NOTES ON BIOLOGICAL ASSETS
Understand the alternative methods of measuring biological assets
Animals
1. The traditional way of measuring
Accumulate all costs of acquiring and converting the asset to its final form
Problems with this method: it is not so simple
 These are costs of raising the animal until productive stage.
 Not all costs can be traced to an individual animal e.g. costs of fencing, feeding
and labour cost
 Because of the lengthy growth cycle, costs are likely to be irrelevant as time
passes
2. Are 3 variations of market value
Net realizable value
Is the net price after deducting transactions costs incurred at the end of reporting financial
period
Market prices are readily available. So this could have some form of acceptable reliability
It has the problem of volatility affected by climatic conditions, disease & natural
disasters. However any volatility in carrying amounts reflects reality and provides
relevant information to the statement users.
Discounted market value
It is net realizable value less amount provided for possible future reductions in market
prices
Has an element of subjectivity, hence could render the result unreliable
Standard value
Involves use of agreed values for animals
Based on conservative estimates of market prices in the foreseeable future
Standard values are simply assumed and have no conceptual validity
Conclusion: animal biological assets should be measured at their net realizable
value
Plants
 Issues discussed and conclusions reached about the measurement of animals are
relevant to the measurement of plant biological assets.
 There is a problem of measuring net realizable value of bearer plants
 Bearer plants are normally valued together with land and improvements on which
the plants are grown. (land and improvements are non-living assets)
So net realizable value of bearer biological plants is determined as residual
The bearer plants are not sold as separate assets
According to Roberts, Staunton & Hagan - are 3 possible cost based methods of
measuring forestry assets
1. Sustained yield method
Accumulate costs until the plants reach equilibrium i.e. the amount of timber
harvested = amount of growth per year
When forest reaches equilibrium all new costs are recognised as expenses in the
period in which they are incurred; revenues are recognised when sales of timber are
made and they are matched with expenses recognised in the same reporting period.
The method assumes size of the forest remains constant when equilibrium is reached
The method has the same problems of historical costs – costs are not relevant to the
needs of the users.
It will not provide asset valuations that are relevant to the needs of financial statement
users
2. Stand method
Forest is divided into homogenous planting units. Costs for each unit is matched
against revenue received when the stand is eventually clear-felled. If the cleared area
is replanted a new cost centre is established.
Method relies on matching costs incurred with revenues obtained from that area.
Asset revaluations become increasingly irrelevant as the stand matures.
3. Compounded historical cost
Involves multiplying historical cost by indices of prices changes- to give more current
costs.
It is subject to the criticism that forestry management methods change over time.
Using the price index does not give the current cost of contemporary management
practices.
It retains all the faults of historical cost based systems
4. Replacement cost
Has also been advocated
The measurement method requires that the value of a forest is determined as the
present cost of replacing it.
So the replacement cost of a mature forest would be the cost of planting seedlings of
the same quality as the existing forest on the same site
Problem with this approach – it ignores the growth of the forest and the consequence
increase in value
From all the above methods, Roberts, Staunton and Hagan concluded that cost
based methods were not appropriate because they do not provide information
that is relevant for financial statement users.
They suggested 2 ways of incorporating current value based method of accounting for
forestry assets
 Net present value method
 Net realizable value method
Net present value method
 Expected future cash flows from the forest are discounted to a present value
 Method requires estimates of the yield from the forest and that the prices will
be obtained in the future
 Method requires the appropriate discount rate
 Hence the method is not appropriate as it relies too much on estimates of
conditions that happen 25 to 30 years in the future.
Net realizable value
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Could be reliably measured as managers of the forests are always selling in
the market
They are acutely aware of markets, prevailing prices and market trends
Are also able to refer to royalties set by the government for comparable
government controlled forests.