Urban Vertical Farming Investment Accounting: Valuation and Disclosure
of Investments in Vertical Farming Systems for Sustainable Urban
Agriculture.
Introduction
Vertical farming refers to the practice of producing food crops in vertically stacked layers or
inclined surfaces with the use of controlled-environment agriculture technology including
artificial lighting. The objective of vertical farming is to grow crops in compact urban
settings at much higher yields and optimization compared to traditional open field farming
techniques. There has been rising interest in vertical farming as a means to address issues
related to land scarcity, urbanization, food security and environmental sustainability.
Accounting for investments in vertical farming systems presents unique challenges due to the
convergence of farming and technology. Traditional farming is based on land as the primary
asset whereas vertical farming relies on capital intensive technology systems. This requires
accounting standards and norms to appropriately capture the nature of vertical farming assets
and develop valuation and disclosure methods keeping in view the convergence of agriculture
and technology.
This paper aims to analyze key issues around investment accounting, valuation and disclosure
of investments in vertical farming systems from the perspective of companies investing in
this emerging space of sustainable urban agriculture. The paper evaluates relevant accounting
concepts, standards and methods that can provide guidance on appropriate accounting
treatment for vertical farming investments and disclosure of related financial information.
Accounting Concepts and Standards for Vertical Farming Assets
Vertical farming assets can be understood as a combination of tangible and intangible assets
forming a production system for growing crops in controlled environment vertical farms
located within urban settings. Some key accounting concepts and standards relevant for
valuing and accounting vertical farming investments include:
Tangible Assets - The physical infrastructure of a vertical farm including building structures,
lighting systems, hydroponic/aeroponic grow towers, irrigation systems, climate control
equipment etc. would constitute tangible assets for accounting purposes. These assets need to
be recognized initially at cost and subjected to depreciation over their estimated useful lives
as per prevailing accounting standards similar to other production equipment.
Intangible Assets - Significant elements of vertical farming technology like proprietary
lighting designs, sensor networks, automated processes, software, data models and algorithms
developed for optimizing yields would qualify as intangible assets. Internally developed
intangibles need to be capitalized as assets if they meet definability, separability, and
reliability criteria as per IAS 38. Externally acquired intangibles are recognized at cost.
Intangible assets also need to be amortized over their estimated useful lives.
Research and Development (R&D)
Considerable investments are often required in R&D to develop new
vertical farming technologies, refine designs and validate commercial
operations. R&D expenditure in the research phase needs to be expensed
as per IAS 38, whereas development costs meeting 定义,可行性, usefulness
criteria can be capitalized as intangible assets.
Right-of-use Assets - If farms are operated from leased buildings or land, corresponding
right-of-use assets as per IFRS 16 need to be recognized on the balance sheet along with
corresponding lease liabilities.
Agricultural Produce - Vertical farms grow a variety of food crops which qualify as
biological assets as per IAS 41. At harvest, agricultural produce needs to be measured at fair
value less costs to sell. Changes in fair value between periods are recognized in profit or loss.
Impairment - Assets deployed in vertical farms need to be tested periodically for impairment
as per IAS 36 whenever indications of impairment exist. Recoverable amounts are estimated
and impairment losses recognized promptly.
Government Grants - Funding and tax incentives received from government bodies to
encourage innovations and commercialization of vertical farming technologies need to be
accounted as per IAS 20 by either the income approach or as deferred income liability.
The above accounting concepts and standards provide a broad framework for appropriately
recognizing, measuring, presenting and disclosing vertical farming assets and investments on
the balance sheet and income statement based on their nature and characteristics aligned with
capitalized investments in other high-technology sectors.
Methods for Initial Valuation and Subsequent Measurement
There are several accepted valuation methods that can be adopted to arrive at reasonable
estimates of fair values for various vertical farming assets both at the time of initial
capitalization as well as for subsequent impairment testing and revaluation purposes. Some of
the commonly used valuation approaches include:
Cost Method - For valuing recently acquired tangible assets based on amounts paid to
purchase or construct the assets. It provides an objective measure of fair value but does not
capture changes in market conditions or asset performance over time.
Income Approach - Discounted cash flow (DCF) models valuing expected future cash flows
discounted at a rate reflecting risks. Can be used to value intangibles like technologies,
licenses etc. Requires significant assumptions and projections.
Market Approach - Guideline public company (GPC) method and guideline transaction (GT)
method look at market multiples observed for comparable assets in recent transactions or
public companies in the same industry after making necessary quantitative and qualitative
adjustments. Provides external validation but comparability can be challenging for emerging
sectors like vertical farming.
Relief from Royalty Method - Estimates value of intangible asset by calculating net present
value of projected cost savings from owning the asset instead of paying royalties. Commonly
used for technologies and brands. Depends on reliable projections.
Replacement Cost Method - Estimates value based on costs that would be incurred to replace
the functionality provided by the specific asset. Relevant for unique
manufacturing/processing facilities and equipment requiring specialized skills.
For subsequent impairment testing and revaluations, fair values estimated using the above
methods serve as benchmark for comparison with carrying values. Going concern
assumptions are an important consideration given long investment horizons in agriculture.
Disclosures on key assumptions, sensitivity of estimates to changes, and reconciliation to
carrying values also provide transparency.
Disclosure Requirements for Vertical Farming Investments
Appropriate disclosures around vertical farming investments are important to enable users of
financial statements understand the extent, nature and risks around such unconventional
agricultural business models. Some specific disclosure items that would be relevant as per
prevailing accounting standards include:
Accounting Policies - Significant accounting policies adopted for classifying, recognizing,
measuring and reporting vertical farming assets, biological assets, impairment testing
methodology etc.
Classes of Assets - Classes of tangible and intangible assets deployed in vertical farming
operations segregated based on nature and use along with useful lives adopted for
depreciation/amortization.
Key Assumptions - Critical assumptions used in valuations and impairment testing regarding
growth rates, inflation, discount rates, yield projections, commodity prices etc. with
sensitivity analysis.
Capitalized Costs - Expenditure capitalized as intangible assets during the period along with
rationale for meeting recognition criteria. R&D projects still in progress.
Impairment Losses - Amount of any impairment losses recognized or reversed during the
period, assets/cash generating units affected, key reasons and quantitative disclosures as per
IAS 36.
Biological Assets - Reconciliation of changes in biological assets carried at fair value
including harvests, additions, fair value adjustments etc. Basis of fair valuation
determination.
Right-of-use Assets - Classes of leased assets recognized on balance sheet along with details
of lease liabilities, maturity analysis, amounts recognized in P&L etc.
Funding/Incentives - Details of any special government/industry funding or tax incentives
received including recognition and presentation.
Risk Factors - Technology, market and operational risks specific to vertical farming business
including those arising from specialized nature of assets, production processes, dependencies
etc.
The above disclosures provide transparency on accounting policies, estimates involved,
nature and characteristics of vertical farming investments from both qualitative and
quantitative perspectives in line with principles of relevance, reliability and comparability as
per conceptual framework. This assists financial statement users in better understanding risks
and return prospects of such unconventional agricultural ventures.
Convergence with Sustainability Reporting Standards
With sustainability goals forming core objectives of vertical farming, there is opportunity for
convergence with emerging sustainability reporting standards that highlight environmental
and social priorities along with financial performance. Key frameworksl applicable in this
context include:
Global Reporting Initiative (GRI) - Disclosures on resource consumption metrics, waste
generation, emission reductions from indoor farming, energy/water usage intensity, organic
certification programmes etc.
Sustainability Accounting Standards Board (SASB) - Industry specific standards for
“Agricultural Products” sector covering metrics on land use, working conditions, food safety
issues etc.
Task Force on Climate-related Financial Disclosures (TCFD) - Forward looking information
on climate risks to operations and strategies to mitigate impacts of extreme weather events
through controlled indoor environments.
International Integrated Reporting Council (IIRC) - Integrated reporting bringing together
material sustainability impacts, dependencies and outcomes with financial performance,
business model and governance aspects.
Such sustainability reporting expands disclosure horizons beyond traditional accounting
statements. It helps evaluate non-financial capitals deployed and generated through vertical
farming operations, long term resilience, environmental stewardship and social goals
achievement. Voluntary adoption of relevant frameworks can demonstrate commitment to
sustainability priorities being core drivers of this emerging industry sector.
Challenges and Future Outlook
While the convergence of farming and technology opens new avenues for sustainable urban
food production, it also presents challenges from accounting and reporting perspectives:
Specialized Nature of Assets - Valuation complexities arise due to lack of established market
comparables for unique controlled environment agriculture assets.
Long Investment and Payback Periods - Traditional accounting metrics may not fully capture
long term value creation unfolding over decades as in conventional farming.
Technology Obsolescence Risks - Rapid innovations may render existing systems outdated
requiring revaluation adjustments to reflect fair values.
Subjective Assumptions - Key estimates involve inherent subjectivity around yield
projections, cost structures, commodity prices over extended time horizons.
Nascent State of the Industry - Evolving business models, lack of operating history and
uncertainty regarding commercial scales add estimation risks.
Lack of Specific Guidance - Existing accounting standards provide general principles but no
explicit guidelines tailored for high-tech agricultural ventures.
While experience will refine accounting practices over time, standard setters can consider
sector specific guidance addressing above challenges. Use of non-financial performance
indicators, scenario based disclosures and integrated reporting may better capture potentials
and trade-offs of shifting to a sustainability centered urban food system through vertical
farming. With supportive policy frameworks and accounting framework convergence, this
innovative field promises to redefine sustainable food production globally.
Conclusion
Accounting for vertical farming investments encompasses convergence of agriculture,
technology and environmental sustainability domains presenting both opportunities and
challenges from financial reporting perspectives. Existing accounting concepts and valuation
methods provide broad guidance if adapted judiciously to the specialized nature and long
term horizons characterizing these emerging capital intensive agricultural ventures.
Comprehensive qualitative and quantitative disclosures grounded in principles of relevance,
reliability and comparability ensure transparency around uncertainties, estimates, asset
characteristics, funding schemes, sustainability impacts and risks. Voluntary sustainability
reporting frameworks can complement mainstream financial statements in portraying the
multi-capital nature of vertical farm businesses. With refinements of practices and tailored
guidelines over time, accounting can aid informed investment decisions for transitioning to
sustainable urban food systems through innovative vertical farmingmodels.
Vertical farming refers to the practice of producing food crops in vertically stacked layers or
inclined surfaces with the use of controlled-environment agriculture technology including
artificial lighting. The objective of vertical farming is to grow crops in compact urban
settings at much higher yields and optimization compared to traditional open field farming
techniques. There has been rising interest in vertical farming as a means to address issues
related to land scarcity, urbanization, food security and environmental sustainability.
Accounting for investments in vertical farming systems presents unique challenges due to the
convergence of farming and technology. Traditional farming is based on land as the primary
asset whereas vertical farming relies on capital intensive technology systems. This requires
accounting standards and norms to appropriately capture the nature of vertical farming assets
and develop valuation and disclosure methods keeping in view the convergence of agriculture
and technology.
This paper aims to analyze key issues around investment accounting, valuation and disclosure
of investments in vertical farming systems from the perspective of companies investing in
this emerging space of sustainable urban agriculture. The paper evaluates relevant accounting
concepts, standards and methods that can provide guidance on appropriate accounting
treatment for vertical farming investments and disclosure of related financial information.
