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Accounting for Agricultural Producers (Portfolio 5205)

Product Code: TPOR45
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Accounting for Agricultural Producers, written by Barbara M. Wheeling, Ph.D., CPA, explains and analyzes financial accounting guidelines for agricultural operations. 

A significant number of farm liquidations in the 1980's led to changes in ownership of agricultural land and an increasing trend in absentee ownership of farm operations. Many absentee owners are unfamiliar with agricultural production and financial management, resulting in the need for professional managers who are competent in these areas and for more education in accounting and financial management for both the professional farm managers and the absentee owners. 

The accounting profession has provided limited guidance for industry-specific issues in accounting for agricultural operations. In response to this lack of guidance, the Farm Financial Standards Council (FFSC) has developed and published a set of accounting guidelines for the agricultural industry. The FFSC guidelines provide recommendations for standardized format and content of farm financial statements and disclosure notes, specific farm financial ratios with standardized definitions and methods of calculation, and suggestions for the use of standardized farm financial data and the development of a database of farm financial information. The FFSC guidelines identify and provide treatments for specific items, such as personal assets and liabilities combined with farm business assets and liabilities, raised breeding livestock, capital leases, inventories, and deferred taxes, that are acceptable alternatives to generally accepted accounting principles in widespread use in the agricultural industry. 

This Portfolio presents detailed discussion and analysis of the methods, procedures, and financial statement presentations in the FFSC guidelines that are alternative to generally accepted accounting principles. It first compares the current professional literature for agricultural operations with the FFSC guidelines.  

Accounting for Agricultural Producers also provides detailed examples of the procedures required to implement the FFSC guidelines for the benefit of preparers and analysts. This Portfolio augments the current literature by providing examples of transactions and year-end procedures for preparing farm financial statements, currently not available in the FFSC guidelines or other pronouncements. 

Aside from agricultural producers, many groups and individuals, including agricultural lenders, academicians, farm research specialists, representatives of the U.S. Department of Agriculture's Extension Service and Economic Research Service, agricultural economists, farm trade groups, public officials and regulators, can benefit from the use of a standardized system of financial reporting in the agricultural industry for comparative analysis.

Accounting for Agricultural Producers allows you to benefit from:

  • Hundreds of hours of original research on specific tax planning topics from leading practitioners in this area.
  • Invaluable practice documents including tables, charts and lists.
  • Guidance from world-class experts.
  • Real-world and in-depth analysis that lets you explore various options.
  • Time-saving access to relevant sections of tax laws, regulations, court cases, IRS documents and more.
  • Alternative approaches to both common and unique tax scenarios. 

This Portfolio is included in the Accounting Policy & Practice Series, a comprehensive series of titles which explain, explicate, and offer commentary on a wide range of accounting and financial management topics, including revenue recognition, income taxes, leasing, business combinations, debt instruments, risk management, internal controls and more. 

Detailed Analysis

I. Authoritative Pronouncements and Scope of Portfolio

A. Purpose and Role of Portfolio

B. Background and History

1. Need for Guidance

2. Farm Financial Standards Council

C. Financial Guidelines for Agricultural Producers

D. Authoritative Literature and Pronouncements

1. AICPA Statement of Position No. 85-3

a. Scope

b. Definitions

c. Growing Crops

d. Harvested Crops

e. Development Costs

f. Investments in Agricultural Cooperatives

2. AICPA Audit and Accounting Guide

a. Scope

b. Inventories

c. Investments in Cooperatives

d. Government Loans

e. Income Taxes

3. Other Professional Pronouncements

E. Scope of Portfolio

II. Farm Financial Statements

A. Components

B. Combined Financial Statements

C. Income Statement

1. Gross Revenue

a. In General

b. Sales of Breeding Livestock

c. Government Programs

2. Comparison of Income Statement Formats

a. Gross Revenue Format

b. Value of Farm Production Format

D. Statement of Owner Equity

1. Business-Only Format

2. Statement of Net Worth

E. Balance Sheet

1. Comparison of Formats

a. Business-Only Format

b. Combined Balance Sheet

F. Statement of Cash Flows

III. Alternatives to GAAP for Farm Financial Statements

A. Relationship to Other Sections

B. Underlying Principles

1. Alternative Bases of Accounting

2. Historical Cost

C. Financial Reporting Basis

1. Cash-Basis

2. Accrual-Adjusted Approach

3. Year-End Adjustments Generally

a. Prepaid Expenses

b. Accrued Expenses

c. Accrued Revenues

D. Market-Based Balance Sheet

1. Alternate Valuation Methods

2. Formats

3. Year-End Market Value Adjustments

IV. Departures from GAAP for Particular Items

Introductory Material

A. Inventory Valuation

1. Revenue Recognition

2. Year-End Adjustments

a. Inventories Purchased for Resale

(1) Purchased Market Livestock for Resale

(2) Purchased Crop for Resale

(3) Purchase of Feedstuffs for Use in the Operation

(4) Purchase of Feed for Resale

b. Inventories Purchased for Use in the Production Process Other Than Feedstuffs.

c. Inventories Raised/Harvested for Use in the Production Process.

