When one thinks of a farm, the image of farm land comes immediately to mind.
Real estate on a farm balance sheet refers to the value of land. In many cases, this can include the value of the buildings and fixed property attached to the land as well.
In This Section
What is Farm Land?
Farm land is one of the most important assets for a farmer. It is the foundation upon which all farming activities take place, from growing crops to raising livestock. The quality, size, and location of the land can significantly influence the productivity and profitability of a farm. Fertile, well-managed land can yield abundant crops and support healthy livestock, making it a valuable resource for any agricultural operation.
On a balance sheet, farm land is listed as a long-term asset. This is because land is a permanent asset that does not depreciate over time like buildings or equipment. Instead, it often appreciates in value. The value of the farm land on the balance sheet reflects its purchase cost or its current market value, depending on the accounting practices used. Including farm land on the balance sheet provides a clear picture of the farm’s total assets, which is essential for financial planning and management.
Farm land’s inclusion on the balance sheet also has significant implications for a farmer’s financial health and decision-making. It can be used as collateral for loans, giving farmers access to capital needed for expansion, equipment purchases, or operational expenses. The value of the land can also impact the overall net worth of the farm, which is important for attracting investors or partners. By accurately recording the value of the land, farmers can better understand their financial position and make informed decisions about their business.
Types & Examples of Farm Land
Examples of farm real estate includes:
- Farmland – This is the primary piece of real estate on a farm, consisting of the land used for cultivating crops, grazing livestock, or other agricultural activities.
- Farmhouses – These are residential buildings located on the farm property where the farm owner, farm manager, or farm workers may reside.
- Barns and Outbuildings – Barns, sheds, silos, and other structures used for storing equipment, housing livestock, or processing agricultural products are essential components of farm real estate.
- Storage Facilities – Grain silos, warehouses, and other storage structures used for storing harvested crops, seeds, fertilizers, and equipment are part of farm real estate.
- Irrigation Infrastructure – Irrigation systems, including pumps, pipes, and reservoirs, may be considered real estate assets if they are permanently installed on the land.
- Fencing and Infrastructure – Fencing, gates, drainage systems, and other infrastructure improvements made to the land to enhance its agricultural productivity are also included in farm real estate.
- Farm Roads and Access – Roads, driveways, and access points on the farm property may also be considered part of the real estate assets.
These examples represent the physical assets that contribute to the agricultural operations of the farm and are typically recorded as part of the real estate holdings on the farm’s balance sheet.
Farm Land & Real Estate on the Balance Sheet
Farm land and real estate has an economic lifespan of several years. As such, farm land and real estate is almost always considered a long-term asset on the balance sheet.
Purpose of Farm Real Estate
Farm real estate is crucial for farmers because it serves as the foundation of their agricultural operations. This real estate includes the land used for growing crops, raising livestock, and any buildings or infrastructure on the property. The quality and size of farm real estate directly impact a farm’s productivity and profitability. Fertile land with good access to water and appropriate climate conditions can lead to higher yields and better-quality produce. Additionally, well-maintained buildings and infrastructure, such as barns, silos, and irrigation systems, are essential for efficient farm management and operation.
Including farm real estate on a balance sheet is important for several reasons. Firstly, it provides a clear picture of the farm’s total assets. Real estate is a significant part of a farm’s asset base, often representing a large portion of its value. This helps farmers understand their financial health and make informed decisions about investments, expansions, or improvements. Secondly, farm real estate can be used as collateral for loans. Lenders are more likely to provide financing when they can secure the loan against valuable real estate. This access to capital is essential for purchasing equipment, buying additional land, or covering operational costs.
Moreover, accurately recording farm real estate on the balance sheet reflects the farm’s long-term investment in its future. Unlike other assets that may depreciate over time, land generally appreciates in value, contributing to the farm’s overall net worth. This appreciation can provide a financial cushion, offering stability and security for the farmer. By including farm real estate on the balance sheet, farmers can ensure they have a comprehensive view of their assets, aiding in strategic planning and financial management. This transparency is also beneficial when attracting investors or partners, as it clearly demonstrates the farm’s asset strength and potential for growth.
How to Record Farm Real Estate on Balance Sheet
On balance sheets, there are two common approaches to valuing farm real estate. 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
When land is acquired, it is initially recorded on the balance sheet at its purchase price, which is its historical cost. This cost includes the purchase price itself, as well as any associated costs such as legal fees, surveying fees, and closing costs. Over time, the historical cost of the land may be adjusted for factors such as improvements made to the land or changes in its condition.
It is noteworthy that buildings and improvements on the farm land may be depreciated, whereas land does not typically depreciate. See our guide on buildings and improvements to learn more about the depreciation aspects of this asset.
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 real estate 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 real estate 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.
It’s important to note that the method of valuation used for farm land may depend on factors such as accounting standards, regulatory requirements, and the preferences of the farm owner or management. Additionally, fluctuations in land values may be disclosed in the footnotes to the balance sheet or in accompanying financial statements to provide additional context to stakeholders.
Exclusions from Farm Real Estate on the Balance Sheet
Common exclusions from farm real estate on a balance sheet typically include items that do not meet the criteria for capitalization as real estate or are categorized differently. These exclusions help ensure accurate financial reporting. Here are some of the common exclusions:
- Personal Residences: If the farmer’s personal home is on the farm property but is not used for business purposes, it is usually excluded from the farm’s business balance sheet.
- Temporary Structures: Structures that are not intended to be permanent, such as temporary sheds or portable buildings, are often excluded because they do not have a long-term useful life.
- Leasehold Improvements: Improvements made to leased land are generally recorded separately as leasehold improvements and not included as farm real estate on the balance sheet.
- Equipment and Machinery: Items such as tractors, irrigation systems, and other machinery are categorized as equipment and machinery rather than real estate, even though they may be integral to farming operations.
- Non-Farm Business Properties: Real estate used for other businesses that are not related to the farm operations are excluded from the farm real estate category. They might be listed separately if the farm operates multiple businesses.
- Land Not Used for Farming: Land that is not used for farming purposes, such as vacant lots or undeveloped property not intended for agricultural use, is typically excluded from the farm real estate category.
- Personal Property: Personal property items, such as vehicles used for non-farming purposes or personal effects stored on the farm, are not included in farm real estate.
- Fully Depreciated Structures: While fully depreciated buildings may still be in use, they might not be included at full value on the balance sheet, depending on the accounting policies.
- Environmental Liabilities: Any liabilities or costs associated with environmental remediation or compliance may not be included as real estate but rather recorded as separate liabilities.
- Land Improvements: Certain land improvements, such as roads, fencing, and landscaping, may be categorized separately from real estate depending on how they are accounted for and their impact on the land’s usability.
By excluding these items from the farm real estate category on the balance sheet, farmers can provide a more accurate representation of their capital assets related to agricultural operations. This clarity is essential for financial planning, obtaining financing, and managing the farm’s resources effectively.
Frequently Asked Questions
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