PUBLISHING

Evaluation of Biological Assets: Problems and Solutions

Sarmte Rozentle, Maira Ore idzeme !niversit" of A##lied Sciences, idzeme, $atvia

%&e c&ief #roduction elements of an agricultural enter#rise are its biological assets and t&e c&oice and #ractical a##lication of t&e evaluation met&ods, as t&e assets directl" affect man" as#ects: decision ma'ing of economic c&aracter b" t&e financial statement user, indicators of financial o#eration anal"sis, inter(com#arison of sector enter#rises, assessment of t&e com#an" value and ta)es on its economic activit", and statistical data of t&e agricultural sector* %&e aut&ors &ave used t&e discounted cas& flo+ ,-./0 as an alternative met&od and a model of s"stem d"namics* Suc& a s"stem d"namics met&od &as not been used for assessment of biological assets so far* 1n t&e o#erating #rocess, t&e com#an" ac2uires or loses #ossession of t&e resources* 1t is vital to anal"ze t&e resources to see +&et&er t&e" com#l" +it& t&e conce#t of t&e assets and t&e terms of recognition* 1t is necessar" for t&e same com#an" as +ell as for e)ternal users of financial statements to get true information about t&e business and t&e value of mone"* Biological assets ma" be recognized in t&e com#an"3s accounting onl" +&en it is #redictable t&at future benefits associated +it& t&ese assets +ill flo+ into t&e enter#rise* 1t is also im#ortant t&at t&e fair value or t&e cost can be measured reliabl"* Keywords: biological assets, assessment met&ods, fair value

Introduction
Agriculture #rovides t&e #o#ulation +it& liveli&ood* 1t #romotes commercial activities and sustainable em#lo"ment in rural areas, t&us im#roving t&e living 2ualit" and retaining densit" of rural #o#ulation* %&e value of agriculture in t&e total net domestic #roduct ,4-P0 of $atvia 'ee#s a gro+ing trend, and in 5676, it +as 7*89* :rain cro#s and mil' are definitel" t&e most significant agricultural #roducts of t&e $atvian agriculture ,Ministr" of Agriculture of Re#ublic of $atvia, 56770* .om#re&ensive, ob;ective, and timel" information is vitall" im#ortant for a successful develo#ment of t&e national econom" in mar'et conditions* %&e main sources of information including agriculture are accounting statement data of t&e com#anies ,<esem=i'a, 5676a0* A coordinated a##roac& to ma'e financial statements and t&eir contents for all or at least man" countries is a #recondition for successful o#eration of multinational com#anies* 1ncom#arabilit" of t&e statement data does not #romote o#timal managerial decision ma'ing* As t&e accounting standards regulating determination and measurement of #rofits are t&e results of accumulated e)#erience of accountants, regulating institutions, business #eo#le, and ot&er #ractitioners, t&e" de#ict onl" a >tem#orar" balance? based #artiall" on t&e 'no+ledge and e)#erience of #ractitioners and #artiall" u#on a com#romise bet+een traditionall" different

Sarmte Rozentle, #rofessor, /acult" of Business Administration and Economics, idzeme !niversit" of A##lied Sciences* Email: sarmite*rozentale@va*lv* Maira Ore, assistant #rofessor, /acult" of Business Administration and Economics, idzeme !niversit" of A##lied Sciences*

