Estimate value of stock

At the end of the year we estimate the value of the livestock being born on the farm during that year. How would you enter that estimated market value?

Hi @sloeman,

Generally speaking (the accounting standards of your locale may differ), you would not enter the estimated market value for developing animals, but instead would book the direct and indirect costs of their development (e.g. veterinary costs, etc.) and treat the animals as either inventory or fixed assets, depending on their purpose and function.

To do so in Manager, you would need to setup the livestock as either inventory using the Inventory Items tab, or fixed assets using the Fixed Assets tab. The guides here should be useful for how to set the tabs up and enter new items, if you aren’t already familiar with them; https://www.manager.io/guides/11111 and https://www.manager.io/guides/9106

The basic accounting is to debit their direct & indirect costs to an asset account, and credit a cash or liability account (depending on how payment was made). Their market value would come into play once, and if, they are sold.

If you could provide some more information on what the animals are used for, and your jurisdiction, I may be able to provide some more applicable guidance; at any rate, I hope this helps get you started!

You don’t enter livestock born at market value.
Check with your local authority as to the “nominal” value they use for natural increase.
For example this is the Australian Tax Office regulation

Natural increase

The cost (value) of an animal you hold as livestock that you acquired by natural increase is

  • cost prescribed by the regulations
    • cattle, horses and deer – $20

So if you have 10 calves born in the year, your Journal entry would be:
Debit > BS > Inventory on-hand > Calves > 200.00
Credit > P&L > Cost of Goods Sold > 200.00

Cost of Goods Sold is used as it is an adjustment against other Inventory cost movements.

Hi again @sloeman,

If you are indeed in Australia, I can refine my previous post; I would recommend you follow IFRS.

This would mean you estimate how much the animals will sell for when they have matured, then subtract any known costs you would have to pay in order to sell them, and bring them onto your books as an asset at that amount.

The underlying accounting would still be to debit the animals to an asset account, but under IFRS you would credit an income account (as opposed to cash/liability/COGS).

As an example, if you know you are likely to get AUD 1500 for an animal, but it will likely cost you 200 to get them to a saleyard, pay any commissions, taxes, fees, etc., you would value them at 1300.

Whether they will be treated as inventory or fixed assets would still depend on their intended use/function, but either way you can bring them into Manager through Purchase Invoices; “purchase” the new born animal at the market value minus the selling costs, then add a second line, leave Item blank, select an income account (“Gain (Loss) on valuation of biological assets” is typically the name I see in use), and for Unit Price, enter the market value minus the selling costs as a negative amount. This will result in a zero invoice (since you don’t owe any supplier), the animal being added to inventory or fixed assets, and the gain being booked as income.

Bear in mind, even though it looks as if Brucanna and I have given conflicting advice, both could be applicable; if you keep your books on the tax basis, Brucanna’s suggestion would be the more appropriate method. If you keep your books on the accrual accounting basis, IFRS guidance would more appropriate to follow. Since the two methods would be entered differently, determine what your reporting needs and requirements are first, then apply the method that best aligns.

I didn’t know that the IFRS was into crystal ball gazing.

This is totally and utterly wrong. How can you predict what value an animal born today will be worth in the future, especially when you don’t even know at what point they will be sold or how the animal will develop.

This means you would bring to account a “Profit” (and pay taxes) of 1300 per head even though you haven’t sold them, in fact, they are still wondering around the paddocks drinking off their mums.

What if they die before being sold, you paid the taxes for what ???

Keeping one’s reportable profit in line with one’s sales would be a good start. Not by over valuing inventory and paying taxes on profits which might never occur.

That is what IFRS (IAS 41) calls for. If you disagree with the standard, that is fine, but do not complain to me about it; I did not create it. If you disagree with me, that is fine, too, but no one deserves snide comments like “I didn’t know that the IFRS was into crystal ball gazing.” or “…totally and utterly wrong.”

That is not necessarily true. A businesses’ taxes are not always determined off their accrual accounting records; that is why IFRS has standards for deferred tax assets and deferred tax liabilities—they expect there will be differences in accrual-based income when compared to tax-based income. It is perfectly acceptable, and common, for a business to recognize income they do not pay taxes on and to pay taxes on income they have not yet earned since tax schemes are, generally, based on realized cash whereas accrual accounting is not.

But we must consider: what kind of reportable profit? This is why I advised @sloeman to determine what their reporting needs are before applying a particular guidance. If the profit needs to be reported to a tax authority, it would not be advisable to use IFRS (as I said). But if the profit and business position needs to be reported to a bank to maintain or acquire credit, the bank may want statements reported according to IFRS, since Australia has adopted the standards.

NO IT DOES NOT. What the IAS 41 calls for is the FAIR VALUE as at the DATE OF VALUATION.
That is, if the valuation date is June 30 and the value of the calf (if sold on that date) is 200 then that is the stock value.

IAS 41 does not call upon you to “predict” how much the mature calf will sell for at a future date, especially as any future sale date is totally unknown.

To quote IAS 41
The fair value of a biological asset or agricultural produce is its market price less any costs to sell the produce. Costs to sell include commissions, levies, and transfer taxes and duties.