(1) Use of Raised Feedstuffs

d. Inventories Raised/Harvested for Sale

(1) Raised Crops/Feed for Sale

(2) Raised Market Livestock for Sale

(3) Market Values

(4) Purchased/Raised Feed for Sale and Purchased Crop for Resale

3. Commingling of Inventories

4. Conclusion and Suggestions

B. Perennial Crops

1. In General

2. Expenses

C. Raised Breeding Livestock

1. Issues

2. Full Cost Absorption Method

3. Base Value Method

a. Base Values

b. Animal Groupings

c. Individual vs. Group Approach

d. Changes in Quantity and Changes in Base Values

e. Single vs. Multiple Transfer Points

f. Long Version vs. Shortcut Alternative

D. Investments

1. Investments in Entities Other Than Farm Cooperatives

2. Investments in Farm Cooperatives

3. Cash Value of Life Insurance

4. Retirement Accounts

E. Government Loans

F. Capital Leases

1. GAAP Accounting for Capital Leases

a. Present Value

b. Interest Rate

c. Guaranteed Residual Value or Bargain Purchase Option

2. FFSC Alternative One

3. FFSC Alternative Two

G. Income Taxes and Deferred Taxes

1. Explanation and Requirements

2. FFSC Guidelines

3. Example

4. Computational Steps

5. Current Portion of Deferred Taxes

a. Components

b. Procedures Summarized

c. Accrued Revenues

d. Prepaid Expenses

e. Accrued Expenses

f. Journal Entries

6. Non-Current Portion of Deferred Taxes

a. Components

b. Installment Notes Receivable

c. Long-Term Assets

d. Steps: First Component

e. Steps: Second Component

f. Tax Refund Situations

H. Summary

V. Analysis of Farm Financial Statements

A. Relationship to Rest of Portfolio

B. Comparative Financial Statements

C. Financial Ratios

1. Categories

2. Liquidity Ratios

a. Current Ratio

b. Working Capital

3. Solvency Ratios

a. Debt to Assets Ratio

b. Equity to Assets Ratio

c. Debt to Equity Ratio

4. Repayment Capacity Ratios

a. Term Debt and Capital Lease Coverage Ratio

b. Capital Replacement and Term Debt Repayment Margin

5. Profitability Ratios

a. Rate of Return of Farm Assets

b. Rate of Return on Farm Equity

c. Operating Profit Margin Ratio

d. Net Farm Income

6. Financial Efficiency Ratios

a. Asset Turnover Ratio

b. Operational Ratios

D. Limitations of the Use of Financial Ratios

VI. Checklist

Working Papers

TABLE OF WORKSHEETS

Worksheet 1 Excerpts From AICPA Statement of Position No. 85-3, Accounting by Agricultural Producers and Agricultural Cooperatives April, 1985

Worksheet 2 Excerpts From AICPA Audit and Accounting Guide, Agricultural Producers and Agricultural Cooperatives May 1, 2007

Worksheet 3 Excerpts From Accounting Research Bulletin No. 43, Restatement and Revision of Accounting Research Bulletins Nos. 1-42 and Accounting Terminology Bulletin No. 1, Chapter 4 June, 1953

Worksheet 4 Excerpts From FASB Statement of Financial Accounting Concepts No. 5, Recognition and Measurement in Financial Statements 1984

Worksheet 5 Excerpts From SEC Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements December, 1999

Worksheet 6 Gross Revenue Format for Income Statement

Worksheet 7 VFP Format for Income Statement

Worksheet 8 Format for Statement of Owner Equity for Farm Business Only

Worksheet 9 Format for Statement of Net Worth

Worksheet 10 Balance Sheet Format for Farm Business Only

Worksheet 11 Balance Sheet Format With Personal and Farm Business Assets and Liabilities

Worksheet 12 Format for the Statement of Cash Flows

Worksheet 13 Farm Chart of Accounts

Worksheet 14 Comparison of Journal Entries for Cash-Basis, Accrual-Basis, and Accrual-Adjusted Systems: Examples of a Utility Bill and Sale of Feeder Cattle

Worksheet 15 Examples of Cash-Basis Income Statement Versus Accrual-Adjusted Income Statement

Worksheet 16 Difference Between Cash-Basis Accounting and Accrual-Adjusted Treatment for Prepaid Insurance

Worksheet 17 Difference Between Cash-Basis Accounting and Accrual-Adjusted Treatment for Accrued Interest

Worksheet 18 Difference Between Cash-Basis Accounting and Accrual-Adjusted Treatment for Accrued Revenues