Accounting Concepts and Standards for Vertical Farming Assets
Vertical farming assets can be understood as a combination of tangible and intangible assets
forming a production system for growing crops in controlled environment vertical farms
located within urban settings. Some key accounting concepts and standards relevant for
valuing and accounting vertical farming investments include:
Tangible Assets - The physical infrastructure of a vertical farm including building structures,
lighting systems, hydroponic/aeroponic grow towers, irrigation systems, climate control
equipment etc. would constitute tangible assets for accounting purposes. These assets need to
be recognized initially at cost and subjected to depreciation over their estimated useful lives
as per prevailing accounting standards similar to other production equipment.
Intangible Assets - Significant elements of vertical farming technology like proprietary
lighting designs, sensor networks, automated processes, software, data models and algorithms
developed for optimizing yields would qualify as intangible assets. Internally developed
intangibles need to be capitalized as assets if they meet definability, separability, and
reliability criteria as per IAS 38. Externally acquired intangibles are recognized at cost.
Intangible assets also need to be amortized over their estimated useful lives.
Research and Development (R&D)
Considerable investments are often required in R&D to develop new
vertical farming technologies, refine designs and validate commercial
operations. R&D expenditure in the research phase needs to be expensed
as per IAS 38, whereas development costs meeting 定义,可行性, usefulness
criteria can be capitalized as intangible assets.
Right-of-use Assets - If farms are operated from leased buildings or land, corresponding
right-of-use assets as per IFRS 16 need to be recognized on the balance sheet along with
corresponding lease liabilities.
Agricultural Produce - Vertical farms grow a variety of food crops which qualify as
biological assets as per IAS 41. At harvest, agricultural produce needs to be measured at fair
value less costs to sell. Changes in fair value between periods are recognized in profit or loss.
Impairment - Assets deployed in vertical farms need to be tested periodically for impairment
as per IAS 36 whenever indications of impairment exist. Recoverable amounts are estimated
and impairment losses recognized promptly.
Government Grants - Funding and tax incentives received from government bodies to
encourage innovations and commercialization of vertical farming technologies need to be
accounted as per IAS 20 by either the income approach or as deferred income liability.
The above accounting concepts and standards provide a broad framework for appropriately
recognizing, measuring, presenting and disclosing vertical farming assets and investments on
the balance sheet and income statement based on their nature and characteristics aligned with
capitalized investments in other high-technology sectors.
Methods for Initial Valuation and Subsequent Measurement
There are several accepted valuation methods that can be adopted to arrive at reasonable
estimates of fair values for various vertical farming assets both at the time of initial
capitalization as well as for subsequent impairment testing and revaluation purposes. Some of
the commonly used valuation approaches include:
Cost Method - For valuing recently acquired tangible assets based on amounts paid to
purchase or construct the assets. It provides an objective measure of fair value but does not
capture changes in market conditions or asset performance over time.
Income Approach - Discounted cash flow (DCF) models valuing expected future cash flows
discounted at a rate reflecting risks. Can be used to value intangibles like technologies,
licenses etc. Requires significant assumptions and projections.
Market Approach - Guideline public company (GPC) method and guideline transaction (GT)
method look at market multiples observed for comparable assets in recent transactions or
public companies in the same industry after making necessary quantitative and qualitative
adjustments. Provides external validation but comparability can be challenging for emerging
sectors like vertical farming.
Relief from Royalty Method - Estimates value of intangible asset by calculating net present
value of projected cost savings from owning the asset instead of paying royalties. Commonly
used for technologies and brands. Depends on reliable projections.
Replacement Cost Method - Estimates value based on costs that would be incurred to replace
the functionality provided by the specific asset. Relevant for unique
manufacturing/processing facilities and equipment requiring specialized skills.
For subsequent impairment testing and revaluations, fair values estimated using the above
methods serve as benchmark for comparison with carrying values. Going concern
assumptions are an important consideration given long investment horizons in agriculture.
Disclosures on key assumptions, sensitivity of estimates to changes, and reconciliation to
carrying values also provide transparency.
Disclosure Requirements for Vertical Farming Investments
Appropriate disclosures around vertical farming investments are important to enable users of
financial statements understand the extent, nature and risks around such unconventional
agricultural business models. Some specific disclosure items that would be relevant as per
prevailing accounting standards include:
Accounting Policies - Significant accounting policies adopted for classifying, recognizing,
measuring and reporting vertical farming assets, biological assets, impairment testing
methodology etc.
Classes of Assets - Classes of tangible and intangible assets deployed in vertical farming
operations segregated based on nature and use along with useful lives adopted for
depreciation/amortization.
Key Assumptions - Critical assumptions used in valuations and impairment testing regarding
growth rates, inflation, discount rates, yield projections, commodity prices etc. with
sensitivity analysis.
Capitalized Costs - Expenditure capitalized as intangible assets during the period along with
rationale for meeting recognition criteria. R&D projects still in progress.
Impairment Losses - Amount of any impairment losses recognized or reversed during the
period, assets/cash generating units affected, key reasons and quantitative disclosures as per
IAS 36.
Biological Assets - Reconciliation of changes in biological assets carried at fair value
including harvests, additions, fair value adjustments etc. Basis of fair valuation
determination.
Right-of-use Assets - Classes of leased assets recognized on balance sheet along with details
of lease liabilities, maturity analysis, amounts recognized in P&L etc.
Funding/Incentives - Details of any special government/industry funding or tax incentives
received including recognition and presentation.
Risk Factors - Technology, market and operational risks specific to vertical farming business
including those arising from specialized nature of assets, production processes, dependencies
etc.
The above disclosures provide transparency on accounting policies, estimates involved,
nature and characteristics of vertical farming investments from both qualitative and
quantitative perspectives in line with principles of relevance, reliability and comparability as
per conceptual framework. This assists financial statement users in better understanding risks
and return prospects of such unconventional agricultural ventures.
Convergence with Sustainability Reporting Standards
With sustainability goals forming core objectives of vertical farming, there is opportunity for
convergence with emerging sustainability reporting standards that highlight environmental
and social priorities along with financial performance. Key frameworksl applicable in this
context include:
Global Reporting Initiative (GRI) - Disclosures on resource consumption metrics, waste
generation, emission reductions from indoor farming, energy/water usage intensity, organic
certification programmes etc.
Sustainability Accounting Standards Board (SASB) - Industry specific standards for
“Agricultural Products” sector covering metrics on land use, working conditions, food safety
issues etc.
Task Force on Climate-related Financial Disclosures (TCFD) - Forward looking information
on climate risks to operations and strategies to mitigate impacts of extreme weather events
through controlled indoor environments.
International Integrated Reporting Council (IIRC) - Integrated reporting bringing together
material sustainability impacts, dependencies and outcomes with financial performance,
business model and governance aspects.
Such sustainability reporting expands disclosure horizons beyond traditional accounting
statements. It helps evaluate non-financial capitals deployed and generated through vertical
farming operations, long term resilience, environmental stewardship and social goals
achievement. Voluntary adoption of relevant frameworks can demonstrate commitment to
sustainability priorities being core drivers of this emerging industry sector.
Challenges and Future Outlook
While the convergence of farming and technology opens new avenues for sustainable urban
food production, it also presents challenges from accounting and reporting perspectives:
Specialized Nature of Assets - Valuation complexities arise due to lack of established market
comparables for unique controlled environment agriculture assets.
Long Investment and Payback Periods - Traditional accounting metrics may not fully capture
long term value creation unfolding over decades as in conventional farming.
Technology Obsolescence Risks - Rapid innovations may render existing systems outdated
requiring revaluation adjustments to reflect fair values.
Subjective Assumptions - Key estimates involve inherent subjectivity around yield
projections, cost structures, commodity prices over extended time horizons.
Nascent State of the Industry - Evolving business models, lack of operating history and
uncertainty regarding commercial scales add estimation risks.
Lack of Specific Guidance - Existing accounting standards provide general principles but no
explicit guidelines tailored for high-tech agricultural ventures.
While experience will refine accounting practices over time, standard setters can consider
sector specific guidance addressing above challenges. Use of non-financial performance
indicators, scenario based disclosures and integrated reporting may better capture potentials
and trade-offs of shifting to a sustainability centered urban food system through vertical
farming. With supportive policy frameworks and accounting framework convergence, this
innovative field promises to redefine sustainable food production globally.
Conclusion
Accounting for vertical farming investments encompasses convergence of agriculture,
technology and environmental sustainability domains presenting both opportunities and
challenges from financial reporting perspectives. Existing accounting concepts and valuation
methods provide broad guidance if adapted judiciously to the specialized nature and long
term horizons characterizing these emerging capital intensive agricultural ventures.
Comprehensive qualitative and quantitative disclosures grounded in principles of relevance,
reliability and comparability ensure transparency around uncertainties, estimates, asset
characteristics, funding schemes, sustainability impacts and risks. Voluntary sustainability
reporting frameworks can complement mainstream financial statements in portraying the
multi-capital nature of vertical farm businesses. With refinements of practices and tailored
guidelines over time, accounting can aid informed investment decisions for transitioning to
sustainable urban food systems through innovative vertical farmingmodels.
Vertical farming refers to the practice of producing food crops in vertically stacked layers or
inclined surfaces with the use of controlled-environment agriculture technology including
artificial lighting. The objective of vertical farming is to grow crops in compact urban
settings at much higher yields and optimization compared to traditional open field farming
techniques. There has been rising interest in vertical farming as a means to address issues
related to land scarcity, urbanization, food security and environmental sustainability.
Accounting for investments in vertical farming systems presents unique challenges due to the
convergence of farming and technology. Traditional farming is based on land as the primary
asset whereas vertical farming relies on capital intensive technology systems. This requires
accounting standards and norms to appropriately capture the nature of vertical farming assets
and develop valuation and disclosure methods keeping in view the convergence of agriculture
and technology.
This paper aims to analyze key issues around investment accounting, valuation and disclosure
of investments in vertical farming systems from the perspective of companies investing in
this emerging space of sustainable urban agriculture. The paper evaluates relevant accounting
concepts, standards and methods that can provide guidance on appropriate accounting
treatment for vertical farming investments and disclosure of related financial information.
Accounting Concepts and Standards for Vertical Farming Assets
Vertical farming assets can be understood as a combination of tangible and intangible assets
forming a production system for growing crops in controlled environment vertical farms
located within urban settings. Some key accounting concepts and standards relevant for
valuing and accounting vertical farming investments include:
Tangible Assets - The physical infrastructure of a vertical farm including building structures,
lighting systems, hydroponic/aeroponic grow towers, irrigation systems, climate control
equipment etc. would constitute tangible assets for accounting purposes. These assets need to
be recognized initially at cost and subjected to depreciation over their estimated useful lives
as per prevailing accounting standards similar to other production equipment.
Intangible Assets - Significant elements of vertical farming technology like proprietary
lighting designs, sensor networks, automated processes, software, data models and algorithms
developed for optimizing yields would qualify as intangible assets. Internally developed
intangibles need to be capitalized as assets if they meet definability, separability, and
reliability criteria as per IAS 38. Externally acquired intangibles are recognized at cost.
Intangible assets also need to be amortized over their estimated useful lives.
Research and Development (R&D)
Considerable investments are often required in R&D to develop new
vertical farming technologies, refine designs and validate commercial
operations. R&D expenditure in the research phase needs to be expensed
as per IAS 38, whereas development costs meeting 定义,可行性, usefulness
criteria can be capitalized as intangible assets.