interests and vie+#oints regarding t&e evaluation met&ods* Alt&oug& t&e accountants &ave graduall" narro+ed t&e range of measurement #rinci#les, alternatives still e)ist and cannot be e)cluded in t&e nearest future* %&us, unification of accounting means diminis&ing differences in a##roac&es to accounting met&ods of economic o#erations, events, and conditions ,1vanova, n*d*0* An im#ortant tool for accounting in agricultural activities is t&e aid >biological assets? +&ic& distinguis& accounting in agriculture from ot&er sectors of econom" ,Ore, 56760* Biological assets are animals or #lants t&at a com#an" gro+s to obtain agricultural #roduce for sale or as additional biological assets ,Su#reme .ouncil of Re#ublic of $atvia, 7AA5a0* %&e accounting for biological assets is closel" related to t&e inventor" of t&e agricultural #roduce from t&e #lants and animals at t&e moment of its &arvesting ,BalniCa, 566D0* %&e #roblems in t&e assessment of biological assets are related to t&e fact t&at agriculture de#ends on agro climatic conditions and territorial remoteness of an enter#rise from t&e sales mar'ets to a great e)tent* %&is is es#eciall" acute +&en estimating long(term biological assets, t&e fair value of +&ic& &as been created in a longer #eriod of time in c&angeable mar'et conditions* %&e value of #erennial #lants and food(#roducing animals considerabl" c&anges, de#ending on t&eir location zones* %&is is closel" related to t&e c&anges in ris' degree and #roduction costs* 1t s&ould be noted t&at +it& time, t&e initial #lant and animal values differ from t&e values of similar #&"sicall" "oung and more #roductive biological assets ,<esem=i'a, 5676b0* Eo+ever, ver" little attention is #aid to issues of biological assets stoc'ta'ing in accounting in $atvia* 4eit&er is t&ere a normative legislation to determine t&e order of accounting biological assets, nor an" researc& e)#loring t&e #roblems of biological asset accounting &as been carried out ,<esem=i'a, 5676a0* %&e c&oice and a##lication of evaluation met&ods of biological assets and #roducts obtained from t&em give different values in suc& a financial statement elements suc& as balance asset grou#s ,>biological assets?, >stoc's?0, liabilities grou# ,>undivided #rofit of t&e re#orting "ear?0, as +ell as #rofit and loss account of #roduction cost and stoc' value correction items* %&is in turn leads to different results in anal"ses of financial statements, com#an" value, and ta) account from economic activities and conse2uentl" leaves an im#act on o#erational and strategic managerial decisions and statistical data of t&e state agricultural sector* %&e aim of t&is researc& is to s"stematise and anal"se accounting met&ods of biological assets on t&e basis of t&e 1nternational Accounting Standard ,1AS0 F7>Agriculture? and normative documentation of t&e Re#ublic of $atvia ,$R0 and to dra+ conclusions on t&e e)isting t&eories and international e)#erience +it& an aim of develo#ing an alternative for evaluation met&ods of biological assets of agricultural enter#rises* Research Methods %&is researc& is based u#on an issue: G&en anal"sing t&e regulator" basis and e)#ert cognitions on current evaluation met&ods of biological assets, t&eir basic #rinci#les, and a##lication, it is evident t&at t&e" &ave certain s&ortcomings* -uring t&is researc&, t&e aut&ors &ave carried out an anal"sis of 1AS F7, $R la+s and regulations, #revious researc&es and e)#ert #ublications, and international e)#erience regarding assessment as#ects of biological assets from <anuar" 7, 5666 until -ecember 5677* As a result of t&is researc&, t&e aut&ors &ave summarised t&eoretical findings in assessment met&ods of biological assets as stated in current normative legislation, advantages, and disadvantages of t&eir a##lication +&ic& #roves t&at none of t&e met&ods is ideal* On t&e basis of t&ese conclusions, t&e aut&ors &ave summarised and anal"sed evaluation met&ods of biological assets and &ave develo#ed an alternative met&od of evaluation*

Results and Discussion %o #re#are a &ig&(2ualit" financial statement, an agricultural com#an" &as to ta'e into account t+o im#ortant conditions: classification of funds and t&eir evaluation* %&is +ould #rovide com#arabilit" of se#arate financial indicators of agricultural com#anies +it&in t&e sector* %&is +ould also #rovide clear and trut&ful information on t&e #ro#ert" of a com#an" and t&e results of its economic activities* %&is is #rimaril" necessar" for ever" o+ner ,manager0 for an evaluation of one3s financial situation, control, furt&er #lanning of economic activities and decision ma'ings* Assessment is t&e #rocess of estimation in monetar" units, +&ere elements of financial statements are recognised and assessed on t&e enter#rise balance s&eet and in t&e #rofit and loss account* /or t&is #ur#ose, it is necessar" to select a s#ecific met&od ,<esem=i'a, 5676b0* -ifferences in determination of #rofit de#end on t&e a##lied asset value evaluation and deleting met&ods on t&e a##roac& to #rofit account and to +&at e)tent ta) legislation affects stoc'ta'ing ,1vanova, n*d*0* :enerall" acce#ted are assessment met&ods +&ic& are based on t&e follo+ings: transfer #rices +&ic& are calculated considering inflation and ob;ect #rofitabilit"H #urc&ase valueH substitution valueH sales valueH actual or regulator" cost +&ic& is ad;usted considering t&e inflation inde), and discounted value ,<esem=i'a, 5676b0* %&e e)isting normative documents and accounting standards of $atvia do not e)#licitl" contain #rovisions for t&e evaluation of ob;ects, records, etc* and a##lication of accounting #rinci#les in agricultural com#anies* 1n contrar" to Estonia and $it&uania, $atvia &as not develo#ed or a##roved t&e accounting standards for biological assets ,Ore, 56760* %&e aut&ors &ave anal"zed re2uirements of regulator" frame+or' for evaluation of biological assets of $atvian agricultural enter#rises* %&e summar" of t&e anal"sis is given in %able 7* %able 7 Regulatory Framework for Evaluation of Biological Assets of Latvian Agricultural Enterprises
Re2uirem ent in biological asset assessme nt

