other productive processes.
To understand the steps of recognition, registration and valuation of biological assets, let us consider the example of livestock, for which it will first be necessary to explain certain terms and provide some definitions contained in the NIF E-1.
The evolutionary periods of livestock are as follows:
In addition, the biological cycles of livestock are defined in the following five stages
* Herd: A number of animals of the same species or the same characteristics.
Accounting Policies
It should be clear that for a biological asset or an agricultural product to be recognized as accountable as such, it must meet three requirements established by the standards: 1) the entity controls the asset as the result of past events; 2) it is probable that the future economic benefits associated with the asset will flow to the entity; and 3) the fair value or the cost of an asset can be determined in a trusted, verifiable and objective way. This fair value should decrease in the estimated costs up to the point of sale. If it is not possible to determine the fair value because it is not reliable or in the absence of an active market, then it will be registered at the cost of production less depreciation or accumulated wear and any loss due to deterioration of the same asset.
In the case of livestock, biological assets originate from purchase, birth in the deliveries of the heifer or livestock in production. They should be appraised each time that a statement of financial position is submitted at fair value, or in the specific case of initial recognition, if it is not possible to obtain the market prices or they are not reliable, then they will be appraised at the production cost less the accumulated depreciation and if there is any loss due to deterioration. It must be clear that this would be only in the initial recognition. After, when the fair value of the asset is determined, it will always be at that value less the estimated costs of the point of sale, as a biological asset will be appraised.
The accounting recognition must be carried out during the period in which the biological transformation is performed; for example, for the birth of a bovine, the recognition will be made at the fair value of a bovine eight days after birth. The fair value of the bovine must be determined on the basis of the market price of livestock of the same age, species and genetic characteristics.
The initial accounting record by birth will be as follows:
Debit: Biological assets in growth and development
Credit: Income
If the initial recognition is by purchase of the livestock, the registration will be as follows:
a) Livestock purchased newborn:
Debit: Biological assets in growth and development
Credit: Banks/Suppliers
b) Livestock bought for production or exploitation:
Debit: Biological assets in production
Credit: Banks/Suppliers
After this initial recognition, costs (such as food, vaccines, medicine and others) must be accumulated during growth and development, and earnings or losses are recognized when presenting the financial statement, depending on whether the value is greater in the books or the fair value of the asset. The same thing occurs if one has livestock in production; then, one must compare the value in the books with the fair value and determine the gain or loss.
In Mexico, in general those who are dedicated to the breeding and development of biological assets are family businesses, ranches that are inherited, which although they have accumulated knowledge, they do not rely on the best practices for the purposes of accounting recognition. In addition, in most cases, they do not know the operating expenses, the real value of their assets, how to assess them and present them in a financial statement and even how to declare them, so they lack information in order to make good decisions and they do not understand the risks they face.
In this situation, family businesses are unaware of their real gains or losses. If we are able to train the owners or managers of these family businesses even on a small scale, we would contribute so that this sector would see their business from another perspective, so that with the financial information that is issued, it will know how to determine profit or loss and know the amount of the flows generated by their operation to make better decisions.
Table 1. Examples of biological assets, agricultural produce and products that are the result of a process after the harvest.
References
CINIF-IMCP, “Boletín E-1 Agricultura”, Normas de Información Financiera (NIF), 11a. ed., México, IMCP, 2016.
CINIF Consejo Mexicano de Normas de Información Financiera. http://www.cinif.org.mx/2014_nor_emitidasvigentes.php Consulted on January 17, 2016
KPMG Accounting Advisory Services NIC 41 Activos biológicos y prácticas europeas de aplicación, December of 2008 KPMG in Chile https://www.kpmg.com/CL/es/IssuesAndInsights/ArticlesPublications/Documents/2008-12-kpmg-advisory-activo-biologico.pdf Consulted on January 17, 2016
Bolsa Mexicana de Valores. Industrias Bachoco S.A.B. DE C.V.
http://www.bmv.com.mx/docs-pub/infoanua/infoanua_590798_2014_1.pdf Consulted on January 17, 2016
Manual para el manejo de bovinos de doble propósito
http://sgpwe.izt.uam.mx/files/users/uami/mvzjmvr/Manejo_Bovino_Doble_Prop_sito.pdf Consulted on January 18, 2016.