In another words - The fair value is its market price “IF” sold at the date of valuation, not any crystal ball gazing into a future date valuation.

I would offer a deeper dive (but I feel we may have to ultimately disagree);
Per IAS 41;

10 An entity shall recognise a biological asset or agricultural produce when, and only when:

  1. (a) the entity controls the asset as a result of past events;
  2. (b) it is probable that future economic benefits associated with the asset will flow to the entity; and
  3. (c ) the fair value or cost of the asset can be measured reliably.

11 In agricultural activity, control may be evidenced by, for example, legal ownership of cattle and the branding or otherwise marking of the cattle on acquisition, birth, or weaning. The future benefits are normally assessed by measuring the significant physical attributes.
12 A biological asset shall be measured on initial recognition and at the end of each reporting period at its fair value less costs to sell, except for the case described in paragraph 30 where the fair value cannot be measured reliably.

Paragraph 30 states (in part);

30 There is a presumption that fair value can be measured reliably for a biological asset. However, that presumption can be rebutted only on initial recognition for a biological asset for which quoted market prices are not available and for which alternative fair value measurements are determined to be clearly unreliable. In such a case, that biological asset shall be measured at its cost less any accumulated depreciation and any accumulated impairment losses. Once the fair value of such a biological asset becomes reliably measurable, an entity shall measure it at its fair value less costs to sell.

IFRS 13 further describes the objective of fair value measurement as;

…to estimate the price at which an orderly transaction to sell the asset or to transfer the liability would take place…

So, since recognition can occur at birth, and because estimation must be used, in a sense IFRS does require some “crystal ball gazing” :smile:. It may be helpful to analogize estimating salvage value for a fixed asset; there is never a guarantee it will be worth that much n years in the future, but it is not necessarily considered unreliable.

The prevailing opinion I have seen in practice is that one can make a reasonable and reliable estimate of the fair value an animal will sell for at birth as livestock typically does not take an unusually long time to mature, ranchers and breeders are well equipped to estimate the future benefits (how an animal will mature in terms of size, weight, etc. by the intended selling age), the market publishes price ranges at regular intervals, and those prices can be future-valued using appropriate discount rates (some animals are also sold immature).

Since paragraph 12 also requires revaluing the animals over time (this would include if they die before sale), adjustments will be made that bring them more in line with the market over time and up to the point they are sold.

Since the topic is getting technical I want to point out to everyone—in case of disagreement between @Brucanna and @p4unger, consult your local professional accountant. Accounting standards are based in principles rather than rules and as a result, differences of professional opinion in how to apply them can and do arise. We could both be right; we could both be wrong (though, I think it’s clear, we both want to be right :slightly_smiling_face:). In the end a local accountant that can work directly with you and become familiar with your business would be better than listening to two random people on the interest you don’t know.

Yes, just because your stated belief in “future worth valuations” totally contradicts the very accounting standard you keep quoting. In fact, if you re-read your various quoted extracts you will note that they make absolutely no reference to “future” or “maturity” valuations.

So keeping it simple, Balance Sheets are required to value businesses assets at their FAIR VALUE as at the Balance Sheet date, they never contain speculative or futuristic values. That is, if the business was liquidated at that date, then the values in Balance Sheet should be a fair guidance as to the realisable value of those assets.

Therefore taking the first part of your quoted 12 - “A biological asset shall be measured on initial recognition and at the end of each reporting period at its fair value less costs to sell”

NOTE the “at its fair value less costs to sell”. That is, if the animal was sold on that Balance Sheet date, then the fair value would be the estimated that that sale would realise. Absolutely nothing about future or maturity values such as your post #4 indicated with $1500.

Now if we take the second part of your quoted 12 - “except for the case described in paragraph 30 where the fair value cannot be measured reliably”.

Firstly, paragraph 30 opens with the expectation that “There is a presumption that fair value can be measured reliably for a biological asset”, but then it goes on to state “However, that presumption can be rebutted only on initial recognition for a biological asset for which quoted market prices are not available”

To clarify
(1) “initial recognition” - being a biological asset under the age of 12 months, born after the previous Balance Sheet date, which hasn’t been purchased.
(2) “market prices are not available” - generally applies for those aged under 6 months as they aren’t sold prior to that age.

Then paragraph 30 closes with “Once the fair value of such a biological asset becomes reliably measurable, an entity shall measure it at its fair value less costs to sell.” That is, if it is aged under 1 month it maybe unreliably measurable however at 6 months it could be more reliably measurable. But take particular note that paragraph 30 stills refers to FAIR VALUE not any or your future, maturity or final worth valuations.

Anyhow, you don’t have to take my word for any of this, however, you could read the financial accounts of any pastoral business listed on your local stock exchange where they publish detail notes about their livestock valuations. You will note in the following extracts the company’s repeated use of FAIR VALUE and not one reference to any other form of valuations.



Note the precise comment in (1) - value increases occur through changes in fair value rather than sales margin. Which contradicts your earlier position in post #4 - where you recommended a stock valuation of $1300, being the anticipated future sales margin.

Therefore in closing, if you still disagree then don’t argue with me here but write to the company - Australian Agricultural Company, their auditors KPMG and the Australian Stock Exchange and advise them how they have been completely misinterpreting IAS 41.