Agricultural enter#rise form .ommercial com#an", +&ic& #rovides an annual re#ort in com#liance +it& 1AS according to financial instrument mar'et la+ %&e single(entr" accounting s"stem ma" be used b" sole traders, individual enter#rises, farms and fis&eries +&ose turnover from economic activities in t&e #revious ta) "ear does not e)ceed $ $ 566,666 and ot&er natural #ersons carr"ing out an economic activit" Ot&er agricultural com#anies

4ormative document

1AS F7 re2uirements

Ies

.abinet regulation 4o* 7JJ >on #rocedures allo+ing t&e single(entr" accounting s"stem to be used b" sole traders, individual enter#rises, farms and fis&eries, and ot&er natural #ersons carr"ing out an economic activit"? .abinet regulation 4o* K67 >regulations on sole traders3 financial statements? $R annual accounts la+ .abinet regulation 4o* FJJ >enforcement of la+ on annual re#orts?7

4o

4o

Ies 4o

Note. Source: %&e aut&ors3 o+n stud" based on t&e $R la+s and regulations*

1f an agricultural enter#rise is a commercial com#an" +&ic& #rovides an annual re#ort in com#liance +it& 1AS ,Su#reme .ouncil of Re#ublic of $atvia, 7AA5a0 according to financial instrument mar'et la+, t&en suc& a com#an" s&ould follo+ t&e re2uirements of 1AS F7 regarding evaluation of biological assets and initial 7

Retrieved from &tt#:LL+++*li'umi*lvLdoc*#&#MidN5K5KOK*

evaluation of agricultural #roduce at t&e moment of &arvesting* 1f agricultural #roduce is manufactured b" individual enter#rises, farms and fis&eries +&ose turnover from economic activities in t&e #revious ta) "ear does not e)ceed $atvia $ats ,$ $0 566,666 and +&o use a single(entr" accounting s"stem, sole traders, and ot&er natural #ersons carr"ing out an economic activit" ,Su#reme .ouncil of Re#ublic of $atvia, 7AA5b0, t&e" reflect revenues and e)#enditures and fill in declarations and forms according to .abinet regulation 4o* 7JJ from Marc& 56, 5668 >on #rocedures allo+ing t&e single(entr" accounting s"stem to be used b" sole traders, individual enter#rises, farms and fis&eries, and ot&er natural #ersons carr"ing out an economic activit"? ,.abinet of Ministers, 5668a0 and .abinet regulation 4o* K67 from Ma" J, 566J, >regulations on sole traders3 financial statements? ,.abinet of Ministers, 5668b0* %&is normative legislation does not sti#ulate nor define re2uirements regarding t&e evaluation of biological assets* %&e accountants of ot&er agricultural enter#rises &ave to follo+ t&e re2uirements of t&e la+ on annual re#orts +&ic& &ave certain inconsistenc" and contradictions in com#arison +it& 1AS F7* .urrent assessment met&ods of biological assets for $R(registered agricultural enter#rises are &istorical cost accounting ,E.A0 and fair value accounting ,/ A0* 1AS F7 re2uires t&at biological assets s&all be measured at t&eir fair value less estimated sales costs from t&e initial recognition of t&e biological assets to t&e #oint of &arvest, e)ce#t cases +&en fair value cannot be measured reliabl" on t&e initial recognition* %&e fair value of an asset is based on its #resent location and condition* As a result, for e)am#le, t&e fair value of cattle at a farm is t&e #rice for t&e cattle in t&e relevant mar'et less t&e trans#ort and ot&er costs of getting t&e cattle to t&at mar'et ,1nternational Accounting Standards .ommittee, 56660* $atvian agricultural com#anies sub;ected to t&e annual accounts la+ ma" evaluate t&eir biological assets b" t&e cost account met&od or a##l" t&e fair value met&od* %&e annual accounts la+ defines t&e cost account met&od in Section 5D, Part K, as follo+s: >.ost account is calculated b" summing t&e cost of ra+ materials and ot&er e)#enses directl" related to manufacturing t&e res#ective ob;ect* 1ndirect e)#enses ma" also be included in t&e cost account if t&e" refer to t&is #eriod of time? ,Su#reme .ouncil of Re#ublic of $atvia, 7AA5a0* %able 5 s&o+s a com#arison of &istorical cost and fair value b" different criteria* %able 5 omparison of !alue alculation "et#ods
.riterion alue calculation at t&e moment of recognition and eac& date of balance -e#reciation Eistorical cost Purc&ase cost N #urc&ase #rice P associated costs or #roduction cost N direct costs P indirect costs 1s assessed 1n case of value decrease according to t&e lo+est value or in case of value increase according to t&e &ig&est value /air value /air value N mar'et value Q calculated sales costs 1s not assessed 1ncluded in t&e #rofit and loss account Active mar'et e)ists or it is #ossible to state t&e fair value b" ot&er recognised met&ods

alue c&anges

Additional #rovisions

4one

Note. Source: %&e aut&ors3 o+n stud" based on t&e 1AS F7 and t&e annual accounts la+*

