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Value of inventory on tree farm
07-30-2010, 01:24 PM
Post: #1
Value of inventory on tree farm
I grow trees in central Alberta, Canada.

We're in the process of graduating out of the shoebox method of accounting, and are stuck with how to put a value on inventory for tax purposes and for doing an end of the year balance sheet.

One advisor tells us that we record inventory at cost of acquisition, since it is an item to be sold.

This however seriously degrades the value of our farm at the end of the year.

I think that the first advisor is thinking in terms of a company that buys widgets to resell them essentially unchanged. It is closer to that of a raw material used to create a manufactured product, where the raw material is insignificant compared to the labour.

Let me illustrate with an example

I buy a box of fir seedlings at 40 cents per tree.

A week later they are in styrofoam block planters. Freshly planted they have a value of zero to negative. (A fraction will die. The rest cannot be sold at this point, as they are effectively a manufactured product in process.)

Depending on the species, and the growing conditions, the seedlings will be in the styroblocks for one to two years. After 2 months in the styroblock, they have rooted well enough that they are saleable. They retail for $5 each, wholesale for about 3.50 each.

The next spring they are transplanted to a 2 gallon container. They remain in this container for two years. Some are sold in this container for $8 per foot.

Two years pass.

The firs, mostly 3 feet tall, are transplanted to either #7 pots or #10 grow bags

The ones in pots will remain there for 2-3 years and be sold as 6-8 foot trees, the ones in grow bags will remain there for 4-5 years and be sold as 9-12 foot trees.

Styroblocks cost $3.75 each for a 15 cell block (25 cents per cell) and can be reused several times. Under ideal circumstances they can be reused about 6 times, but there is also about a 10% per year loss rate from breaking.

2 gallon pots can be reused indefinately, but some go away with trees in them, and some are damaged. I buy my pots from landscape contractors for $100 per cord. A cord can have from 2000-3500 gallons of pots depending on the manufacturer, how well sorted they are, and the individual details of the mix. I figure roughly 5 cents per gallon for used pots.

#7 pots cost me no money up front, but are made on site from salvaged pails. The time to make them is variable, mostly depending on the skill level of the worker and the nature of the previous material in the pail. Converting a pail to a pot is a 4 stage process spanning about 6 weeks.

Growbags are use once and discard/sell with tree.

At each stage on the farm, they need to be watered, weeded, fertilized. The farm is in it's formative stages yet. A lot of work goes into building infrastructure.

Time is not tracked by individual task E.g. I do not know how much time I spent weeding firs this year. Nor do I know how much time I spent watering firs. Heck, I don't know how much time I spent watering! (I told Laura, my better half who actually does the books "I can do the work, or I can track what I do. I can't do both.")

Suppose that my inventory at a given time is

400 fir seedlings fresh from the forestry nursery.
350 1 year old fir seedlings in styroblocks.
330 2 year old fir seedlings in styroblocks.
300 3 year old fir seedlings in 2 gallon pots.
150 4 year old fir seedlings in #7 pots
100 4 year old fir seedlings in grow bags.
140 5 year old fir seedligns in # 7 pots.
90 5 year old fir seedlings in grow bags.
130 6 year old fir seedlings in #7 pots.
85 6 year old fir seedlings in grow bags.

(If it were only this simple I have 40 species of trees. I don't have the same number starting each year. Some grow faster than others... Some I start from seed swiped off trees in a local park, or raise from cuttings from stool beds I established for that purpose.)

Now the cost of acquiring goods is 40 cents per tree. But some of these trees came in 6 years ago, and have been increasing in value ever since. So 40 cents is unreasonably low.

The only other business that has similar situation are whiskey distillers. They ahve a product that they can sell at almost any time, but with age increases in value.

The method I suggested to my tax advisor is 1/3 of the retail value of the trees. He doesn't accept this.

What is the GAAP way to deal with situations like this?
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08-04-2010, 09:49 PM
Post: #2
IAS 40 provide clear guidelines about biological assets....that when it became inventory ..and when and it should be classified....and to measure.......(fair value calculation and policy how and when the biological asset is ready for sale is crux of such items accounting)
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08-04-2010, 10:58 PM
Post: #3
Actually IAS 41. Summary here http//

If I'm interpreting it correctly since I have a product that is harvestable over a large span of time, I would calculate it's FMV at the time of the inventory, and use an industry average for cost of sale, and a reasonable figure for maintenance for the time to dispose.
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