Farm Management Software Blog

Can you trust a report that's not backed by accounting data?

"It's not what people don't know that hurts them. It's what they do know that just ain't so."

We will be examining the changes you need to make in handling Agricultural inventories as you move from traditional agriculture financial reporting to more up to date statements that follow Generally Accepted Accounting Principles.

You can count on the "Extra" edition of Farm Futures magazine to concentrate on relevant management topics.  The 2012 edition, Power Up Profits, contains two articles that dovetail nicely with the objectives of FBS Software.

Over the past three articles we've contrasted the ways farmers produce financial statements and the conflicting goals of maintaining simultaneous cash and accrual records.
      

Over the past two articles we've contrasted the ways farmers produce financial statements and the conflicting goals of maintaining simultaneous farm financial records by cash and accrual.

The conflict is created by these realities:

    •      Because the IRS allows it, most farmers file cash-basis tax returns.
    •      As a result, the cash-basis 1040 Schedule F intentionally distorts true farm earnings.
    •      Few farmers have the training or incentive to prepare accrual financial statements.

Therefore an "adjusted accrual" system (Coordinated Financial Statements) was developed by Tom Frey and Danny Klinefelter at the University of Illinois in the late 70s.  Further refined and re-dubbed "Agricultural Financial Reporting and Analysis" (AFRA), this methodology is the heart of the process adopted by the Farm Financial Standards Council.

We began a series on farm financial reporting in agriculture by looking at three general ways farmers produce financial statements (cash-basis accounting / "black box" analysis, cash-basis accounting/"user-supplied" data and accrual/managerial accounting). Before moving into more depth with the agricultural financial reporting process, let's examine all the reporting requirements that operations sooner or later encounter. In fact, we've identified eight coexisting, and often conflicting information goals in farm records:

We ran across this AgTalk post by Mark Wilsdorf, who markets an add-on to Quickbooks for farmers.  If anyone has figured out how to make this ubiquitous small business accounting program function as an effective farm financial management tool it would be Mark.

Attendees at the 2011 Ag Bankers Conference experienced a warping of the time-space continuum as 93 percent reported that their farm customers were managing their farms like it was 1981, not 2011.  Unbelievably, only seven out of 100 lenders had clients using accrual accounting.

’Tis the season to toil over financial statements.  Many of you depend on programs like Finpack and AFRA (Agricultural Financial Reporting and Analysis) to convert your cash-basis accounting records to “adjusted accrual” financial statements.  Based on the Coordinated Financial Statement forms developed at the University of Illinois in the late 70s, AFRA will be celebrating its 30^th birthday in 2014.