Right-of-use Assets - If farms are operated from leased buildings or land, corresponding
right-of-use assets as per IFRS 16 need to be recognized on the balance sheet along with
corresponding lease liabilities.
Agricultural Produce - Vertical farms grow a variety of food crops which qualify as
biological assets as per IAS 41. At harvest, agricultural produce needs to be measured at fair
value less costs to sell. Changes in fair value between periods are recognized in profit or loss.
Impairment - Assets deployed in vertical farms need to be tested periodically for impairment
as per IAS 36 whenever indications of impairment exist. Recoverable amounts are estimated
and impairment losses recognized promptly.
Government Grants - Funding and tax incentives received from government bodies to
encourage innovations and commercialization of vertical farming technologies need to be
accounted as per IAS 20 by either the income approach or as deferred income liability.
The above accounting concepts and standards provide a broad framework for appropriately
recognizing, measuring, presenting and disclosing vertical farming assets and investments on
the balance sheet and income statement based on their nature and characteristics aligned with
capitalized investments in other high-technology sectors.
Methods for Initial Valuation and Subsequent Measurement
There are several accepted valuation methods that can be adopted to arrive at reasonable
estimates of fair values for various vertical farming assets both at the time of initial
capitalization as well as for subsequent impairment testing and revaluation purposes. Some of
the commonly used valuation approaches include:
Cost Method - For valuing recently acquired tangible assets based on amounts paid to
purchase or construct the assets. It provides an objective measure of fair value but does not
capture changes in market conditions or asset performance over time.
Income Approach - Discounted cash flow (DCF) models valuing expected future cash flows
discounted at a rate reflecting risks. Can be used to value intangibles like technologies,
licenses etc. Requires significant assumptions and projections.
Market Approach - Guideline public company (GPC) method and guideline transaction (GT)
method look at market multiples observed for comparable assets in recent transactions or
public companies in the same industry after making necessary quantitative and qualitative
adjustments. Provides external validation but comparability can be challenging for emerging
sectors like vertical farming.
Relief from Royalty Method - Estimates value of intangible asset by calculating net present
value of projected cost savings from owning the asset instead of paying royalties. Commonly
used for technologies and brands. Depends on reliable projections.
Replacement Cost Method - Estimates value based on costs that would be incurred to replace
the functionality provided by the specific asset. Relevant for unique
manufacturing/processing facilities and equipment requiring specialized skills.
For subsequent impairment testing and revaluations, fair values estimated using the above
methods serve as benchmark for comparison with carrying values. Going concern
assumptions are an important consideration given long investment horizons in agriculture.
Disclosures on key assumptions, sensitivity of estimates to changes, and reconciliation to
carrying values also provide transparency.
Disclosure Requirements for Vertical Farming Investments
Appropriate disclosures around vertical farming investments are important to enable users of
financial statements understand the extent, nature and risks around such unconventional
agricultural business models. Some specific disclosure items that would be relevant as per
prevailing accounting standards include:
Accounting Policies - Significant accounting policies adopted for classifying, recognizing,
measuring and reporting vertical farming assets, biological assets, impairment testing
methodology etc.
Classes of Assets - Classes of tangible and intangible assets deployed in vertical farming
operations segregated based on nature and use along with useful lives adopted for
depreciation/amortization.
Key Assumptions - Critical assumptions used in valuations and impairment testing regarding
growth rates, inflation, discount rates, yield projections, commodity prices etc. with
sensitivity analysis.
Capitalized Costs - Expenditure capitalized as intangible assets during the period along with
rationale for meeting recognition criteria. R&D projects still in progress.
Impairment Losses - Amount of any impairment losses recognized or reversed during the
period, assets/cash generating units affected, key reasons and quantitative disclosures as per
IAS 36.
Biological Assets - Reconciliation of changes in biological assets carried at fair value
including harvests, additions, fair value adjustments etc. Basis of fair valuation
determination.
Right-of-use Assets - Classes of leased assets recognized on balance sheet along with details
of lease liabilities, maturity analysis, amounts recognized in P&L etc.
Funding/Incentives - Details of any special government/industry funding or tax incentives
received including recognition and presentation.
Risk Factors - Technology, market and operational risks specific to vertical farming business
including those arising from specialized nature of assets, production processes, dependencies
etc.
The above disclosures provide transparency on accounting policies, estimates involved,
nature and characteristics of vertical farming investments from both qualitative and
quantitative perspectives in line with principles of relevance, reliability and comparability as
per conceptual framework. This assists financial statement users in better understanding risks
and return prospects of such unconventional agricultural ventures.
Convergence with Sustainability Reporting Standards
With sustainability goals forming core objectives of vertical farming, there is opportunity for
convergence with emerging sustainability reporting standards that highlight environmental
and social priorities along with financial performance. Key frameworksl applicable in this
context include:
Global Reporting Initiative (GRI) - Disclosures on resource consumption metrics, waste
generation, emission reductions from indoor farming, energy/water usage intensity, organic
certification programmes etc.
Sustainability Accounting Standards Board (SASB) - Industry specific standards for
“Agricultural Products” sector covering metrics on land use, working conditions, food safety
issues etc.
Task Force on Climate-related Financial Disclosures (TCFD) - Forward looking information
on climate risks to operations and strategies to mitigate impacts of extreme weather events
through controlled indoor environments.
International Integrated Reporting Council (IIRC) - Integrated reporting bringing together
material sustainability impacts, dependencies and outcomes with financial performance,
business model and governance aspects.
Such sustainability reporting expands disclosure horizons beyond traditional accounting
statements. It helps evaluate non-financial capitals deployed and generated through vertical
farming operations, long term resilience, environmental stewardship and social goals
achievement. Voluntary adoption of relevant frameworks can demonstrate commitment to
sustainability priorities being core drivers of this emerging industry sector.
Challenges and Future Outlook
While the convergence of farming and technology opens new avenues for sustainable urban
food production, it also presents challenges from accounting and reporting perspectives:
Specialized Nature of Assets - Valuation complexities arise due to lack of established market
comparables for unique controlled environment agriculture assets.
Long Investment and Payback Periods - Traditional accounting metrics may not fully capture
long term value creation unfolding over decades as in conventional farming.
Technology Obsolescence Risks - Rapid innovations may render existing systems outdated
requiring revaluation adjustments to reflect fair values.
Subjective Assumptions - Key estimates involve inherent subjectivity around yield
projections, cost structures, commodity prices over extended time horizons.
Nascent State of the Industry - Evolving business models, lack of operating history and
uncertainty regarding commercial scales add estimation risks.
Lack of Specific Guidance - Existing accounting standards provide general principles but no
explicit guidelines tailored for high-tech agricultural ventures.
While experience will refine accounting practices over time, standard setters can consider
sector specific guidance addressing above challenges. Use of non-financial performance
indicators, scenario based disclosures and integrated reporting may better capture potentials
and trade-offs of shifting to a sustainability centered urban food system through vertical
farming. With supportive policy frameworks and accounting framework convergence, this
innovative field promises to redefine sustainable food production globally.
Conclusion
Accounting for vertical farming investments encompasses convergence of agriculture,
technology and environmental sustainability domains presenting both opportunities and
challenges from financial reporting perspectives. Existing accounting concepts and valuation
methods provide broad guidance if adapted judiciously to the specialized nature and long
term horizons characterizing these emerging capital intensive agricultural ventures.
Comprehensive qualitative and quantitative disclosures grounded in principles of relevance,
reliability and comparability ensure transparency around uncertainties, estimates, asset
characteristics, funding schemes, sustainability impacts and risks. Voluntary sustainability
reporting frameworks can complement mainstream financial statements in portraying the
multi-capital nature of vertical farm businesses. With refinements of practices and tailored
guidelines over time, accounting can aid informed investment decisions for transitioning to
sustainable urban food systems through innovative vertical farmingmodels.
Vertical farming refers to the practice of producing food crops in vertically stacked layers or
inclined surfaces with the use of controlled-environment agriculture technology including
artificial lighting. The objective of vertical farming is to grow crops in compact urban
settings at much higher yields and optimization compared to traditional open field farming
techniques. There has been rising interest in vertical farming as a means to address issues
related to land scarcity, urbanization, food security and environmental sustainability.
Accounting for investments in vertical farming systems presents unique challenges due to the
convergence of farming and technology. Traditional farming is based on land as the primary
asset whereas vertical farming relies on capital intensive technology systems. This requires
accounting standards and norms to appropriately capture the nature of vertical farming assets
and develop valuation and disclosure methods keeping in view the convergence of agriculture
and technology.
This paper aims to analyze key issues around investment accounting, valuation and disclosure
of investments in vertical farming systems from the perspective of companies investing in
this emerging space of sustainable urban agriculture. The paper evaluates relevant accounting
concepts, standards and methods that can provide guidance on appropriate accounting
treatment for vertical farming investments and disclosure of related financial information.
Accounting Concepts and Standards for Vertical Farming Assets
Vertical farming assets can be understood as a combination of tangible and intangible assets
forming a production system for growing crops in controlled environment vertical farms
located within urban settings. Some key accounting concepts and standards relevant for
valuing and accounting vertical farming investments include:
Tangible Assets - The physical infrastructure of a vertical farm including building structures,
lighting systems, hydroponic/aeroponic grow towers, irrigation systems, climate control
equipment etc. would constitute tangible assets for accounting purposes. These assets need to
be recognized initially at cost and subjected to depreciation over their estimated useful lives
as per prevailing accounting standards similar to other production equipment.
Intangible Assets - Significant elements of vertical farming technology like proprietary
lighting designs, sensor networks, automated processes, software, data models and algorithms
developed for optimizing yields would qualify as intangible assets. Internally developed
intangibles need to be capitalized as assets if they meet definability, separability, and
reliability criteria as per IAS 38. Externally acquired intangibles are recognized at cost.
Intangible assets also need to be amortized over their estimated useful lives.
Research and Development (R&D)
Considerable investments are often required in R&D to develop new
vertical farming technologies, refine designs and validate commercial
operations. R&D expenditure in the research phase needs to be expensed
as per IAS 38, whereas development costs meeting 定义,可行性, usefulness
criteria can be capitalized as intangible assets.
Right-of-use Assets - If farms are operated from leased buildings or land, corresponding
right-of-use assets as per IFRS 16 need to be recognized on the balance sheet along with
corresponding lease liabilities.
Agricultural Produce - Vertical farms grow a variety of food crops which qualify as
biological assets as per IAS 41. At harvest, agricultural produce needs to be measured at fair
value less costs to sell. Changes in fair value between periods are recognized in profit or loss.
Impairment - Assets deployed in vertical farms need to be tested periodically for impairment
as per IAS 36 whenever indications of impairment exist. Recoverable amounts are estimated
and impairment losses recognized promptly.
Government Grants - Funding and tax incentives received from government bodies to
encourage innovations and commercialization of vertical farming technologies need to be
accounted as per IAS 20 by either the income approach or as deferred income liability.
The above accounting concepts and standards provide a broad framework for appropriately
recognizing, measuring, presenting and disclosing vertical farming assets and investments on
the balance sheet and income statement based on their nature and characteristics aligned with
capitalized investments in other high-technology sectors.
Methods for Initial Valuation and Subsequent Measurement
There are several accepted valuation methods that can be adopted to arrive at reasonable
estimates of fair values for various vertical farming assets both at the time of initial
capitalization as well as for subsequent impairment testing and revaluation purposes. Some of
the commonly used valuation approaches include:
Cost Method - For valuing recently acquired tangible assets based on amounts paid to
purchase or construct the assets. It provides an objective measure of fair value but does not
capture changes in market conditions or asset performance over time.