Retrieved from &tt#:LL+++*li'umi*lvLdoc*#&#MidN7OFJF6* K Retrieved from &tt#:LL+++*li'umi*lvLdoc*#&#MidN7O8676RfromNoff* F Retrieved from &tt#:LL+++*li'umi*lvLdoc*#&#MidNDDFD7*

%able K gives a com#arison of re2uirements of 1AS F7 and annual accounts regarding evaluation of biological assets and evaluation of agricultural #roduce obtained from biological assets at t&e #oint of &arvest* According to t&e stoc' assessment #rocedures stated in Sections K6, K7, and K5 of t&e annual accounts la+, t&e #roduction obtained in t&e &arvesting #rocess or animal breeding or cessation of animal3s life #rocess s&ould be registered as #roduction cost* %&is is different from 1AS F73s >Agriculture? guidelines +&ic& #rovide an assessment of t&e agricultural #roduce obtained in t&e &arvesting #rocess to be assessed at t&eir fair value, +&ic& in furt&er records is treated as cost of #roduction ,BalniCa, 566D0* %able K Re$uirements for Assessment of Biological Assets
Ob;ect Biological assets Agricultural #roduce obtained from biological assets at t&e #oint of &arvest 1AS F7 /air value /air value, +&ic& in furt&er accounting is e2ualized to #roduction costs Annual accounts la+ /air value or &istorical cost Eistorical cost

Note* Source: %&e aut&ors3 o+n stud" based on t&e 1AS F7 and t&e annual accounts la+*

Regarding 1AS F7 ,a##roved b" t&e 1AS .ouncil in -ecember 56660, Elad maintained t&at it >mar'ed bot& a radical de#arture from t&e traditional accounting for biological assets and an earl" test of fair value accounting? ,Elad, 566FH as cited in /is&er, Mortensen, R Gebber, 5676, #* 70* >%&ere is an intense debate on t&e convenience of moving from &istorical cost account to t&e fair value #rinci#le? ,ArgilSs, :arcia(Blandon, R Monllau, 5677, #* J80* >Economic realities and current develo#ments &ave made man" sc&olars +onder about +&et&er cor#orate re#orting s&ould be led b" mar'ets or b" regulators* Mean+&ile, t&e conce#t of fair value and its im#lementation ta'es t&e aut&ors even furt&er into an area +&ere management3s in#ut and disclosure ta'es on added significance? ,Bonaci R Strou&al, 5677, #* 7F0* 1nternational scientists3 cognitions on t&e advantages and disadvantages of t&e fair value met&od &ave been accumulated b" /is&er et al* ,56760, ArgilSs et al* ,56770, and Bonaci and Strou&al ,56770* G&ile anal"sing statements of t&eoreticians, t&e aut&ors &ave identified t&e follo+ing disadvantages of t&e E.A model: ,70 >1t fails to ade2uatel" account for t&e uni2ue re#roductive and natural transformational nature of biological assets? ,ArgilSs R Slof, 5667H as cited in /is&er et al*, 5676, #* 50H ,50 1t >ignores t&e realities of ra#idl"(c&anging mar'et values of farming assets? ,.o+an, 7A85H as cited in /is&er et al*, 5676, #* 50H and ,K0 /inancial statement users need a better assessment of t&e true #erformance and management of t&e firm t&an allo+ed t&roug& &istorical cost ,ArgilSs et al*, 56770* As regards t&e advantages of t&e E.A model com#ared +it& /.A, t&e" are t&e follo+ing: ,70 /air valuation is sub;ected to more mani#ulation and is a #oorer measure of +ort& and #erformance t&an &istorical cost accordingl"H ,50 >Accounting cannot com#ete +it& t&e mar'et in valuing a firm? ,Gatts, 566DH as cited in ArgilSs et al*, 5677, #* A60H ,K0 >/air valuation does not necessaril" ma'e investors better off, and t&at its usefulness &as not been demonstrated? ,Ball, 566DH as cited in ArgilSs et al*, 5677, #* A60H ,F0 >/air value accounting is liable to #roduce absurdities and misleading information, if it is based on e)#ectations t&at turn out to be false? ,Ra"man, 5668H as cited in ArgilSs et al*, 5677, #* A60H and ,O0 /air value >in&erits more managerial mani#ulation and induces less efficient investment decisions t&an cost valuations? ,$iang R Gen, 5668H as cited in ArgilSs et al*, 5677, #* A60* %&e aut&ors &ave s"stematised researc&ers3 o#inions of general assessment of / A model ,see %able F0*

