Buildings on a farm balance sheet are any type of physical structure that is used as part of the farm or ranch operation. Any modifications or upgrades to enhance the buildings are known as improvements. Buildings and improvement represent a major capital expenditure for most agriculture operations and including these assets on the balance sheet is crucial to getting a full understanding of the financial postion of the farm.
In This Section
What are Buildings & Improvements?
Buildings and improvements on a farm balance sheet typically refer to the physical structures and enhancements on the farm property that contribute to its operations. These assets are categorized under property, plant, and equipment (PP&E) or fixed assets.
On a farm balance sheet, buildings and improvements are typically reported at their historical cost, which includes all expenditures necessary to acquire, construct, or improve the assets to make them operational. Over time, these assets may be depreciated to reflect their gradual wear and tear or obsolescence. Depreciation expenses associated with buildings and improvements are often recorded on the income statement to allocate the cost of these assets over their estimated useful lives.
Types & Examples of Buildings & Improvements
Buildings
Buildings can include any physical structure which is a part of the farming operation. There can be significant variation depending on the type of farming operation, however, common examples include:
- Barns,
- Sheds
- Silos
- Grain Bins
- Storage facilities
- Offices
- Equipment Garages
- Farmhouses (typical for small and family owned farms)
Buildings are considered long-term assets and are expected to provide benefits to the farm over several years.
Improvements
Improvements on a farm can encompass enhancements made to the land or existing structures to increase their utility, efficiency, or value.
Examples of improvements include:
- Land clearing
- Grading
- Drainage installation
- Fencing
- Irrigation systems
- Landscaping
- Renovations to existing buildins
- Additions or expansions to existing buildings.
Buildings & Improvements on the Balance Sheet
Buildings and improvements most often have a useful economic life of more than a year. As such, these are classified as long-term assets on the balance sheet. Buildings and improvements are sometimes grouped under the term Property, Plant & Equipment, however, this is less common.
Purpose of Buildings & Improvements
Buildings and improvements are vital assets for farmers, playing a crucial role in the efficiency, productivity, and overall success of agricultural operations. These structures provide necessary facilities for various farming activities, including housing livestock, storing equipment, and protecting crops. Barns, for instance, are essential for sheltering animals, ensuring they are safe and healthy. Storage buildings keep valuable equipment and machinery secure from weather-related damage. Grain silos and other storage facilities protect harvested crops, preserving their quality and preventing spoilage.
Improvements on a farm, such as irrigation systems, fencing, and roadways, enhance the functionality and productivity of the land. An efficient irrigation system ensures crops receive adequate water, boosting yields and promoting healthy growth. Fencing is crucial for managing livestock, keeping them contained, and protecting them from predators. Well-maintained roads and pathways make it easier to move equipment and transport goods across the farm, saving time and reducing wear and tear on vehicles.
Including buildings and improvements on a farm balance sheet is important for several reasons. First, it provides a clear picture of the farm’s assets, which is essential for financial planning and decision-making. Knowing the value of buildings and improvements helps farmers manage their resources effectively and plan for future investments or upgrades. Second, these assets contribute to the farm’s overall value and can be used as collateral when seeking loans or financing. This financial leverage can be crucial for expanding operations, purchasing new equipment, or covering unexpected expenses.
Overall, buildings and improvements are foundational elements that support the daily operations and long-term sustainability of a farm. By including them on the balance sheet, farmers can better understand their financial position, make informed decisions, and ensure the continued growth and success of their agricultural endeavors.
How to Record Buildings & Improvements on a Balance Sheet
The total value of all buildings and improvements can be totaled and added into a single account on the balance sheet.
The key is to use the appropriate valuation method that makes sense when valuing the buildings and improvements.
On balance sheets, there are two common approaches to valuing buildings and improvements. These are the Historic Cost Method and the Fair Value Method. The historic cost method is the more common used approach. Below is a brief overview of how both approaches work:
Historic Cost Method
Buildings and improvements on a farm balance sheet are typically valued at their historical cost. Historical cost refers to the actual amount of money paid or incurred to acquire, construct, or improve the buildings and improvements on the farm property. Historic cost includes all direct costs associated with the acquisition or construction, such as purchase price, construction costs, labor expenses, materials, permits, and any other costs necessary to make the assets operational.