Income Approach - Discounted cash flow (DCF) models valuing expected future cash flows
discounted at a rate reflecting risks. Can be used to value intangibles like technologies,
licenses etc. Requires significant assumptions and projections.
Market Approach - Guideline public company (GPC) method and guideline transaction (GT)
method look at market multiples observed for comparable assets in recent transactions or
public companies in the same industry after making necessary quantitative and qualitative
adjustments. Provides external validation but comparability can be challenging for emerging
sectors like vertical farming.
Relief from Royalty Method - Estimates value of intangible asset by calculating net present
value of projected cost savings from owning the asset instead of paying royalties. Commonly
used for technologies and brands. Depends on reliable projections.
Replacement Cost Method - Estimates value based on costs that would be incurred to replace
the functionality provided by the specific asset. Relevant for unique
manufacturing/processing facilities and equipment requiring specialized skills.
For subsequent impairment testing and revaluations, fair values estimated using the above
methods serve as benchmark for comparison with carrying values. Going concern
assumptions are an important consideration given long investment horizons in agriculture.
Disclosures on key assumptions, sensitivity of estimates to changes, and reconciliation to
carrying values also provide transparency.
Disclosure Requirements for Vertical Farming Investments
Appropriate disclosures around vertical farming investments are important to enable users of
financial statements understand the extent, nature and risks around such unconventional
agricultural business models. Some specific disclosure items that would be relevant as per
prevailing accounting standards include:
Accounting Policies - Significant accounting policies adopted for classifying, recognizing,
measuring and reporting vertical farming assets, biological assets, impairment testing
methodology etc.
Classes of Assets - Classes of tangible and intangible assets deployed in vertical farming
operations segregated based on nature and use along with useful lives adopted for
depreciation/amortization.
Key Assumptions - Critical assumptions used in valuations and impairment testing regarding
growth rates, inflation, discount rates, yield projections, commodity prices etc. with
sensitivity analysis.
Capitalized Costs - Expenditure capitalized as intangible assets during the period along with
rationale for meeting recognition criteria. R&D projects still in progress.
Impairment Losses - Amount of any impairment losses recognized or reversed during the
period, assets/cash generating units affected, key reasons and quantitative disclosures as per
IAS 36.
Biological Assets - Reconciliation of changes in biological assets carried at fair value
including harvests, additions, fair value adjustments etc. Basis of fair valuation
determination.
Right-of-use Assets - Classes of leased assets recognized on balance sheet along with details
of lease liabilities, maturity analysis, amounts recognized in P&L etc.
Funding/Incentives - Details of any special government/industry funding or tax incentives
received including recognition and presentation.
Risk Factors - Technology, market and operational risks specific to vertical farming business
including those arising from specialized nature of assets, production processes, dependencies
etc.
The above disclosures provide transparency on accounting policies, estimates involved,
nature and characteristics of vertical farming investments from both qualitative and
quantitative perspectives in line with principles of relevance, reliability and comparability as
per conceptual framework. This assists financial statement users in better understanding risks
and return prospects of such unconventional agricultural ventures.
Convergence with Sustainability Reporting Standards
With sustainability goals forming core objectives of vertical farming, there is opportunity for
convergence with emerging sustainability reporting standards that highlight environmental
and social priorities along with financial performance. Key frameworksl applicable in this
context include:
Global Reporting Initiative (GRI) - Disclosures on resource consumption metrics, waste
generation, emission reductions from indoor farming, energy/water usage intensity, organic
certification programmes etc.
Sustainability Accounting Standards Board (SASB) - Industry specific standards for
“Agricultural Products” sector covering metrics on land use, working conditions, food safety
issues etc.
Task Force on Climate-related Financial Disclosures (TCFD) - Forward looking information
on climate risks to operations and strategies to mitigate impacts of extreme weather events
through controlled indoor environments.
International Integrated Reporting Council (IIRC) - Integrated reporting bringing together
material sustainability impacts, dependencies and outcomes with financial performance,
business model and governance aspects.
Such sustainability reporting expands disclosure horizons beyond traditional accounting
statements. It helps evaluate non-financial capitals deployed and generated through vertical
farming operations, long term resilience, environmental stewardship and social goals
achievement. Voluntary adoption of relevant frameworks can demonstrate commitment to
sustainability priorities being core drivers of this emerging industry sector.
Challenges and Future Outlook
While the convergence of farming and technology opens new avenues for sustainable urban
food production, it also presents challenges from accounting and reporting perspectives:
Specialized Nature of Assets - Valuation complexities arise due to lack of established market
comparables for unique controlled environment agriculture assets.
Long Investment and Payback Periods - Traditional accounting metrics may not fully capture
long term value creation unfolding over decades as in conventional farming.
Technology Obsolescence Risks - Rapid innovations may render existing systems outdated
requiring revaluation adjustments to reflect fair values.
Subjective Assumptions - Key estimates involve inherent subjectivity around yield
projections, cost structures, commodity prices over extended time horizons.
Nascent State of the Industry - Evolving business models, lack of operating history and
uncertainty regarding commercial scales add estimation risks.
Lack of Specific Guidance - Existing accounting standards provide general principles but no
explicit guidelines tailored for high-tech agricultural ventures.
While experience will refine accounting practices over time, standard setters can consider
sector specific guidance addressing above challenges. Use of non-financial performance
indicators, scenario based disclosures and integrated reporting may better capture potentials
and trade-offs of shifting to a sustainability centered urban food system through vertical
farming. With supportive policy frameworks and accounting framework convergence, this
innovative field promises to redefine sustainable food production globally.
Conclusion
Accounting for vertical farming investments encompasses convergence of agriculture,
technology and environmental sustainability domains presenting both opportunities and
challenges from financial reporting perspectives. Existing accounting concepts and valuation
methods provide broad guidance if adapted judiciously to the specialized nature and long
term horizons characterizing these emerging capital intensive agricultural ventures.
Comprehensive qualitative and quantitative disclosures grounded in principles of relevance,
reliability and comparability ensure transparency around uncertainties, estimates, asset
characteristics, funding schemes, sustainability impacts and risks. Voluntary sustainability
reporting frameworks can complement mainstream financial statements in portraying the
multi-capital nature of vertical farm businesses. With refinements of practices and tailored
guidelines over time, accounting can aid informed investment decisions for transitioning to
sustainable urban food systems through innovative vertical farmingmodels.
Vertical farming refers to the practice of producing food crops in vertically stacked layers or
inclined surfaces with the use of controlled-environment agriculture technology including
artificial lighting. The objective of vertical farming is to grow crops in compact urban
settings at much higher yields and optimization compared to traditional open field farming
techniques. There has been rising interest in vertical farming as a means to address issues
related to land scarcity, urbanization, food security and environmental sustainability.
Accounting for investments in vertical farming systems presents unique challenges due to the
convergence of farming and technology. Traditional farming is based on land as the primary
asset whereas vertical farming relies on capital intensive technology systems. This requires
accounting standards and norms to appropriately capture the nature of vertical farming assets
and develop valuation and disclosure methods keeping in view the convergence of agriculture
and technology.
This paper aims to analyze key issues around investment accounting, valuation and disclosure
of investments in vertical farming systems from the perspective of companies investing in
this emerging space of sustainable urban agriculture. The paper evaluates relevant accounting
concepts, standards and methods that can provide guidance on appropriate accounting
treatment for vertical farming investments and disclosure of related financial information.
Accounting Concepts and Standards for Vertical Farming Assets
Vertical farming assets can be understood as a combination of tangible and intangible assets
forming a production system for growing crops in controlled environment vertical farms
located within urban settings. Some key accounting concepts and standards relevant for
valuing and accounting vertical farming investments include:
Tangible Assets - The physical infrastructure of a vertical farm including building structures,
lighting systems, hydroponic/aeroponic grow towers, irrigation systems, climate control
equipment etc. would constitute tangible assets for accounting purposes. These assets need to
be recognized initially at cost and subjected to depreciation over their estimated useful lives
as per prevailing accounting standards similar to other production equipment.
Intangible Assets - Significant elements of vertical farming technology like proprietary
lighting designs, sensor networks, automated processes, software, data models and algorithms
developed for optimizing yields would qualify as intangible assets. Internally developed
intangibles need to be capitalized as assets if they meet definability, separability, and
reliability criteria as per IAS 38. Externally acquired intangibles are recognized at cost.
Intangible assets also need to be amortized over their estimated useful lives.
Research and Development (R&D)
Considerable investments are often required in R&D to develop new
vertical farming technologies, refine designs and validate commercial
operations. R&D expenditure in the research phase needs to be expensed
as per IAS 38, whereas development costs meeting 定义,可行性, usefulness
criteria can be capitalized as intangible assets.
Right-of-use Assets - If farms are operated from leased buildings or land, corresponding
right-of-use assets as per IFRS 16 need to be recognized on the balance sheet along with
corresponding lease liabilities.
Agricultural Produce - Vertical farms grow a variety of food crops which qualify as
biological assets as per IAS 41. At harvest, agricultural produce needs to be measured at fair
value less costs to sell. Changes in fair value between periods are recognized in profit or loss.
Impairment - Assets deployed in vertical farms need to be tested periodically for impairment
as per IAS 36 whenever indications of impairment exist. Recoverable amounts are estimated
and impairment losses recognized promptly.
Government Grants - Funding and tax incentives received from government bodies to
encourage innovations and commercialization of vertical farming technologies need to be
accounted as per IAS 20 by either the income approach or as deferred income liability.
The above accounting concepts and standards provide a broad framework for appropriately
recognizing, measuring, presenting and disclosing vertical farming assets and investments on
the balance sheet and income statement based on their nature and characteristics aligned with
capitalized investments in other high-technology sectors.
Methods for Initial Valuation and Subsequent Measurement
There are several accepted valuation methods that can be adopted to arrive at reasonable
estimates of fair values for various vertical farming assets both at the time of initial
capitalization as well as for subsequent impairment testing and revaluation purposes. Some of
the commonly used valuation approaches include:
Cost Method - For valuing recently acquired tangible assets based on amounts paid to
purchase or construct the assets. It provides an objective measure of fair value but does not
capture changes in market conditions or asset performance over time.
Income Approach - Discounted cash flow (DCF) models valuing expected future cash flows
discounted at a rate reflecting risks. Can be used to value intangibles like technologies,
licenses etc. Requires significant assumptions and projections.
Market Approach - Guideline public company (GPC) method and guideline transaction (GT)
method look at market multiples observed for comparable assets in recent transactions or
public companies in the same industry after making necessary quantitative and qualitative
adjustments. Provides external validation but comparability can be challenging for emerging
sectors like vertical farming.
Relief from Royalty Method - Estimates value of intangible asset by calculating net present
value of projected cost savings from owning the asset instead of paying royalties. Commonly
used for technologies and brands. Depends on reliable projections.
Replacement Cost Method - Estimates value based on costs that would be incurred to replace
the functionality provided by the specific asset. Relevant for unique
manufacturing/processing facilities and equipment requiring specialized skills.
For subsequent impairment testing and revaluations, fair values estimated using the above
methods serve as benchmark for comparison with carrying values. Going concern
assumptions are an important consideration given long investment horizons in agriculture.
Disclosures on key assumptions, sensitivity of estimates to changes, and reconciliation to
carrying values also provide transparency.
