Agriculture is a big part of Arizona’s past, present and future. From crops to livestock, there are many farming and ranching companies within the state. One question that may come about when running a company involving agriculture, or farm, is what to do with your crops, animals and other products. Do you make these your inventory? Are they assets? Is there a difference between each one and how they are treated? Here is some guidance as to how these items, or animals, should be treated.
Crops and livestock are treated differently from one another for accounting purposes, and even different kinds of livestock are treated differently from others. Crops, as defined by Accounting Standards, are grains, vegetables, fruits, berries, nuts and fibers grown by agricultural producers. Livestock is defined as registered and commercial cattle, sheep, hogs, horses, poultry and small animals bred and raised by agricultural producers. Production animals provide a service or primary product other than their progeny (offspring of animals or plants), such as dairy cows for their milk, poultry for their meat and eggs and sheep for their meat and wool.
Crops are an inventoriable item. The costs, both direct and indirect, that go into the growing of crops are accumulated until the crop is harvested. Some crops can take multiple years to mature or be ready for harvest; because of this, the costs going into them will be deferred until the point of harvest. Once the crops are harvested, there are additional processes that are performed that are not possible before the crops are harvested. These costs can occur in a subsequent year; therefore, they are estimated, accrued and allocated to the harvested crop. Additional costs of crops, such as the soil preparation, are also deferred and later get allocated to the crop that is being grown in the soil.
Depending on the type of livestock, the animals can either be treated as an asset or inventory. Production animals with short lives are likely to be treated as inventory. The shorter life span causes their operating cycles to be shorter, making it easier to treat them as inventory. All other livestock, such as breeding animals, cattle hogs, sheep, goats and longer-lived production animals are to be considered assets. The direct and indirect costs of care and development are tracked and accumulated until maturity and then capitalized to the asset. Some of these costs also include the production and use of field or row crops when classified as a maintenance cost of the livestock. The value of the animal at this time is then depreciated over their estimated useful life less their estimated salvage value.
This is a brief overview of how each item would be treated. For additional information and details over what is considered to be a maintenance cost of an animal or what is considered to be short lived, contact your Henry+Horne CPA who specializes in agricultural accounting for what would work best in your situation.