%able F %eneral Assessment of F!A "odel

Positive argument /air value information en&ances decision usefulness and trans#arenc", as it is timel" reflected in current mar'et conditions ,/is&er et al*, 56760* An asset is reflected in t&e balance in its fair value, if its #rime cost is smaller t&an its mar'et #rice ,BalniCa, 566D0* 4egative argument / A comes at t&e e)#ense of reliabilit" and understandabilit", referring to t&e need to sometimes use some+&at arbitrar" mar'et( based values t&at rel" on sub;ective means of establis&ment ,Barlev R Eaddad, 566KH Penman, 5668H Benston, 566JH as cited in /is&er et al*, 5676, #* 70* Eo+ to determine t&e costs of ascertaining suc& values, #articularl" for re#orting entities in t&e develo#ing countries ,/is&er et al*, 56760M %&e annual revaluation re2uirements im#osed b" 1AS F7 mig&t #rove difficult and e)#ensive, #articularl" in less develo#ed countries ,Elad, 566FH as cited in /is&er et al*, 5676, #* F0* %&e undesirable effects of increased volatilit" of t&e re#orted earnings ,/arg&er, 5667H Penman, 5668H as cited in /is&er et al*, 5676, #* 70* /air value does not al+a"s reflect t&e true economics of business ,/is&er et al*, 56760* %&e e)tension of / A to a range of assets, industries, and countries &as raised concerns about t&e abilit" of one measurement s"stem to be all t&ings to all sta'e&olders, +it& man" of t&e 'e" re2uirements being tailored to assets +&ere active mar'et is #revalent ,e*g*, financial instruments0 ,Penman, 5668H as cited in /is&er et al*, 5676, #* 70* 1ncreased com#an" income ta) ris' for small and medium com#anies, +&ere accounting is done mainl" for fair ta) calculation reasons ,BalniCa, 566D0*

%&e im#ortance of anal"tical financial information increases for its users ,Buzmina, 566D0*

Note. Source: %&e aut&ors3 o+n stud" based on s"stematised researc&ers3 o#inions*

A##lication of t&e #rinci#le of fair value allo+s #re#aring a &ig&er(2ualit" financial statement from t&e #oint of vie+ of financial management ,Buzmina, 566D0* 1n t&e furt&er #rocess of anal"sis based on financial re#orting 2ualit" c&aracteristics, t&e aut&ors &ave s"stematised t&e main conce#ts of t&eoreticians regarding t&e assessment of biological assets* G&en #re#aring an annual re#ort, t&e agricultural com#anies s&ould reflect an ob;ective accounting value of a biological asset on t&e balance and correctl" reflect t&e value c&anges in t&e #rofit and loss account so t&at t&e included information s&ould meet all t&e 2ualit" criteria: relevance, reliabilit", com#arabilit", and understandabilit"* %+o #rimar" criteria re2uired b" accounting standards are relevance and reliabilit" ,ArgilSs et al*, 5677H <aunzeme, 56680* %&e #rior researc& #rovides an overall conclusion t&at fair value(based information is more relevant t&an &istorical

cost(based information ,ArgilSs et al*, 56770* 1n %ables O and D, t&e aut&ors &ave summarised cognitions of t&eoreticians from t&e #oint of vie+ of relevance and reliabilit"* %able O Assessment of F!A "odel From t#e &oint of !iew of Relevance
Positive argument 1ncluding unrealised gains or losses in t&e re#orted #rofits #rovides users +it& more timel" information t&at is relevant to assess t&eir investment and t&e efforts of management over t&e #eriod ,Eerbo&n, 566OH as cited in /is&er et al*, 5676, #* F0* 4egative argument %&ere is fre2uentl" too muc& uncertaint" regarding t&e ultimate realisation of man" agricultural revenues ,Eerbo&n, 566DH as cited in /is&er et al*, 5676, #* F0*

(T able 5 continued) Positive argument 4egative argument Allo+ing recognition of estimates in income statements could result in significant ad;ustments in subse2uent #eriods and ma" create #ressure on com#anies to declare and #a" dividends for +&ic& no funds are available ,Eerbo&n, 566OH as cited in /is&er et al*, 5676, #* F0* %&is allo+s greater o##ortunities ,and motivation0 for com#anies to massage t&eir accounts in an" financial "ear, de#ending on +&et&er t&e" +is& to s&o+ &ig&er or lo+er earnings ,Eerbo&n, 566DH as cited in /is&er et al*, 5676, #* F0* %&erefore, income management s#&ere distinctl" increases +&en sub;ective valuation met&ods are re2uired* Active mar'ets are essential for valuating relevant ob;ects, and conse2uentl" t&e #rovision of 2ualified #rofessional assessors ,Buzmina, 566D0* 1t increases t&e institutional ris' ,coordination of administrative bodies regarding regulation0 ,Buzmina, 566D0*