Disclosure Requirements for Vertical Farming Investments
Appropriate disclosures around vertical farming investments are important to enable users of
financial statements understand the extent, nature and risks around such unconventional
agricultural business models. Some specific disclosure items that would be relevant as per
prevailing accounting standards include:
Accounting Policies - Significant accounting policies adopted for classifying, recognizing,
measuring and reporting vertical farming assets, biological assets, impairment testing
methodology etc.
Classes of Assets - Classes of tangible and intangible assets deployed in vertical farming
operations segregated based on nature and use along with useful lives adopted for
depreciation/amortization.
Key Assumptions - Critical assumptions used in valuations and impairment testing regarding
growth rates, inflation, discount rates, yield projections, commodity prices etc. with
sensitivity analysis.
Capitalized Costs - Expenditure capitalized as intangible assets during the period along with
rationale for meeting recognition criteria. R&D projects still in progress.
Impairment Losses - Amount of any impairment losses recognized or reversed during the
period, assets/cash generating units affected, key reasons and quantitative disclosures as per
IAS 36.
Biological Assets - Reconciliation of changes in biological assets carried at fair value
including harvests, additions, fair value adjustments etc. Basis of fair valuation
determination.
Right-of-use Assets - Classes of leased assets recognized on balance sheet along with details
of lease liabilities, maturity analysis, amounts recognized in P&L etc.
Funding/Incentives - Details of any special government/industry funding or tax incentives
received including recognition and presentation.
Risk Factors - Technology, market and operational risks specific to vertical farming business
including those arising from specialized nature of assets, production processes, dependencies
etc.
The above disclosures provide transparency on accounting policies, estimates involved,
nature and characteristics of vertical farming investments from both qualitative and
quantitative perspectives in line with principles of relevance, reliability and comparability as
per conceptual framework. This assists financial statement users in better understanding risks
and return prospects of such unconventional agricultural ventures.
Convergence with Sustainability Reporting Standards
With sustainability goals forming core objectives of vertical farming, there is opportunity for
convergence with emerging sustainability reporting standards that highlight environmental
and social priorities along with financial performance. Key frameworksl applicable in this
context include:
Global Reporting Initiative (GRI) - Disclosures on resource consumption metrics, waste
generation, emission reductions from indoor farming, energy/water usage intensity, organic
certification programmes etc.
Sustainability Accounting Standards Board (SASB) - Industry specific standards for
“Agricultural Products” sector covering metrics on land use, working conditions, food safety
issues etc.
Task Force on Climate-related Financial Disclosures (TCFD) - Forward looking information
on climate risks to operations and strategies to mitigate impacts of extreme weather events
through controlled indoor environments.
International Integrated Reporting Council (IIRC) - Integrated reporting bringing together
material sustainability impacts, dependencies and outcomes with financial performance,
business model and governance aspects.
Such sustainability reporting expands disclosure horizons beyond traditional accounting
statements. It helps evaluate non-financial capitals deployed and generated through vertical
farming operations, long term resilience, environmental stewardship and social goals
achievement. Voluntary adoption of relevant frameworks can demonstrate commitment to
sustainability priorities being core drivers of this emerging industry sector.
Challenges and Future Outlook
While the convergence of farming and technology opens new avenues for sustainable urban
food production, it also presents challenges from accounting and reporting perspectives:
Specialized Nature of Assets - Valuation complexities arise due to lack of established market
comparables for unique controlled environment agriculture assets.
Long Investment and Payback Periods - Traditional accounting metrics may not fully capture
long term value creation unfolding over decades as in conventional farming.
Technology Obsolescence Risks - Rapid innovations may render existing systems outdated
requiring revaluation adjustments to reflect fair values.
Subjective Assumptions - Key estimates involve inherent subjectivity around yield
projections, cost structures, commodity prices over extended time horizons.
Nascent State of the Industry - Evolving business models, lack of operating history and
uncertainty regarding commercial scales add estimation risks.
Lack of Specific Guidance - Existing accounting standards provide general principles but no
explicit guidelines tailored for high-tech agricultural ventures.
While experience will refine accounting practices over time, standard setters can consider
sector specific guidance addressing above challenges. Use of non-financial performance
indicators, scenario based disclosures and integrated reporting may better capture potentials
and trade-offs of shifting to a sustainability centered urban food system through vertical
farming. With supportive policy frameworks and accounting framework convergence, this
innovative field promises to redefine sustainable food production globally.
Conclusion
Accounting for vertical farming investments encompasses convergence of agriculture,
technology and environmental sustainability domains presenting both opportunities and
challenges from financial reporting perspectives. Existing accounting concepts and valuation
methods provide broad guidance if adapted judiciously to the specialized nature and long
term horizons characterizing these emerging capital intensive agricultural ventures.
Comprehensive qualitative and quantitative disclosures grounded in principles of relevance,
reliability and comparability ensure transparency around uncertainties, estimates, asset
characteristics, funding schemes, sustainability impacts and risks. Voluntary sustainability
reporting frameworks can complement mainstream financial statements in portraying the
multi-capital nature of vertical farm businesses. With refinements of practices and tailored
guidelines over time, accounting can aid informed investment decisions for transitioning to
sustainable urban food systems through innovative vertical farmingmodels.
Vertical farming refers to the practice of producing food crops in vertically stacked layers or
inclined surfaces with the use of controlled-environment agriculture technology including
artificial lighting. The objective of vertical farming is to grow crops in compact urban
settings at much higher yields and optimization compared to traditional open field farming
techniques. There has been rising interest in vertical farming as a means to address issues
related to land scarcity, urbanization, food security and environmental sustainability.
Accounting for investments in vertical farming systems presents unique challenges due to the
convergence of farming and technology. Traditional farming is based on land as the primary
asset whereas vertical farming relies on capital intensive technology systems. This requires
accounting standards and norms to appropriately capture the nature of vertical farming assets
and develop valuation and disclosure methods keeping in view the convergence of agriculture
and technology.
This paper aims to analyze key issues around investment accounting, valuation and disclosure
of investments in vertical farming systems from the perspective of companies investing in
this emerging space of sustainable urban agriculture. The paper evaluates relevant accounting
concepts, standards and methods that can provide guidance on appropriate accounting
treatment for vertical farming investments and disclosure of related financial information.
Accounting Concepts and Standards for Vertical Farming Assets
Vertical farming assets can be understood as a combination of tangible and intangible assets
forming a production system for growing crops in controlled environment vertical farms
located within urban settings. Some key accounting concepts and standards relevant for
valuing and accounting vertical farming investments include:
Tangible Assets - The physical infrastructure of a vertical farm including building structures,
lighting systems, hydroponic/aeroponic grow towers, irrigation systems, climate control
equipment etc. would constitute tangible assets for accounting purposes. These assets need to
be recognized initially at cost and subjected to depreciation over their estimated useful lives
as per prevailing accounting standards similar to other production equipment.
Intangible Assets - Significant elements of vertical farming technology like proprietary
lighting designs, sensor networks, automated processes, software, data models and algorithms
developed for optimizing yields would qualify as intangible assets. Internally developed
intangibles need to be capitalized as assets if they meet definability, separability, and
reliability criteria as per IAS 38. Externally acquired intangibles are recognized at cost.
Intangible assets also need to be amortized over their estimated useful lives.
Research and Development (R&D)
Considerable investments are often required in R&D to develop new
vertical farming technologies, refine designs and validate commercial
operations. R&D expenditure in the research phase needs to be expensed
as per IAS 38, whereas development costs meeting 定义,可行性, usefulness
criteria can be capitalized as intangible assets.
Right-of-use Assets - If farms are operated from leased buildings or land, corresponding
right-of-use assets as per IFRS 16 need to be recognized on the balance sheet along with
corresponding lease liabilities.
Agricultural Produce - Vertical farms grow a variety of food crops which qualify as
biological assets as per IAS 41. At harvest, agricultural produce needs to be measured at fair
value less costs to sell. Changes in fair value between periods are recognized in profit or loss.
Impairment - Assets deployed in vertical farms need to be tested periodically for impairment
as per IAS 36 whenever indications of impairment exist. Recoverable amounts are estimated
and impairment losses recognized promptly.
Government Grants - Funding and tax incentives received from government bodies to
encourage innovations and commercialization of vertical farming technologies need to be
accounted as per IAS 20 by either the income approach or as deferred income liability.
The above accounting concepts and standards provide a broad framework for appropriately
recognizing, measuring, presenting and disclosing vertical farming assets and investments on
the balance sheet and income statement based on their nature and characteristics aligned with
capitalized investments in other high-technology sectors.
Methods for Initial Valuation and Subsequent Measurement
There are several accepted valuation methods that can be adopted to arrive at reasonable
estimates of fair values for various vertical farming assets both at the time of initial
capitalization as well as for subsequent impairment testing and revaluation purposes. Some of
the commonly used valuation approaches include:
Cost Method - For valuing recently acquired tangible assets based on amounts paid to
purchase or construct the assets. It provides an objective measure of fair value but does not
capture changes in market conditions or asset performance over time.
Income Approach - Discounted cash flow (DCF) models valuing expected future cash flows
discounted at a rate reflecting risks. Can be used to value intangibles like technologies,
licenses etc. Requires significant assumptions and projections.
Market Approach - Guideline public company (GPC) method and guideline transaction (GT)
method look at market multiples observed for comparable assets in recent transactions or
public companies in the same industry after making necessary quantitative and qualitative
adjustments. Provides external validation but comparability can be challenging for emerging
sectors like vertical farming.
Relief from Royalty Method - Estimates value of intangible asset by calculating net present
value of projected cost savings from owning the asset instead of paying royalties. Commonly
used for technologies and brands. Depends on reliable projections.
Replacement Cost Method - Estimates value based on costs that would be incurred to replace
the functionality provided by the specific asset. Relevant for unique
manufacturing/processing facilities and equipment requiring specialized skills.
For subsequent impairment testing and revaluations, fair values estimated using the above
methods serve as benchmark for comparison with carrying values. Going concern
assumptions are an important consideration given long investment horizons in agriculture.
Disclosures on key assumptions, sensitivity of estimates to changes, and reconciliation to
carrying values also provide transparency.
Disclosure Requirements for Vertical Farming Investments
Appropriate disclosures around vertical farming investments are important to enable users of
financial statements understand the extent, nature and risks around such unconventional
agricultural business models. Some specific disclosure items that would be relevant as per
prevailing accounting standards include:
Accounting Policies - Significant accounting policies adopted for classifying, recognizing,
measuring and reporting vertical farming assets, biological assets, impairment testing
methodology etc.
Classes of Assets - Classes of tangible and intangible assets deployed in vertical farming
operations segregated based on nature and use along with useful lives adopted for
depreciation/amortization.
Key Assumptions - Critical assumptions used in valuations and impairment testing regarding
growth rates, inflation, discount rates, yield projections, commodity prices etc. with
sensitivity analysis.
Capitalized Costs - Expenditure capitalized as intangible assets during the period along with
rationale for meeting recognition criteria. R&D projects still in progress.
Impairment Losses - Amount of any impairment losses recognized or reversed during the
period, assets/cash generating units affected, key reasons and quantitative disclosures as per
IAS 36.
Biological Assets - Reconciliation of changes in biological assets carried at fair value
including harvests, additions, fair value adjustments etc. Basis of fair valuation
determination.
Right-of-use Assets - Classes of leased assets recognized on balance sheet along with details
of lease liabilities, maturity analysis, amounts recognized in P&L etc.
