’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 30th birthday in 2014.
What’s the future of AFRA? In the months ahead we’ll describe where we’re going, why we’re doing it and how it affects AFRA users (as well as users of its counterpart, The Ferguson System). First, though, let’s examine the three alternatives for financial reporting in production agriculture.
Three Levels of Financial Accounting
1. Cash-Basis Accounting/“Black Box” Analysis. If you maintain pure cash-basis books and fill out a balance sheet for your lender once a year, you’re a member of agriculture’s “silent majority.” In effect, you’ve delegated financial oversight and control of your operation to your lender and his “black box” system of analysis.
2. Cash-Basis Accounting/“User-Supplied” Data. You’re in this category if you maintain cash-basis accounting, but produce your own financial statements outside of the accounting system through programs like AFRA or Finpack based on “Farm Financial Standards.”
3. Accrual/Managerial Accounting. Under this process, financial statements (including inventory values) are maintained within the accounting system. Up until recently only large operations with internal accounting expertise could maintain these systems; however, recent innovations in software (i.e. e.CLIPSE) permit concurrent cash and accrual reporting as well as automatic inventory adjustments driven from Crop Audit and Smart Feeder management modules.
In the nearly 30 years since Coordinated Financial Statements defined the “recipe” for converting cash records to accrual, most serious players in agriculture have at least adopted financial reporting option #2.
Agriculture structure and technology has changed dramatically since the close of the 20th Century; therefore, it’s time for many of you to prepare to move from the “Old World” (method #2) to the “New World” (method #3) level of financial management and reporting.
Here’s a comparison of those two “worlds:”
We’ll be addressing these points in upcoming posts. In the meantime we invite your questions and will help you formulate a transition plan tailored to the aspirations and limitations of your operation.