8 Conflicting Goals For Farm Financial Reporting
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:
1. Cash accounting is necessary for cash-basis tax returns, cash flow budgets, and bank account reconciliation. Revenue and expenses are recognized when cash is exchanged.
2. Accrual accounting (which provides the basis for most external financial statements) matches costs, revenue, and profits to the appropriate time period, in compliance with generally accepted accounting principles. In order to generate accrual information, producers who still rely on cash accounting must:
-
Maintain two sets of book
-
Operate an accounting system that can maintain concurrent cash and accrual balances, or
-
Utilize the Farm Financial Standard's adjusted accrual system to convert cash revenue and expenses to accrual
3. Inventories, whose valuation is affected by both accounting (purchases, sales and cost allocations) and production (physical field and feedlot) events. This process is further complicated by:
-
Dual quantities (head, hundredweight; ton, pound; ration, ingredient) in one or both systems
-
Multiple valuation methods (cost, market, tax basis) and
-
Determining which source—accounting or production—is "right" when inventories don't reconcile
4. Production systems, which when compared with accounting systems, tend to be less structured (groups of animals and crop production rarely coincide with fiscal periods) and are more tolerant of changes in "closed" months. Typically, accountants will insist on writing off inventory variances in a current or future period, while production specialists will want to go back and fix the original error to avoid distorting performance data.
5. Managerial accounting goes a step beyond accrual accounting by matching costs and revenues to specific cost centers, profit centers, locations, groups of animals or field projects. While managerial accounting is utilized primarily for internal use within a firm, it can also be used to value inventories for financial accounting.
6. Ownership accounting deals with the separation or consolidation of entities (either formal tax entities, informal partnerships, landlords, family living components, or internal management units (Pork, Beef, Crops) that share ownership of livestock and/or crop operations.
7. Budgeting involves access to and consolidation of:
8. Benchmarking requires the contribution of data from all of the above sources in a reliable and consistent format, and can be used internally (within an operation) or externally (between operations).
We first isolated and began addressing these conflicting goals nearly twenty-five years ago. Since then, the levels of complexity and sophistication in agriculture have expanded geometrically. Fortunately, information technology and our ability to apply it to the real world have also made great strides. Be prepared to "unlearn" some of your most comfortable financial reporting habits as we move further into the "Financial New World" in the articles ahead.