Funding/Incentives - Details of any special government/industry funding or tax incentives
received including recognition and presentation.
Risk Factors - Technology, market and operational risks specific to vertical farming business
including those arising from specialized nature of assets, production processes, dependencies
etc.
The above disclosures provide transparency on accounting policies, estimates involved,
nature and characteristics of vertical farming investments from both qualitative and
quantitative perspectives in line with principles of relevance, reliability and comparability as
per conceptual framework. This assists financial statement users in better understanding risks
and return prospects of such unconventional agricultural ventures.
Convergence with Sustainability Reporting Standards
With sustainability goals forming core objectives of vertical farming, there is opportunity for
convergence with emerging sustainability reporting standards that highlight environmental
and social priorities along with financial performance. Key frameworksl applicable in this
context include:
Global Reporting Initiative (GRI) - Disclosures on resource consumption metrics, waste
generation, emission reductions from indoor farming, energy/water usage intensity, organic
certification programmes etc.
Sustainability Accounting Standards Board (SASB) - Industry specific standards for
“Agricultural Products” sector covering metrics on land use, working conditions, food safety
issues etc.
Task Force on Climate-related Financial Disclosures (TCFD) - Forward looking information
on climate risks to operations and strategies to mitigate impacts of extreme weather events
through controlled indoor environments.
International Integrated Reporting Council (IIRC) - Integrated reporting bringing together
material sustainability impacts, dependencies and outcomes with financial performance,
business model and governance aspects.
Such sustainability reporting expands disclosure horizons beyond traditional accounting
statements. It helps evaluate non-financial capitals deployed and generated through vertical
farming operations, long term resilience, environmental stewardship and social goals
achievement. Voluntary adoption of relevant frameworks can demonstrate commitment to
sustainability priorities being core drivers of this emerging industry sector.
Challenges and Future Outlook
While the convergence of farming and technology opens new avenues for sustainable urban
food production, it also presents challenges from accounting and reporting perspectives:
Specialized Nature of Assets - Valuation complexities arise due to lack of established market
comparables for unique controlled environment agriculture assets.
Long Investment and Payback Periods - Traditional accounting metrics may not fully capture
long term value creation unfolding over decades as in conventional farming.
Technology Obsolescence Risks - Rapid innovations may render existing systems outdated
requiring revaluation adjustments to reflect fair values.
Subjective Assumptions - Key estimates involve inherent subjectivity around yield
projections, cost structures, commodity prices over extended time horizons.
Nascent State of the Industry - Evolving business models, lack of operating history and
uncertainty regarding commercial scales add estimation risks.
Lack of Specific Guidance - Existing accounting standards provide general principles but no
explicit guidelines tailored for high-tech agricultural ventures.
While experience will refine accounting practices over time, standard setters can consider
sector specific guidance addressing above challenges. Use of non-financial performance
indicators, scenario based disclosures and integrated reporting may better capture potentials
and trade-offs of shifting to a sustainability centered urban food system through vertical
farming. With supportive policy frameworks and accounting framework convergence, this
innovative field promises to redefine sustainable food production globally.
Conclusion
Accounting for vertical farming investments encompasses convergence of agriculture,
technology and environmental sustainability domains presenting both opportunities and
challenges from financial reporting perspectives. Existing accounting concepts and valuation
methods provide broad guidance if adapted judiciously to the specialized nature and long
term horizons characterizing these emerging capital intensive agricultural ventures.
Comprehensive qualitative and quantitative disclosures grounded in principles of relevance,
reliability and comparability ensure transparency around uncertainties, estimates, asset
characteristics, funding schemes, sustainability impacts and risks. Voluntary sustainability
reporting frameworks can complement mainstream financial statements in portraying the
multi-capital nature of vertical farm businesses. With refinements of practices and tailored
guidelines over time, accounting can aid informed investment decisions for transitioning to
sustainable urban food systems through innovative vertical farmingmodels.
Vertical farming refers to the practice of producing food crops in vertically stacked layers or
inclined surfaces with the use of controlled-environment agriculture technology including
artificial lighting. The objective of vertical farming is to grow crops in compact urban
settings at much higher yields and optimization compared to traditional open field farming
techniques. There has been rising interest in vertical farming as a means to address issues
related to land scarcity, urbanization, food security and environmental sustainability.
Accounting for investments in vertical farming systems presents unique challenges due to the
convergence of farming and technology. Traditional farming is based on land as the primary
asset whereas vertical farming relies on capital intensive technology systems. This requires
accounting standards and norms to appropriately capture the nature of vertical farming assets
and develop valuation and disclosure methods keeping in view the convergence of agriculture
and technology.
This paper aims to analyze key issues around investment accounting, valuation and disclosure
of investments in vertical farming systems from the perspective of companies investing in
this emerging space of sustainable urban agriculture. The paper evaluates relevant accounting
concepts, standards and methods that can provide guidance on appropriate accounting
treatment for vertical farming investments and disclosure of related financial information.
Accounting Concepts and Standards for Vertical Farming Assets
Vertical farming assets can be understood as a combination of tangible and intangible assets
forming a production system for growing crops in controlled environment vertical farms
located within urban settings. Some key accounting concepts and standards relevant for
valuing and accounting vertical farming investments include:
Tangible Assets - The physical infrastructure of a vertical farm including building structures,
lighting systems, hydroponic/aeroponic grow towers, irrigation systems, climate control
equipment etc. would constitute tangible assets for accounting purposes. These assets need to
be recognized initially at cost and subjected to depreciation over their estimated useful lives
as per prevailing accounting standards similar to other production equipment.
Intangible Assets - Significant elements of vertical farming technology like proprietary
lighting designs, sensor networks, automated processes, software, data models and algorithms
developed for optimizing yields would qualify as intangible assets. Internally developed
intangibles need to be capitalized as assets if they meet definability, separability, and
reliability criteria as per IAS 38. Externally acquired intangibles are recognized at cost.
Intangible assets also need to be amortized over their estimated useful lives.
Research and Development (R&D)
Considerable investments are often required in R&D to develop new
vertical farming technologies, refine designs and validate commercial
operations. R&D expenditure in the research phase needs to be expensed
as per IAS 38, whereas development costs meeting 定义,可行性, usefulness
criteria can be capitalized as intangible assets.
Right-of-use Assets - If farms are operated from leased buildings or land, corresponding
right-of-use assets as per IFRS 16 need to be recognized on the balance sheet along with
corresponding lease liabilities.
Agricultural Produce - Vertical farms grow a variety of food crops which qualify as
biological assets as per IAS 41. At harvest, agricultural produce needs to be measured at fair
value less costs to sell. Changes in fair value between periods are recognized in profit or loss.
Impairment - Assets deployed in vertical farms need to be tested periodically for impairment
as per IAS 36 whenever indications of impairment exist. Recoverable amounts are estimated
and impairment losses recognized promptly.
Government Grants - Funding and tax incentives received from government bodies to
encourage innovations and commercialization of vertical farming technologies need to be
accounted as per IAS 20 by either the income approach or as deferred income liability.
The above accounting concepts and standards provide a broad framework for appropriately
recognizing, measuring, presenting and disclosing vertical farming assets and investments on
the balance sheet and income statement based on their nature and characteristics aligned with
capitalized investments in other high-technology sectors.
Methods for Initial Valuation and Subsequent Measurement
There are several accepted valuation methods that can be adopted to arrive at reasonable
estimates of fair values for various vertical farming assets both at the time of initial
capitalization as well as for subsequent impairment testing and revaluation purposes. Some of
the commonly used valuation approaches include:
Cost Method - For valuing recently acquired tangible assets based on amounts paid to
purchase or construct the assets. It provides an objective measure of fair value but does not
capture changes in market conditions or asset performance over time.
Income Approach - Discounted cash flow (DCF) models valuing expected future cash flows
discounted at a rate reflecting risks. Can be used to value intangibles like technologies,
licenses etc. Requires significant assumptions and projections.
Market Approach - Guideline public company (GPC) method and guideline transaction (GT)
method look at market multiples observed for comparable assets in recent transactions or
public companies in the same industry after making necessary quantitative and qualitative
adjustments. Provides external validation but comparability can be challenging for emerging
sectors like vertical farming.
Relief from Royalty Method - Estimates value of intangible asset by calculating net present
value of projected cost savings from owning the asset instead of paying royalties. Commonly
used for technologies and brands. Depends on reliable projections.
Replacement Cost Method - Estimates value based on costs that would be incurred to replace
the functionality provided by the specific asset. Relevant for unique
manufacturing/processing facilities and equipment requiring specialized skills.
For subsequent impairment testing and revaluations, fair values estimated using the above
methods serve as benchmark for comparison with carrying values. Going concern
assumptions are an important consideration given long investment horizons in agriculture.
Disclosures on key assumptions, sensitivity of estimates to changes, and reconciliation to
carrying values also provide transparency.
Disclosure Requirements for Vertical Farming Investments
Appropriate disclosures around vertical farming investments are important to enable users of
financial statements understand the extent, nature and risks around such unconventional
agricultural business models. Some specific disclosure items that would be relevant as per
prevailing accounting standards include:
Accounting Policies - Significant accounting policies adopted for classifying, recognizing,
measuring and reporting vertical farming assets, biological assets, impairment testing
methodology etc.
Classes of Assets - Classes of tangible and intangible assets deployed in vertical farming
operations segregated based on nature and use along with useful lives adopted for
depreciation/amortization.
Key Assumptions - Critical assumptions used in valuations and impairment testing regarding
growth rates, inflation, discount rates, yield projections, commodity prices etc. with
sensitivity analysis.
Capitalized Costs - Expenditure capitalized as intangible assets during the period along with
rationale for meeting recognition criteria. R&D projects still in progress.
Impairment Losses - Amount of any impairment losses recognized or reversed during the
period, assets/cash generating units affected, key reasons and quantitative disclosures as per
IAS 36.
Biological Assets - Reconciliation of changes in biological assets carried at fair value
including harvests, additions, fair value adjustments etc. Basis of fair valuation
determination.
Right-of-use Assets - Classes of leased assets recognized on balance sheet along with details
of lease liabilities, maturity analysis, amounts recognized in P&L etc.
Funding/Incentives - Details of any special government/industry funding or tax incentives
received including recognition and presentation.
Risk Factors - Technology, market and operational risks specific to vertical farming business
including those arising from specialized nature of assets, production processes, dependencies
etc.
The above disclosures provide transparency on accounting policies, estimates involved,
nature and characteristics of vertical farming investments from both qualitative and
quantitative perspectives in line with principles of relevance, reliability and comparability as
per conceptual framework. This assists financial statement users in better understanding risks
and return prospects of such unconventional agricultural ventures.
Convergence with Sustainability Reporting Standards
With sustainability goals forming core objectives of vertical farming, there is opportunity for
convergence with emerging sustainability reporting standards that highlight environmental
and social priorities along with financial performance. Key frameworksl applicable in this
context include:
Global Reporting Initiative (GRI) - Disclosures on resource consumption metrics, waste
generation, emission reductions from indoor farming, energy/water usage intensity, organic
certification programmes etc.
Sustainability Accounting Standards Board (SASB) - Industry specific standards for
“Agricultural Products” sector covering metrics on land use, working conditions, food safety
issues etc.
Task Force on Climate-related Financial Disclosures (TCFD) - Forward looking information
on climate risks to operations and strategies to mitigate impacts of extreme weather events
through controlled indoor environments.