1ncome fluctuations reflect investment ris's in t&e agricultural sector* ,/is&er et al*, 56760*

1t gives a more #ro#er basis for t&e estimation of future cas& flo+s com#ared +it& &istorical cost, as it reflects t&e current mar'et value of t&ese cas& flo+s ,Buzmina, 566D0*

1t minimizes t&e ris' of accounting #olic" ,or t&e ris' of fair valuation0 ,Buzmina, 566D0* 1t minimises t&e ris' of relevance of managerial activities regarding o#timization of ta)es ,Buzmina, 566D0*

Note* Source: %&e aut&ors3 o+n stud" based on s"stematised researc&ers3 o#inions*

Summarising findings of different sc&olars, t&e conclusion is t&at from some as#ects, t&e fair value met&od for biological asset evaluation is better t&an t&e cost account met&od, but it is not ideal eit&er* %&us, it is necessar" to find alternatives* %able D Assessment of F!A "odel From t#e &oint of !iew of Relia'ility
Positive argument 1AS F7 #rovides >a good conce#tual frame+or'? for meeting 4egative argument %&e #rinci#al concern is +&en active mar'ets for biological assets do not e)ist* 1n suc& instances, re#orting entities ma" &ave to estimate fair values b" determining t&e net #resent values ,4P s0 of future cas& flo+s, "ielding in&erentl" sub;ective valuations ,/is&er et al*, 5676, #* F0* !nli'e an ob;ective value from an e)ternal mar'et, net #resent value is &ig&l" de#endent on t&e discount rate and gro+t& #ro;ections used in t&e calculation ,-o+ling R :odfre", 5667H as cited in

/is&er et al*, 5676, #* F0*

t&e information needs of different sta'e&olders, but some #ractical difficulties s&ould be noted in o#erationalizing t&e standards? ,/is&er et al*, 5676, #* F0*

/ A a##lication to certain non(severable biological assets, suc& as gra#evines, ma" result in >false or misleading statements and a reduction in trusting t&e #resentation of relevant financial information? ,/is&er et al*, 5676, #* F0* /or man" assets and obligations assessed b" / A, mar'et #rices are not available ,Buzmina, 566D0* Problems of mat&ematical calculations of &"#ot&etical mar'et #rices ,fair value0 ,Buzmina, 566D0* %&e accountants face t&e #roblem of defining t&e mar'et values +&at e)actl" is itM -efining t&e mar'et value is sub;ective to a certain e)tent ,-ziTuma, 56660*

Note. Source: %&e aut&ors3 o+n stud" based on s"stematised researc&ers3 o#inions*

According to Bradbur" ,566JH as cited in Bonaci R Strou&al, 56770:

1t is #ossible t&at re#lacement cost is a better measurement met&od on some dimensions, de#rival value is better on ot&er dimensions, and even &istorical cost is better on certain dimensions* %&us, it is still #ossible for fair value accounting to be, on average, t&e best* ,#* 7A0

%a'ing into account t&at none of t&e #reviousl" offered met&ods can be a##lied +it&out caution, t&e

aut&ors offer an alternative met&od for biological asset evaluation, namel", t&e discounted cas& flo+ ,-./0 met&od* Biological assets, for instance, a cattle &erd, are a long(term investment +it& an aim to gain #rofits in t&e future* %&e asset value is closel" connected +it& future revenues from t&e use of t&is asset* /rom t&is #oint of vie+, it ma" be considered as an investment #ro;ect* S#ecific #ro;ect evaluation met&ods e)ist for t&is #ur#ose, for instance, 4P , internal rate of return ,1RR0, modified 1RR ,M1RR0, and t&e #ro;ect value indicators are lin'ed to t&e #ro;ect revenues ,Revenues s&ould e)ceed t&e cost of t&e #ro;ect0* Bot& 2uantitative and 2ualitative indicators are used for t&e #ro;ect evaluation* Uuantitative indicators reflect #ro;ect e)#enses and e)#ected income in absolute terms, suc& as t&e mil' "ield #er "ear, feed costs, t&e number of units, veterinar" e)#enses, etc** %&ese criteria can be easil" set, tested, and evaluated* Uualitative criteria define t&e #ro;ect 2ualit" #arameters, suc& as t&e selection of a ne+ breed, etc** /or testing t&eir fulfilment, one needs more com#licated evaluation met&ods, for instance, observations, e)#ert evaluation, and testing* Recent findings in financial economics em#&asize t&e gro+ing role of cas& flo+ measures in com#an" valuation models and assessment of t&e financial #osition of an enter#rise* :iven t&e measurement #roblems in accrual accounting, more and more investors and ot&er users of financial statements are beginning to focus on com#an" cas& flo+s instead of earnings of a firm ,Subatnie's, 56680* /uture cas& flo+ of biological assets ma" be mat&ematicall" de#icted in t&e follo+ing +a" ,see %able 80: .as& flo+ stream from investment is indicated as Ft in time t N 6, 7, 5*** (, +&ere t&e e)#enses at t&e beginning are: F6 V 6* %able 8 Future as# Flow of Biological Assets
Biological asset t"#e 6 7 5 ************ ( .attle &erd F6 F7 F5 *************** F( Note. Source: %&e aut&ors3 o+n stud"*

