Livestock Accounting 101 is an important framework to know, but the real work is implementing these concepts in practice. In this section we will discuss the valuation methods available and provide both tools and examples to implement the Base Value method.
According to the FFSC 2024 Guidelines there are “two central issues” in determining balance sheet values for raised breeding livestock: (1) Correctly valuing the asset and (2) understanding how to adjust the managerial farm income statement (different from the taxable income). The two challenges are intertwined.
Let’s think about a cow-calf operation that begins the year with 50 yearlings that have been designated to be kept as replacement heifers. The operators spend all year raising those yearlings (with none sold or lost), and at the end of the year, the yearlings are now 50 bred heifers. On a tax basis, this part of the business hasn’t made any money, but real value has been created. The expenses to raise those yearlings are not regular expenses – it's an investment in future profits. This is the reason we need to value the difference between a yearling and a bred heifer, to understand managerial income.
Valuation Methods
There are two broadly accepted ways to value your raised livestock.
The Full-Cost Absorption method is the most robust. It entails tracking all expenses by specific animals and accruing it into the balance sheet (and not deducting expenses in the period they were incurred). Doing this method correctly can be complex and time consuming – while it is useful, it will be covered more at length in a future article.
The Base Value method is easier if you are just getting started. This method involves identifying the major categories of maturation your livestock goes through and estimating an average cost to raise the animal to each point in your breeding process. The Texas A&M extension office has good resources to help define and think through animal categories as well as other key terms (see here).
For example, the balance sheet on a base values basis for a cow-calf operation at the beginning of the year might look like:
Category | Base Value | Headcount | Balance Sheet |
Calves | $250 | 0 | $0 |
Replacement Heifer | $650 | 50 | $32,500 |
Bred Heifer | $925 | 25 | $23,125 |
Raised Cow | $1,000 | 125 | $125,000 |
An important note to the above is that you will see we have chosen to value calves in this exercise despite the fact that they are not all going to be kept as part of the breeding stock. The purpose of doing managerial accounting is to be flexible and provide relevant insights. If you are a cow-calf operation you surely care about the value of the calves you have in inventory, so it makes sense to track them. The fact that you are including some calf inventory that may be held for resale on the balance sheet can be explained to loan officers or other financial professionals.
Tracking Livestock & Implementing the Base Value Method
You can read more about implementing Inventory tracking in Ambrook in the inventory section here.
Animal Categories as Enterprises on Ambrook
Ambrook has built a concept called enterprise tags that you can set up to correspond to the animal categories you are tracking as part of your managerial bookkeeping. Doing this makes it easy to allocate your overhead expenses by your different animal categories, which you can combine with changes in these asset values to get a wholistic managerial income statement.
One of the reasons it’s worth doing this process is that you want to be able to see a useful P&L statement for your operation even during the parts of the year where there isn’t a ton of cash basis activity going on. Our next article will walk you through the way the managerial entries impact your Managerial Financial Statements.