International Integrated Reporting Council (IIRC) - Integrated reporting bringing together
material sustainability impacts, dependencies and outcomes with financial performance,
business model and governance aspects.
Such sustainability reporting expands disclosure horizons beyond traditional accounting
statements. It helps evaluate non-financial capitals deployed and generated through vertical
farming operations, long term resilience, environmental stewardship and social goals
achievement. Voluntary adoption of relevant frameworks can demonstrate commitment to
sustainability priorities being core drivers of this emerging industry sector.
Challenges and Future Outlook
While the convergence of farming and technology opens new avenues for sustainable urban
food production, it also presents challenges from accounting and reporting perspectives:
Specialized Nature of Assets - Valuation complexities arise due to lack of established market
comparables for unique controlled environment agriculture assets.
Long Investment and Payback Periods - Traditional accounting metrics may not fully capture
long term value creation unfolding over decades as in conventional farming.
Technology Obsolescence Risks - Rapid innovations may render existing systems outdated
requiring revaluation adjustments to reflect fair values.
Subjective Assumptions - Key estimates involve inherent subjectivity around yield
projections, cost structures, commodity prices over extended time horizons.
Nascent State of the Industry - Evolving business models, lack of operating history and
uncertainty regarding commercial scales add estimation risks.
Lack of Specific Guidance - Existing accounting standards provide general principles but no
explicit guidelines tailored for high-tech agricultural ventures.
While experience will refine accounting practices over time, standard setters can consider
sector specific guidance addressing above challenges. Use of non-financial performance
indicators, scenario based disclosures and integrated reporting may better capture potentials
and trade-offs of shifting to a sustainability centered urban food system through vertical
farming. With supportive policy frameworks and accounting framework convergence, this
innovative field promises to redefine sustainable food production globally.
Conclusion
Accounting for vertical farming investments encompasses convergence of agriculture,
technology and environmental sustainability domains presenting both opportunities and
challenges from financial reporting perspectives. Existing accounting concepts and valuation
methods provide broad guidance if adapted judiciously to the specialized nature and long
term horizons characterizing these emerging capital intensive agricultural ventures.
Comprehensive qualitative and quantitative disclosures grounded in principles of relevance,
reliability and comparability ensure transparency around uncertainties, estimates, asset
characteristics, funding schemes, sustainability impacts and risks. Voluntary sustainability
reporting frameworks can complement mainstream financial statements in portraying the
multi-capital nature of vertical farm businesses. With refinements of practices and tailored
guidelines over time, accounting can aid informed investment decisions for transitioning to
sustainable urban food systems through innovative vertical farmingmodels.
Vertical farming refers to the practice of producing food crops in vertically stacked layers or
inclined surfaces with the use of controlled-environment agriculture technology including
artificial lighting. The objective of vertical farming is to grow crops in compact urban
settings at much higher yields and optimization compared to traditional open field farming
techniques. There has been rising interest in vertical farming as a means to address issues
related to land scarcity, urbanization, food security and environmental sustainability.
Accounting for investments in vertical farming systems presents unique challenges due to the
convergence of farming and technology. Traditional farming is based on land as the primary
asset whereas vertical farming relies on capital intensive technology systems. This requires
accounting standards and norms to appropriately capture the nature of vertical farming assets
and develop valuation and disclosure methods keeping in view the convergence of agriculture
and technology.
This paper aims to analyze key issues around investment accounting, valuation and disclosure
of investments in vertical farming systems from the perspective of companies investing in
this emerging space of sustainable urban agriculture. The paper evaluates relevant accounting
concepts, standards and methods that can provide guidance on appropriate accounting
treatment for vertical farming investments and disclosure of related financial information.
Accounting Concepts and Standards for Vertical Farming Assets
Vertical farming assets can be understood as a combination of tangible and intangible assets
forming a production system for growing crops in controlled environment vertical farms
located within urban settings. Some key accounting concepts and standards relevant for
valuing and accounting vertical farming investments include:
Tangible Assets - The physical infrastructure of a vertical farm including building structures,
lighting systems, hydroponic/aeroponic grow towers, irrigation systems, climate control
equipment etc. would constitute tangible assets for accounting purposes. These assets need to
be recognized initially at cost and subjected to depreciation over their estimated useful lives
as per prevailing accounting standards similar to other production equipment.
Intangible Assets - Significant elements of vertical farming technology like proprietary
lighting designs, sensor networks, automated processes, software, data models and algorithms
developed for optimizing yields would qualify as intangible assets. Internally developed
intangibles need to be capitalized as assets if they meet definability, separability, and
reliability criteria as per IAS 38. Externally acquired intangibles are recognized at cost.
Intangible assets also need to be amortized over their estimated useful lives.
Research and Development (R&D)
Considerable investments are often required in R&D to develop new
vertical farming technologies, refine designs and validate commercial
operations. R&D expenditure in the research phase needs to be expensed
as per IAS 38, whereas development costs meeting 定义,可行性, usefulness
criteria can be capitalized as intangible assets.
Right-of-use Assets - If farms are operated from leased buildings or land, corresponding
right-of-use assets as per IFRS 16 need to be recognized on the balance sheet along with
corresponding lease liabilities.
Agricultural Produce - Vertical farms grow a variety of food crops which qualify as
biological assets as per IAS 41. At harvest, agricultural produce needs to be measured at fair
value less costs to sell. Changes in fair value between periods are recognized in profit or loss.
Impairment - Assets deployed in vertical farms need to be tested periodically for impairment
as per IAS 36 whenever indications of impairment exist. Recoverable amounts are estimated
and impairment losses recognized promptly.
Government Grants - Funding and tax incentives received from government bodies to
encourage innovations and commercialization of vertical farming technologies need to be
accounted as per IAS 20 by either the income approach or as deferred income liability.
The above accounting concepts and standards provide a broad framework for appropriately
recognizing, measuring, presenting and disclosing vertical farming assets and investments on
the balance sheet and income statement based on their nature and characteristics aligned with
capitalized investments in other high-technology sectors.
Methods for Initial Valuation and Subsequent Measurement
There are several accepted valuation methods that can be adopted to arrive at reasonable
estimates of fair values for various vertical farming assets both at the time of initial
capitalization as well as for subsequent impairment testing and revaluation purposes. Some of
the commonly used valuation approaches include:
Cost Method - For valuing recently acquired tangible assets based on amounts paid to
purchase or construct the assets. It provides an objective measure of fair value but does not
capture changes in market conditions or asset performance over time.
Income Approach - Discounted cash flow (DCF) models valuing expected future cash flows
discounted at a rate reflecting risks. Can be used to value intangibles like technologies,
licenses etc. Requires significant assumptions and projections.
Market Approach - Guideline public company (GPC) method and guideline transaction (GT)
method look at market multiples observed for comparable assets in recent transactions or
public companies in the same industry after making necessary quantitative and qualitative
adjustments. Provides external validation but comparability can be challenging for emerging
sectors like vertical farming.
Relief from Royalty Method - Estimates value of intangible asset by calculating net present
value of projected cost savings from owning the asset instead of paying royalties. Commonly
used for technologies and brands. Depends on reliable projections.
Replacement Cost Method - Estimates value based on costs that would be incurred to replace
the functionality provided by the specific asset. Relevant for unique
manufacturing/processing facilities and equipment requiring specialized skills.
For subsequent impairment testing and revaluations, fair values estimated using the above
methods serve as benchmark for comparison with carrying values. Going concern
assumptions are an important consideration given long investment horizons in agriculture.
Disclosures on key assumptions, sensitivity of estimates to changes, and reconciliation to
carrying values also provide transparency.
Disclosure Requirements for Vertical Farming Investments
Appropriate disclosures around vertical farming investments are important to enable users of
financial statements understand the extent, nature and risks around such unconventional
agricultural business models. Some specific disclosure items that would be relevant as per
prevailing accounting standards include:
Accounting Policies - Significant accounting policies adopted for classifying, recognizing,
measuring and reporting vertical farming assets, biological assets, impairment testing
methodology etc.
Classes of Assets - Classes of tangible and intangible assets deployed in vertical farming
operations segregated based on nature and use along with useful lives adopted for
depreciation/amortization.
Key Assumptions - Critical assumptions used in valuations and impairment testing regarding
growth rates, inflation, discount rates, yield projections, commodity prices etc. with
sensitivity analysis.
Capitalized Costs - Expenditure capitalized as intangible assets during the period along with
rationale for meeting recognition criteria. R&D projects still in progress.
Impairment Losses - Amount of any impairment losses recognized or reversed during the
period, assets/cash generating units affected, key reasons and quantitative disclosures as per
IAS 36.
Biological Assets - Reconciliation of changes in biological assets carried at fair value
including harvests, additions, fair value adjustments etc. Basis of fair valuation
determination.
Right-of-use Assets - Classes of leased assets recognized on balance sheet along with details
of lease liabilities, maturity analysis, amounts recognized in P&L etc.
Funding/Incentives - Details of any special government/industry funding or tax incentives
received including recognition and presentation.
Risk Factors - Technology, market and operational risks specific to vertical farming business
including those arising from specialized nature of assets, production processes, dependencies
etc.
The above disclosures provide transparency on accounting policies, estimates involved,
nature and characteristics of vertical farming investments from both qualitative and
quantitative perspectives in line with principles of relevance, reliability and comparability as
per conceptual framework. This assists financial statement users in better understanding risks
and return prospects of such unconventional agricultural ventures.
Convergence with Sustainability Reporting Standards
With sustainability goals forming core objectives of vertical farming, there is opportunity for
convergence with emerging sustainability reporting standards that highlight environmental
and social priorities along with financial performance. Key frameworksl applicable in this
context include:
Global Reporting Initiative (GRI) - Disclosures on resource consumption metrics, waste
generation, emission reductions from indoor farming, energy/water usage intensity, organic
certification programmes etc.
Sustainability Accounting Standards Board (SASB) - Industry specific standards for
“Agricultural Products” sector covering metrics on land use, working conditions, food safety
issues etc.
Task Force on Climate-related Financial Disclosures (TCFD) - Forward looking information
on climate risks to operations and strategies to mitigate impacts of extreme weather events
through controlled indoor environments.
International Integrated Reporting Council (IIRC) - Integrated reporting bringing together
material sustainability impacts, dependencies and outcomes with financial performance,
business model and governance aspects.
Such sustainability reporting expands disclosure horizons beyond traditional accounting
statements. It helps evaluate non-financial capitals deployed and generated through vertical
farming operations, long term resilience, environmental stewardship and social goals
achievement. Voluntary adoption of relevant frameworks can demonstrate commitment to
sustainability priorities being core drivers of this emerging industry sector.
Challenges and Future Outlook
While the convergence of farming and technology opens new avenues for sustainable urban
food production, it also presents challenges from accounting and reporting perspectives:
Specialized Nature of Assets - Valuation complexities arise due to lack of established market
comparables for unique controlled environment agriculture assets.
Long Investment and Payback Periods - Traditional accounting metrics may not fully capture
long term value creation unfolding over decades as in conventional farming.
Technology Obsolescence Risks - Rapid innovations may render existing systems outdated
requiring revaluation adjustments to reflect fair values.
Subjective Assumptions - Key estimates involve inherent subjectivity around yield
projections, cost structures, commodity prices over extended time horizons.
Nascent State of the Industry - Evolving business models, lack of operating history and
uncertainty regarding commercial scales add estimation risks.