Once the buildings and improvements are recorded at historical cost on the balance sheet, they may be subject to depreciation. Depreciation is the process of allocating the cost of the assets over their estimated useful lives. Different depreciation methods may be used, such as straight-line depreciation, accelerated depreciation, or units of production depreciation, depending on factors such as regulatory requirements, tax considerations, and management preferences.
The purpose of depreciating buildings and improvements is to reflect their gradual consumption, wear and tear, or obsolescence over time. Depreciation expenses associated with these assets are typically recorded on the income statement, reducing the farm’s net income and reflecting the cost of using these assets in the farm’s operations.
Fair Value Method
It’s important to note that while historical cost is the most common method for valuing buildings and improvements on a farm balance sheet, and alternative approach is the fair value accounting or revaluation accounting.
Fair value for buildings and improvements refers to the estimated market value of these assets if they were to be sold in an open and competitive market. Fair value represents the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
Determining the fair value of buildings and improvements involves assessing various factors, including:
- Market Conditions – Consideration of current market conditions, including supply and demand dynamics, prevailing interest rates, and economic indicators that may affect the value of real estate.
- Comparable Sales – Analysis of recent sales of similar properties in the same geographic area to establish a benchmark for the fair value of buildings and improvements.
- Replacement Cost – Evaluation of the cost to replace or reproduce the buildings and improvements, considering factors such as construction materials, labor costs, and current building codes and regulations.
- Income Approach – Calculation of the present value of future cash flows generated by the buildings and improvements, such as rental income or agricultural production, discounted at an appropriate rate.
- Cost Approach – Assessment of the historical cost of the assets, adjusted for factors such as depreciation, appreciation, and changes in market conditions since the original acquisition or construction.
While fair value accounting provides a more current and market-based measure of asset value compared to historical cost, it may involve more subjective judgments and be subject to greater volatility due to changes in market conditions. Additionally, fair value assessments may require input from qualified appraisers or valuation experts to ensure accuracy and reliability. It is noteworthy, however, that these methods are less common in agricultural settings and are typically more complex to implement.
Exclusions from Buildings & Improvements on the Balance Sheet
When listing buildings and improvements on a balance sheet, it’s important to accurately reflect only the assets that truly meet the criteria for capitalization. Common exclusions from the “Buildings and Improvements” category on a balance sheet include:
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Personal Residences: If the farmer’s personal home is on the farm property but not used for business purposes, it is typically excluded from the farm’s business balance sheet.
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Temporary Structures: Structures that are not intended to be permanent, such as temporary storage tents or movable shelters, are often excluded because they do not have a long-term useful life.
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Repairs and Maintenance: Routine repairs and maintenance costs that do not add significant value or extend the life of the buildings are generally expensed rather than capitalized as improvements.
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Small-Scale Improvements: Minor improvements that do not substantially increase the value or useful life of the building, such as painting or small interior modifications, are usually expensed.
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Non-Farm Business Structures: Buildings used for other businesses unrelated to the farming operations are excluded from the farm balance sheet. These might be listed on a separate balance sheet if the farm operates multiple businesses.
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Leasehold Improvements: If the farm operates on leased land, improvements made to the property may be recorded separately as leasehold improvements rather than under buildings and improvements, depending on the lease terms and accounting policies.
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Fully Depreciated Buildings: While these buildings may still be in use, fully depreciated buildings may not be listed at full value on the balance sheet. Instead, they might be recorded with a note indicating their fully depreciated status.
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Landscaping: General landscaping costs that do not significantly enhance the value or functionality of the farm buildings are typically excluded.
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Agricultural Equipment and Machinery: These are categorized separately from buildings and improvements. Items like irrigation systems, although improving land utility, are often listed under equipment rather than structural improvements.
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Infrastructure Not Owned: Infrastructure improvements not owned by the farm, such as public road access improvements or utilities infrastructure provided by third parties, are excluded from the balance sheet.
Excluding these items ensures that the balance sheet accurately reflects the farm’s long-term, capitalized assets, providing a true picture of the farm’s financial position and asset value. This accuracy is crucial for financial planning, obtaining financing, and managing the farm’s resources effectively.
Frequently Asked Questions
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