The Farm Financial Standards Council Annual Meeting
Jul 26, 2018
Warning, this post is longer than normal.
The Farm Financial Standards Council (FFSC) annual meeting started in Champaign, Illinois on Wednesday with committee meetings. The theme of the meeting is "Integrating Ag Technology Date with Financial and Managerial Accounting".
The first part of the day was a presentation by the University of Illinois and the Illinois Farm Business Farm Management Association. There are about 5,700 farms in the association. The middle size farms are well represented in the database, while smaller farms have a lower representation.
About 2,600 farms are used for comparison purposes since they make the cut for financial records, data input, etc. These farms have accurate usable data while the other 3,100 farms have not quite met the hurdle for being in the benchmark data system (there are 12,000 error checks in the system). The system takes cash accounting (which is by far the predominant record keeping system for farmers). They then provide accrual adjustments for:
- Inventories (at net realizable value),
- Accounts receivable (deferred payment contracts),
- Accounts payable,
- Prepaid expenses,
- Economic depreciation (not tax depreciation)
- Operator labor (expensing the value of operator labor)
Farm Doc and FarmDoc Daily provides daily farm analysis on a lot of subjects (crop sciences, marketing, accounting, etc.). The primary focus is Corn Belt Farm Economics. The first official Farm Doc website was released in 1999. Version 2.0 started in 2000, then version 3.0 started in 2003. Version 4.0 FarmDoc daily started in 2011 and the Farm Bill Toolbox Version 4.1 was released in 2014. 2016 released Farmdoc 5.0 and FarmDoc Daily version 6.0 was released in 2108 and that is the current version.
Next was an update on the changes to accounting standards that have occurred or will occur over the next year. The standards have eliminated the current portion of deferred taxes. All of these will now be considered noncurrent. This could affect the comparability of farm ratios since these assets or liabilities will no longer be part of working capital. Inventory values for most businesses will now be the lower of cost or net realizable value, however, most farmers use net realizable value to show inventories.
It is important to understand that net realizable value is after factoring in all costs of disposing of that asset including storage and transportation costs. With more grain being stored on-farm, it is very important not to simply use the local cash price. That is not usually net realizable value.
A panel after lunch talked about the integration of data obtained by farmers and the effective use of this data. Many farmers are still using equipment that is not tied to any data and they are likely missing out on a management tool to help increase farm profitability. However, many who are connected are still not using the data effectively. The bottom line is that this integration will likely happen but it will take longer than we want.
There are four stages of accounting information:
- Stage 1 - Cash-based records, compliance focused - mainly used for preparation of tax returns.
- Stage 2 - Cash-based records, external or whole entity focused - financial statements prepared at year-end. Earnings may be accrual adjusted, inventories reported at market value. May do some analysis of enterprises.
- Stage 3 - Accrual based records, external or whole entity focused - financial statement prepared more often then annually. Driven by the needs of management rather than tax compliance. Inventory still primarily valued at market value. Often combines information from production and accounting.
- Stage 4 - Accrual based records, segment reporting focused - characterized by multiple profit making ventures, multiple locations and/or multiple managers. Focused on capturing cost information at a detailed level and being able to summarize their costs in a meaningful way across various segments of the business. Also often combine information from production and accounting. Inventory valued at cost.
Most farmers are typically in Stage 1 or 2 with many moving into Stage 3. Not many farmers are ever in Stage 4.
Some of the challenges of implementing a management accounting system are:
- Lack of accounting background.
- Already keeping detailed field records elsewhere. This often means duplicating entries which is time consuming. Integration with other systems would be helpful.
- Not know or lack of defining what kind of output is needed. The reporting drives the setup of the system.
- Coordinating staff to provide detailed information to keep records accurate.
- Finding the right software.
The use of a good management accounting system can help the farmer take the "average" cost of a field or farm and take the information at that level to help drive the decisions to increase profitability by looking at the correct management zones of each field and the changes needed.
Our final session was by Jackson Takach with Farmer Mac. Farmer Mac has a long history with the FFSC. The Farm Data Model has three steps:
- On-Farm Data Sources,
- Aggregation, and then
- Farm Management.
Farmer Mac started in 1987 and had very slow growth through 1996. By 1999, listed on the NYSE and by 2008 reached $10 billion of volume and today volume is more than $19 billion. Farmer Mac does not deal directly with the farmer. It either buys the loan from the bank or provides loans to the bank to fund the loan.
In 2009, Farmer Mac launched Ag Power which streamlines the credit application process. The turnaround time dropped substantially with moving to a standardized online process. My computer is about ready to die so I am going to end the blog post a little early.
All-in-all, the Farm Financial Standards Council is a great resource for farmers. Make sure to check it out.