ACCOUNTING FOR BIOLOGICAL ASSETS
Learning Objectives:
1. Understand the nature of biological assets
2. Determine the amount to which biological assets are to be recorded upon initial
recognition. AT FAIR VALUE less COST TO SELL
3. Measurement of biological assets at its reporting date. F V less COST TO SELL
4. How to determine change in fair value due to physical change
5. Compute gain/loss from change in fair value due to price change
A biological asset is a living plant or animal. Examples are: sheep, trees in a plantation
forest, dairy cattle, pigs, vines, and fruit trees.
Agricultural produce is the harvested product of biological assets. Examples are: wool from
sheep, logs from trees, milk from dairy cattle.
Upon purchase or upon birth, a biological asset is recognized. It is initially recorded at fair
value less cost to sell. The price in an active market is the best basis of the asset’s fair value.
Cost to sell include broker’s commission, levies by regulatory agencies, transfer taxes and
duties. Getting the biological asset to a market is not part of cost to sell.
At its reporting date, biological assets are to be reported at fair value less cost to sell. Any
change in fair value less cost to sell is reported as gain or loss.
Change in fair value less cost to sell are classified as: Change in fair value due to physical
change and change in fair value due to price change. Increase in size, weight and newborn
are examples of physical change.
When a biological asset is purchased, it is recorded at its FV less cost to sell. A gain or loss
may arise upon purchase.
When the FV less cost to sell is < the total purchase price plus any transaction costs, there is
loss on purchase of bio assets.
When the FV less cost to sell is > the total purchase price plus any transaction costs, there is
gain on purchase of bio assets.
Example #1. Bruno’s Farm had the following transactions relating to its biological assets in
their ranch.
Purchase price of biological asset
P 268,000
Fair v Fair value less cost to sell of the biological asset
250,000
The entry to record the biological assets purchased is:
Biological asset (at fair value less cost to sell)
250,000
Loss on initial recognition of biological asset
18,000
Cash
Purchased biological assets at more than fair value.
Example #2.
Purchase price of biological asset
Fair v Fair value less cost to sell of the biological asset
1
P 268,000
300,000
268,000
The entry to record the biological assets purchased is:
Biological asset (at fair value less cost to sell)
300,000
Cash
Gain on initial recognition
Purchased biological assets at less than fair value.
268,000
32,000
When a biological asset is born, it is also recorded at its fair value less cost to sell and is
considered an income.
The entry to record the newborn biological asset is:
Biological asset (at fair value less cost to sell)
Gain from change in fair value of bio assets
To record the birth of bio assets.
xxx
xxx
Labor costs of personnel tending the biological assets, costs of materials and supplies like
fertilizers, feeds and the like are recorded as expense when incurred.
MEASUREMENT AFTER INITIAL RECOGNITION
Biological assets should be presented in the financial statements at fair value less cost to
sell.
Change in fair value due to price change and change in fair value due to physical change are
to be reported separately.
ILLUSTRATIONS:
A. Old Mc Donald Company has the following information relating to its biological assets in
its dairy farm in Bulacan.
A herd of twenty, 2-year old animal was held on January 1, 2021. Five animals aged 2.5
years old were purchased on July 1, 2021 for P20,000 each. Also on July 2021 four animals
were born. On December 31, 2021 Ten animals (age 3years) were sold for P27,000 each.
Fair value less cost to sell were as follows:
January 1,2021
Age
3 years
2.5 years
2 years
.5 year
newborn
December
31,2021
P27,000
22,000
16,500
9,200
8,500
July 1, 2021
P20,000
P15,000
8,000
JOURNAL ENTRIES FOR BIOLOGICAL ASSETS.
100,000
July 1, 2021
Biological assets (P20,000x5)
Cash
100,000
To record biological assets purchased.
July 1, 2021
Biological assets (P8,000x4)
32,000
Gain from increase in fair value due to birth
32,000
increase in fair value due to birth of 4 animals.
(physical change)
Dec.31
Biological assets
279,800
Gain from increase in fair value due to price change
Gain from increase in fair value due to physical
change.
To record increase in FV due to price and physical change.
2
42,000
237,800
Dec. 31
Cash
Biological assets
270,000
270,000
To record sale of biological assets.
COMPUTATIONS of Change in FV due to Price change and Physical change
Gain from change in fair value due to price change is determined by comparing the price on
December 31, with the price on January 1.
Age
Dec. 31, January/July
price
price
Newborn
8,500
8,000
2- year old
16,500
15,000
2.5 year old
22,000
20,000
Change in FV due to price change
Difference in
Price
500
1,500
2,000
Quantity
4
20
5
Amount
P2,000
30,000
10,000
P42,000
Gain from change in fair value due to physical change is determined by considering the
physical change in the bio assets. Example, the one year old on January 1, will become 2
years old on December 31. ( Consider only the price on December 31.)