Lack of Specific Guidance - Existing accounting standards provide general principles but no
explicit guidelines tailored for high-tech agricultural ventures.
While experience will refine accounting practices over time, standard setters can consider
sector specific guidance addressing above challenges. Use of non-financial performance
indicators, scenario based disclosures and integrated reporting may better capture potentials
and trade-offs of shifting to a sustainability centered urban food system through vertical
farming. With supportive policy frameworks and accounting framework convergence, this
innovative field promises to redefine sustainable food production globally.
Conclusion
Accounting for vertical farming investments encompasses convergence of agriculture,
technology and environmental sustainability domains presenting both opportunities and
challenges from financial reporting perspectives. Existing accounting concepts and valuation
methods provide broad guidance if adapted judiciously to the specialized nature and long
term horizons characterizing these emerging capital intensive agricultural ventures.
Comprehensive qualitative and quantitative disclosures grounded in principles of relevance,
reliability and comparability ensure transparency around uncertainties, estimates, asset
characteristics, funding schemes, sustainability impacts and risks. Voluntary sustainability
reporting frameworks can complement mainstream financial statements in portraying the
multi-capital nature of vertical farm businesses. With refinements of practices and tailored
guidelines over time, accounting can aid informed investment decisions for transitioning to
sustainable urban food systems through innovative vertical farmingmodels.
Vertical farming refers to the practice of producing food crops in vertically stacked layers or
inclined surfaces with the use of controlled-environment agriculture technology including
artificial lighting. The objective of vertical farming is to grow crops in compact urban
settings at much higher yields and optimization compared to traditional open field farming
techniques. There has been rising interest in vertical farming as a means to address issues
related to land scarcity, urbanization, food security and environmental sustainability.
Accounting for investments in vertical farming systems presents unique challenges due to the
convergence of farming and technology. Traditional farming is based on land as the primary
asset whereas vertical farming relies on capital intensive technology systems. This requires
accounting standards and norms to appropriately capture the nature of vertical farming assets
and develop valuation and disclosure methods keeping in view the convergence of agriculture
and technology.
This paper aims to analyze key issues around investment accounting, valuation and disclosure
of investments in vertical farming systems from the perspective of companies investing in
this emerging space of sustainable urban agriculture. The paper evaluates relevant accounting
concepts, standards and methods that can provide guidance on appropriate accounting
treatment for vertical farming investments and disclosure of related financial information.
Accounting Concepts and Standards for Vertical Farming Assets
Vertical farming assets can be understood as a combination of tangible and intangible assets
forming a production system for growing crops in controlled environment vertical farms
located within urban settings. Some key accounting concepts and standards relevant for
valuing and accounting vertical farming investments include:
Tangible Assets - The physical infrastructure of a vertical farm including building structures,
lighting systems, hydroponic/aeroponic grow towers, irrigation systems, climate control
equipment etc. would constitute tangible assets for accounting purposes. These assets need to
be recognized initially at cost and subjected to depreciation over their estimated useful lives
as per prevailing accounting standards similar to other production equipment.
Intangible Assets - Significant elements of vertical farming technology like proprietary
lighting designs, sensor networks, automated processes, software, data models and algorithms
developed for optimizing yields would qualify as intangible assets. Internally developed
intangibles need to be capitalized as assets if they meet definability, separability, and
reliability criteria as per IAS 38. Externally acquired intangibles are recognized at cost.
Intangible assets also need to be amortized over their estimated useful lives.
Research and Development (R&D)
Considerable investments are often required in R&D to develop new
vertical farming technologies, refine designs and validate commercial
operations. R&D expenditure in the research phase needs to be expensed
as per IAS 38, whereas development costs meeting 定义,可行性, usefulness
criteria can be capitalized as intangible assets.
Right-of-use Assets - If farms are operated from leased buildings or land, corresponding
right-of-use assets as per IFRS 16 need to be recognized on the balance sheet along with
corresponding lease liabilities.
Agricultural Produce - Vertical farms grow a variety of food crops which qualify as
biological assets as per IAS 41. At harvest, agricultural produce needs to be measured at fair
value less costs to sell. Changes in fair value between periods are recognized in profit or loss.
Impairment - Assets deployed in vertical farms need to be tested periodically for impairment
as per IAS 36 whenever indications of impairment exist. Recoverable amounts are estimated
and impairment losses recognized promptly.
Government Grants - Funding and tax incentives received from government bodies to
encourage innovations and commercialization of vertical farming technologies need to be
accounted as per IAS 20 by either the income approach or as deferred income liability.
The above accounting concepts and standards provide a broad framework for appropriately
recognizing, measuring, presenting and disclosing vertical farming assets and investments on
the balance sheet and income statement based on their nature and characteristics aligned with
capitalized investments in other high-technology sectors.
Methods for Initial Valuation and Subsequent Measurement
There are several accepted valuation methods that can be adopted to arrive at reasonable
estimates of fair values for various vertical farming assets both at the time of initial
capitalization as well as for subsequent impairment testing and revaluation purposes. Some of
the commonly used valuation approaches include:
Cost Method - For valuing recently acquired tangible assets based on amounts paid to
purchase or construct the assets. It provides an objective measure of fair value but does not
capture changes in market conditions or asset performance over time.
Income Approach - Discounted cash flow (DCF) models valuing expected future cash flows
discounted at a rate reflecting risks. Can be used to value intangibles like technologies,
licenses etc. Requires significant assumptions and projections.
Market Approach - Guideline public company (GPC) method and guideline transaction (GT)
method look at market multiples observed for comparable assets in recent transactions or
public companies in the same industry after making necessary quantitative and qualitative
adjustments. Provides external validation but comparability can be challenging for emerging
sectors like vertical farming.
Relief from Royalty Method - Estimates value of intangible asset by calculating net present
value of projected cost savings from owning the asset instead of paying royalties. Commonly
used for technologies and brands. Depends on reliable projections.
Replacement Cost Method - Estimates value based on costs that would be incurred to replace
the functionality provided by the specific asset. Relevant for unique
manufacturing/processing facilities and equipment requiring specialized skills.
For subsequent impairment testing and revaluations, fair values estimated using the above
methods serve as benchmark for comparison with carrying values. Going concern
assumptions are an important consideration given long investment horizons in agriculture.
Disclosures on key assumptions, sensitivity of estimates to changes, and reconciliation to
carrying values also provide transparency.
Disclosure Requirements for Vertical Farming Investments
Appropriate disclosures around vertical farming investments are important to enable users of
financial statements understand the extent, nature and risks around such unconventional
agricultural business models. Some specific disclosure items that would be relevant as per
prevailing accounting standards include:
Accounting Policies - Significant accounting policies adopted for classifying, recognizing,
measuring and reporting vertical farming assets, biological assets, impairment testing
methodology etc.
Classes of Assets - Classes of tangible and intangible assets deployed in vertical farming
operations segregated based on nature and use along with useful lives adopted for
depreciation/amortization.
Key Assumptions - Critical assumptions used in valuations and impairment testing regarding
growth rates, inflation, discount rates, yield projections, commodity prices etc. with
sensitivity analysis.
Capitalized Costs - Expenditure capitalized as intangible assets during the period along with
rationale for meeting recognition criteria. R&D projects still in progress.
Impairment Losses - Amount of any impairment losses recognized or reversed during the
period, assets/cash generating units affected, key reasons and quantitative disclosures as per
IAS 36.
Biological Assets - Reconciliation of changes in biological assets carried at fair value
including harvests, additions, fair value adjustments etc. Basis of fair valuation
determination.
Right-of-use Assets - Classes of leased assets recognized on balance sheet along with details
of lease liabilities, maturity analysis, amounts recognized in P&L etc.
Funding/Incentives - Details of any special government/industry funding or tax incentives
received including recognition and presentation.
Risk Factors - Technology, market and operational risks specific to vertical farming business
including those arising from specialized nature of assets, production processes, dependencies
etc.
The above disclosures provide transparency on accounting policies, estimates involved,
nature and characteristics of vertical farming investments from both qualitative and
quantitative perspectives in line with principles of relevance, reliability and comparability as
per conceptual framework. This assists financial statement users in better understanding risks
and return prospects of such unconventional agricultural ventures.
Convergence with Sustainability Reporting Standards
With sustainability goals forming core objectives of vertical farming, there is opportunity for
convergence with emerging sustainability reporting standards that highlight environmental
and social priorities along with financial performance. Key frameworksl applicable in this
context include:
Global Reporting Initiative (GRI) - Disclosures on resource consumption metrics, waste
generation, emission reductions from indoor farming, energy/water usage intensity, organic
certification programmes etc.
Sustainability Accounting Standards Board (SASB) - Industry specific standards for
“Agricultural Products” sector covering metrics on land use, working conditions, food safety
issues etc.
Task Force on Climate-related Financial Disclosures (TCFD) - Forward looking information
on climate risks to operations and strategies to mitigate impacts of extreme weather events
through controlled indoor environments.
International Integrated Reporting Council (IIRC) - Integrated reporting bringing together
material sustainability impacts, dependencies and outcomes with financial performance,
business model and governance aspects.
Such sustainability reporting expands disclosure horizons beyond traditional accounting
statements. It helps evaluate non-financial capitals deployed and generated through vertical
farming operations, long term resilience, environmental stewardship and social goals
achievement. Voluntary adoption of relevant frameworks can demonstrate commitment to
sustainability priorities being core drivers of this emerging industry sector.
Challenges and Future Outlook
While the convergence of farming and technology opens new avenues for sustainable urban
food production, it also presents challenges from accounting and reporting perspectives:
Specialized Nature of Assets - Valuation complexities arise due to lack of established market
comparables for unique controlled environment agriculture assets.
Long Investment and Payback Periods - Traditional accounting metrics may not fully capture
long term value creation unfolding over decades as in conventional farming.
Technology Obsolescence Risks - Rapid innovations may render existing systems outdated
requiring revaluation adjustments to reflect fair values.
Subjective Assumptions - Key estimates involve inherent subjectivity around yield
projections, cost structures, commodity prices over extended time horizons.
Nascent State of the Industry - Evolving business models, lack of operating history and
uncertainty regarding commercial scales add estimation risks.
Lack of Specific Guidance - Existing accounting standards provide general principles but no
explicit guidelines tailored for high-tech agricultural ventures.
While experience will refine accounting practices over time, standard setters can consider
sector specific guidance addressing above challenges. Use of non-financial performance
indicators, scenario based disclosures and integrated reporting may better capture potentials
and trade-offs of shifting to a sustainability centered urban food system through vertical
farming. With supportive policy frameworks and accounting framework convergence, this
innovative field promises to redefine sustainable food production globally.
Conclusion
Accounting for vertical farming investments encompasses convergence of agriculture,
technology and environmental sustainability domains presenting both opportunities and
challenges from financial reporting perspectives. Existing accounting concepts and valuation
methods provide broad guidance if adapted judiciously to the specialized nature and long
term horizons characterizing these emerging capital intensive agricultural ventures.
Comprehensive qualitative and quantitative disclosures grounded in principles of relevance,
reliability and comparability ensure transparency around uncertainties, estimates, asset
characteristics, funding schemes, sustainability impacts and risks. Voluntary sustainability
reporting frameworks can complement mainstream financial statements in portraying the
multi-capital nature of vertical farm businesses. With refinements of practices and tailored
guidelines over time, accounting can aid informed investment decisions for transitioning to
sustainable urban food systems through innovative vertical farmingmodels.
