(Menomonee Falls, WI — November 1, 2017) Never have the financial stakes been higher in agriculture, yet few producers have the accounting training to effectively monitor and control their expanding operations. In direct response to the Farm Crisis of the ‘80s the Farm Financial Standards Council (the Council) developed its Financial Guidelines for Agriculture. This document is designed to assist in developing sound financial statements on agricultural operations. However, direct adoption of the Guidelines by farmers has been hampered by two obstacles – understanding financial terms and not being accountants.
For that reason the Council has developed and now released a 17-page Implementation Guide to assist non-accounting individuals in developing sound financial reports. It is available free of charge and is designed to be used in tandem with the Financial Guidelines and Management Accounting Guidelines documents available through the Council.
This is according to Jeff Bushey, CPA, a managing partner with Nietzke & Faupel, PC, an accounting firm in Pigeon, MI. As chair and a long-time member of the Technical Committee for the Council., he and fellow committee members are charged with keeping the Guidelines documents current and publishing revisions to them when deemed necessary.
“The first obstacle to adoption is often expressed as the question, ‘How do I get started moving beyond basic, mandatory tax records to meaningful financial reporting’?” Bushey says. “Most agricultural producers and lenders are already using some system to collect and report financial information with farm record books or record keeping software programs which are designed to provide information for two purposes: reporting federal income taxes, and; securing a loan from a financial institution.”
That information is required, at least annually, he explains. “With some additional information, the result can be a vastly-improved financial reporting program.”
This is compounded by a second obstacle: farmers and ranchers are great producers but generally are not accountants. “In a cost-versus-benefit framework, the cost is often considered too high to fully implement the Guidelines,” Bushey says.
“The new Implementation Guide is a simple way to learn how to use the Financial Guidelines. It’s written for a farmer using everyday terms,” Bushey explains. “The Financial Guidelines explain how to produce useful financial information. The Implementation Guide is a road map of how to get there.”This publication leads non-accountants in an abbreviated implementation of the Guidelines by applying a checklist approach and discussion of implementation issues. This checklist enables users to assess the information needed at the various stages of implementation and the benefits and costs associated with moving to each successive stage.
“Once they categorize their current level of farm records users can then begin advancing at their own pace through up to four stages of implementation,” he states. “For example, Stage I only requires a cash basis tax return, Stage II adds a market value balance sheet, Stage III incorporates cost basis valuation and Stage IV completes the process with double-entry accounting records.”
“The Implementation Guide suggests that producers don’t have to go all-in to benefit from partially implementing the fundamental financial reporting concepts discussed in the Financial Guidelines and that the recommendations are likely to be implemented in stages,” notes retired Purdue University Extension Specialist and CPA Alan Miller. He is also a long-time member of the Council’s Technical Committee.
He explains that as in any do-it-yourself project, a level of commitment will be required to achieve meaningful results. These commitments will often require changes in daily, or at minimum weekly, operating procedures.
“Family members and employees must also be committed to the timeliness, accuracy and discipline in gathering information and coding transactions to lay the groundwork for improved financial control and decisions,” Miller explains.
“Each producer must ultimately determine to what extent they will receive additional net benefits from adopting more of the recommendations.”
As farmers implement the Guidelines they can begin benefitting in these areas:
• Improve management decision-making and enhanced profitability
• Better lender relationships and access to capital
• Enhance production as well as financial understanding of their business
• Focus on strengths that set them apart from their peers
• Determine cost of production (through the Council’s Managerial Accounting Guidelines)
• Gain a better understanding of standard financial measures
“A fundamental concept of financial reporting is that accounting period profitability can only be measured accurately on an accrual basis. Cash basis income tax returns are not indicative of farm profitability,” Miller stresses.
“The net benefit of moving to the next stage — accrual-adjusted financial reports to assess farm profitability and financial condition — will be a huge improvement in the quality of information available for decision-making.”