Accounting for Biological Assets and the Cost of Debt

ABSTRACT

Firms engaged in agriculture generate revenue from biological assets that manifest in the cultivation of bearer fruits and nuts, the tilling of crops, and the production of livestock and forestry. We investigate whether firms' cost of debt is associated with the measurement method they use to account for their biological assets. We find that the cost of debt is higher for firms using the fair value method of accounting for their biological assets relative to firms using historical cost. However, the positive association between the cost of debt and fair value is driven by firms that transform bearer plants, i.e., living plants that ultimately bear produce for more than one year. We also document that fair value combined with auditor attested IFRS use results in a lower cost of debt for firms transforming other types of biological assets. Our cross-country study focuses on a class of assets previously unexplored, and contributes to the literature that examines the consequences of fair value accounting for financial statement users.

Keywords: biological assets, fair value, historical cost, IFRS, cost of debt

Article Citation:
Abbie Daly and Hollis A. Skaife (2016) Accounting for Biological Assets and the Cost of Debt. Journal of International Accounting Research: Summer, Vol. 15, No. 2, pp. 31-47.