Worksheet 19 Market-Based Balance Sheets: Various Presentations

Worksheet 20 Procedures for Reporting the Excess of Market Values Over Cost/Tax Basis

Worksheet 21 Difference Between Cash-Basis Accounting and Accrual-Adjusted Treatment for the Purchase and Sale of Market Livestock

Worksheet 22 Difference Between Cash-Basis Accounting and Accrual-Adjusted Treatment for Purchased Feed

Worksheet 23 Difference Between Cash-Basis Accounting and Accrual-Adjusted Treatment for Raised Feed for Use

Worksheet 24 Difference Between Cash-Basis Accounting and Accrual-Adjusted Treatment for Raised Crop for Sale

Worksheet 25 Difference Between Cash-Basis Accounting and Accrual-Adjusted Treatment for Raised Market Livestock

Worksheet 26 Preparing Accrual-Adjusted Financial Statements With Market Adjustments

Worksheet 27 Example of Accounting Procedures for Co-Mingled Inventory

Worksheet 28 Difference Between Cash-Basis Accounting and Accrual-Adjusted Treatment for Cash Investments in Growing Crops

Worksheet 29 Example of Base Values for Raised Breeding Livestock: Individual Animal Approach

Worksheet 30 Example of Base Values for Raised Breeding Livestock: Group Value Approach

Worksheet 31 Example of Base Values for Raised Breeding Livestock: Single Transfer Point

Worksheet 32 Example of Base Values for Raised Breeding Livestock: Shortcut Alternative

Worksheet 33 Example of Base Values for Raised Breeding Livestock: Long Version

Worksheet 34 Example of Base Values for Raised Breeding Livestock: Shortcut Alternative With Base Value Changes

Worksheet 35 Example of Accounting Procedures for Government Loans

Worksheet 36 Example of Accounting Procedures for Capital Leases Under GAAP

Worksheet 37 Example of Accounting Procedures for Capital Leases Under FFSC Alternative 1

Worksheet 38 Example of Accounting Procedures for Capital Leases Under FFSC Alternative 2

Worksheet 39 Example of Accounting Procedures for Accrued Tax Liability

Worksheet 40 Example of Accounting Procedures for Current Deferred Taxes

Worksheet 41 Example of Accounting Procedures for Deferred Taxes on Accrued Revenues

Worksheet 42 Examples of Accounting Procedures for Deferred Taxes for Prepaid Expenses

Worksheet 43 Example of Accounting Procedures for Deferred Taxes for Accrued Expenses

Worksheet 44 Example of Applying Shortcut Method for Current Deferred Taxes

Worksheet 45 Example of Accounting Procedures for Non-Current Deferred Taxes

Worksheet 46 Example of Accounting Procedures for First Component of Non-Current Deferred Taxes

Worksheet 47 Example of Accounting Procedures for Second Component of Non-Current Deferred Taxes

Worksheet 48 Overview of Financial Reporting for Agricultural Operations

Worksheet 49 FFSC Farm Financial Ratios

Worksheet 50 Example of an Adjusted Trial Balance for a Farm Operation

Worksheet 51 Example of Accrual-Adjusted Farm Income Statement

Worksheet 52 Example of Accrual-Adjusted Farm Statement of Owner Equity

Worksheet 53 Example of Accrual-Adjusted Farm Balance Sheet

Worksheet 54 Example of Farm Statement of Cash Flows

Worksheet 55 Checklist for the Preparation of Accrual-Adjusted Financial Statements From a Single-Entry Accounting System

Worksheet 56 Accounting for Agricultural Producers: Significant Accounting Pronouncements Principally Discussed

Bibliography

OFFICIAL

Securities and Exchange Commission:

Financial Accounting Standards Board:

Emerging Issues Task Force:

Accounting Research Bulletins:

American Institute of Certified Public Accountants:

Statements on Auditing Standards:

Statements of Position:

UNOFFICIAL

Bureau of National Affairs

Other

Barbara Wheeling
Barbara M. Wheeling, Ph.D., Accounting, University of Alberta (1999); M.B.A., focus on Accounting and Finance, University of Wyoming (1989); B.S., Animal Science, North Dakota State University (1972). Ms. Wheeling worked in the Accounting Research and SEC Department at the former Coopers & Lybrand. She has consulted with agricultural producers both in the United States and internationally. An assistant professor at Montana State University-Billings, Ms. Wheeling is a member of the Northwest Farm Business Management Instructors.  Ms. Wheeling's publications include Alternatives to GAAP for the Agricultural Industry, Today's CPA (November/December 2005); Agricultural Accounting: A Case for Asset Revaluation, Mountain Plains Journal of Business and Economics (Vol. 2, 2001); and Introduction to Agricultural Accounting, Delmar Learning (anticipated September 2007).