4e+ Wealand and Australian accounting bodies +ere unified in t&eir belief t&at certain agricultural assets ,e*g*, livestoc'0 s&ould be valued at t&eir net current value* !nder#inning t&e c&oice of net current value is a vie+ t&at it #rovides more relevant information to t&e #roducers, farm advisers, and ot&er relevant users ,/is&er et al*, 56760* %&e 1AS F7 re2uirements allo+ using -./ met&od for biological assets assessment in some situations, and annual accounts la+ allo+s using t&is met&od for assessment of financial instruments ,1nternational Accounting Standards .ommittee, 5666H Su#reme .ouncil of Re#ublic of $atvia, 7AA5a0* Broad a##lication of cas& flo+ is #ossible in ascertaining t&e sources and uses of cas&, e)#laining t&e difference bet+een earnings and cas& c&anges, evaluating a com#an"3s abilit" to settle debts and #a" dividends, and #redicting a com#an"3s future cas& flo+ ,Subatnie's, 56680* %&e abovementioned investment evaluation met&ods re2uire c&oosing a relevant discount rate, +&ic& ma" be inter#reted as sun' ca#ital cost #ossibilities* -iscount rate ma" be based u#on government bond "ields in t&e investment #eriod as +ell as on t&e #ro;ect ris' degree* %&e c&ief ris's for biological assets in t&e dair" farming sector, for instance, a cattle &erd, are diseases, insects, etc** %&e main disadvantages of t&e abovementioned met&ods are uncertaint" of cas& flo+ #ro;ections and isolation of t&e model variables* 1t ma" &a##en to be im#ossible to affect t&e most sensitive variables against 4P * %&ese met&ods do not anal"se t&e interactions among elements of a s"stem +it&in time* %&e economic crisis and its conse2uences do not allo+ using t&e traditional statistical and economic forecasting met&ods +&ic& cannot #rovide ade2uate evaluation of t&e future #rocesses*

Ambiguous circumstances re2uire finding #rinci#all" ne+ met&ods a##roac&es +&ere statisticall" uncertain relations&i#s &ave a minor role* 1n suc& conditions, t&e role of e)#ert met&ods increases, +&ile for totall" obscure circumstances, one of t&e actual +or'ing met&ods is s"stem d"namics ,S'ribans, 56760* %&e s"stem d"namics met&od &as become a modern ever"da" a##roac& to find business #roblem solutions* S"stem d"namics is one of researc& directions of s"stems +&ic& anal"ze a s"stem3s be&aviour +it&in time de#ending on t&e structure of t&e s"stem3s elements and t&eir interactions, including cause and effect relations&i#s, reci#rocal lin's, reaction time to e)#osure, etc** Economic s"stem d"namics e)#lores t&e aggregate of economic relations&i#s affecting t&e ob;ect b" a##l"ing relations&i#s3 mat&ematical e2uations, calculation algorit&ms, and s#ecial com#uter #rograms for simulation modelling* %&e main tas' of t&e s"stem d"namics met&od is to reflect t&e real relations&i#s in t&e model b" imitating be&aviours of t&e economic ob;ect* %&e ne)t ste# after creating t&e model is an e)#eriment +it& t&e &el# of t&e model and anal"sis of t&e results ,S'ribans, 566J0* %&e s"stem d"namics met&od +as created and develo#ed b" <* /orrester in t&e end of t&e #revious centur"* .urrentl", t&e most #o#ular boo' on s"stem d"namics is Business )ynamics: *ystems (#inking and "odelling b" Sterman ,56660* One of t&e first to offer t&e s"stem d"namics model onto t&e mar'et of innovations and ne+ #roduct introduction +as /ran' Bass in 7ADA ,Bass diffusion model ,B-M00* .urrentl", t&ere are man" modifications of t&is model for mar'et investigations* S"stem d"namics soft+are is #art of decision(su##ort grou# #rograms, e*g*, Stella, 1%&in', Studio, ensim, etc** %&e most recommended #rograms for entre#reneurs&i# are Stella and 1%&in'* 1n furt&er researc&, t&e aut&ors +ill ;ustif" t&e #ossibilities of s"stem d"namics for biological assets evaluation, develo# a model, ma'e e)#eriments, and carr" out an anal"sis* :rain cro#s and mil' are definitel" t&e most im#ortant $atvian agricultural #roducts* %&erefore, t&e e)#eriment +ill be carried out in assessment of biological assets of a dair" farming com#an"* %&e main advantages of t&e #ro#osed met&od are several de#endent variables, e*g*, energ" #rice, land ta), asset life e)#ectanc", #roductivit", breed, mil' #urc&ase #rice, b"(#roducts, and related #roducts* B" c&anging one or several mutuall" de#endent variables or #arameters, it is #ossible to simulate different situations, +&ic& is a great advantage com#ared +it& t&e -./ met&od*