Age on
Dec. 31
Age on Jan.1- 2 yrs. old
3 yrs. old
Age on July 1- 2.5 yrs.
3 yrs. old
Newborn on July 1
.5 yr. old
Change in FV due to physical change
Price on Dec.
31, of previous
age
Price on Dec.
31, Current
age
Difference
in Price
Qty.
16,500
22,000
8,500
27,000
27,000
9,200
10,500
5,000
700
20
5
4
Amount
P210,000
25,000
2,800
P237,800
On December 31, 2021, the amount of biological assets that will be presented in the company’s
financial statements is 441,800 determined as follows:
January 1 – balance ( twenty, 2-year old animal x P15,000)Add(l Add(Less): 2021 transactions
July
Biolo
1
biological assets purchased
July
Biolo
1
Born
Dec.31 Increase in FV due to price and physical change (42,000+237,800)
Dec.31 Sold
December 31,2021 - Balance
P300,000
100,000
32,000
279,800
(270,000)
441,800
Alternative computation of Biological Assets balance at Dec. 31, 2021:
Age 3 yrs at Dec. 31 ( 20 + 5 – 10)=15 x P27,000 = P405,000
Age .5 yr. old (4 x P9,200)-------------------------------- 36,800
Biological Assets – Dec. 31, 2021----------------------P441,800
B. At December 31, 2021, the following information was gathered for biological assets of
Mariano’s Poultry.
Price of bio assets in an active market
Broker’s commission
Levies by regulatory bodies
Transport and other costs to get the assets to the market
Market prices in the previous month for similar assets
3,600,000
45,000
12,000
40,000
2,900,000
At how much should the biological assets be presented on Dec. 31, 2021? 3,543,000
(3,600,000- 45,000 -12,000 = 3,543,000)
3
C. The following information is made available by Camilo’s Farms in Batangas relating to its dairy
livestock during 2021.
Carrying amount at January 1
Fair value less cost to sell of livestock purchased during the year
Fair value less cost to sell of livestock Born during the year
Increase in FV less cost to sell due to price change
Increase in FV less cost to sell due to physical change
FV less cost to sell of livestock sold during the year
1,000,000
280,000
60,000
180,000
40,000
890,000
How much is the biological assets reported at December 31, 2021? 670,000)
(1,000,000 +280,000 +60,000 + 180,000 + 40,000 -890,000 = 670,000)
Assessment/Activities:
1. The following information pertains to Robina Farms’ biological assets:
A group of thirty 2-year old swine was held on January 1, 2021. Five one year old swine
were purchased on January 2, 2021 for P10,000 each and ten were born also on January 2,
2021. Five 3-year old swine were sold at the end of the year 2021. The fair value less cost
to sell of each were as follows:
FV less cost to sell
FV less cost to sell
Age
January 1,2021
December 31,2021
Newborn
1 year old
2 years
3 years
P4,000
6,000
8,500
11,200
P5,000
6,500
11,600
16,500
Required:
a. Prepare the entries to record transactions relating to the company’s biological assets for
the year 2021.
b. Show computations for the following:
1.
Gain/loss on the initial recognition of biological assets upon purchase.
2.
Gain/loss on change in fair value due to physical change.
3.
Gain/loss on change in fair value due to price change.
4.
Total amount of biological assets that will be shown in the December
31,2021 financial statements.
2. A group of thirty 2- year old pigs was held by Madrigal Farms at January 1, 2021. Five
one-year old pigs were purchased on January 5, 2021 for P8,000 each and ten were born on
the same date. Five 3-year old pigs were disposed of at the end of the year. Per unit fair
values less cost to sell were as follows:
Age
3 years
2 years
1 year
Newborn
January 1
P15,000
11,200
8,500
6,000
December 31
P16,500
11,600
8,800
6,500
The company discloses separately the increase in fair value less cost to sell due to physical
change and change in fair value less cost to sell due to price change.
4
1. How much is the gain or loss on the initial recognition of biological assets upon purchased
of five pigs on January 5, 2021?______
a. P2,500 gain
b. 2,500 loss
c. 4,000 gain
d. 4,000 loss
2. How much is the gain arising from change in fair value due to physical change?
a. P184,000
b. 244,000
c. 455,000
d. 545,000
3. How much is the gain arising from change in fair value due to price change?
a. P16,000
b. 16,500
c. 18,500
d. 50,000
4. What amount shall be presented as biological assets by Madrigal Farms on December 31,
2021?
a. P516,000
b. 558,000
c. 558,500
d. 641,000
5