Conclusions
Anal"sing t&e normative legislation for #re#aring financial statements of agricultural enter#rises, #rior researc&es, and e)#ert #ublications regarding assessment as#ects of biological assets, t&e aut&ors &ave identified t&e follo+ing: ,70 1n order to state trut&ful economic o#eration of an agricultural enter#rise, com#are t&e financial indicators to t&ose of com#etitors and average sector indicators, discover unta##ed #otential and occurred mista'es, and evaluate #otential ris's for all t&ese, t&e 2ualit" of information included in t&e annual re#ort is of vital im#ortanceH ,50 %&e c&oice and a##lication of evaluation met&ods of biological assets and #roducts obtained from t&em give different values in several #rofit and loss account items leading to different results in anal"ses of financial statements, com#an" value, and ta) account from economic activities* 1t leaves an im#act on o#erational and strategic managerial decisions and statistical data of t&e state agricultural sectorH

,K0 According to #arameters of economic activities, t&e com#anies registered in $atvia are sub;ected to different normative legislation and standards regarding t&e assessment of biological assets* %&e standards do not e)#licitl" contain #rovisions for t&e evaluation of ob;ects or differ in re2uirements and a##lication of accounting #rinci#les in agricultural com#anies* %&erefore, financial statements are not com#arable, and e)ternal users of t&e financial statements on an international scale ma" misinter#ret t&e information given in a $atvian com#an" and t&us be misledH ,F0 Annual accounts la+ allo+s assessment of biological assets using bot& models* %&us, financial re#orts of enter#rises of agricultural sector are not com#arable* %&e assessment criteria set b" t&e annual accounts la+ do not #rovide all #ossible situationsH ,O0 %&ere is a discre#anc" among t&e re2uirements of normative documents regarding stoc' assessment #rocedures* .onse2uentl", users of t&e e)ternal financial re#ort at t&e international level can be misled b" t&e information re#orted in t&e $atvian com#an"3s financial statementH ,D0 $atvian accounting regulations do not al+a"s give e)#licit directions, and 1AS is considered as t&e best #ractice to find directions or solutionsH ,80 A c&ange from t&e cost account met&od for assessing biological assets to t&e fair value met&od ma" be evaluated #ositivel"* Eo+ever, researc&ers &ave found man" im#erfections in t&is met&od as +ellH ,J0 %a'ing into account t&at none of t&e current met&ods can be a##lied +it&out caution, t&e aut&ors offer t&e -./ met&od as an alternativeH ,A0 Recent findings in financial economics em#&asise t&e gro+ing role of cas& flo+ measures in com#an" valuation models and in assessment of t&e financial #osition of an enter#rise and anal"sis of t&e economic condition* %&e main disadvantages of t&e abovementioned met&ods are: uncertaint" of cas& flo+ #ro;ections and isolation of t&e model variables* 1t ma" &a##en to be im#ossible to affect t&e most sensitive variables against 4P * %&ese met&ods do not anal"se t&e interactions among elements in a s"stem +it&in timeH ,760 %&e economic crisis and its conse2uences do not allo+ using t&e traditional statistical and economic forecasting met&ods +&ic& cannot #rovide ade2uate evaluation of t&e future #rocessesH ,770 Ambiguous circumstances re2uire finding #rinci#all" ne+ met&odsa##roac&es +&ere statisticall" uncertain relations&i#s &ave a minor role* 1n suc& conditions, t&e role of e)#ert met&ods increases, +&ile for totall" obscure circumstances, one of t&e actual +or'ing met&ods is s"stem d"namics*

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