Why Are Financial Standards Important?

Why Are Financial Standards Important?

Both lenders and farmers can benefit from better financial recordkeeping

Production agricultural plays an important role in the U.S. economy, generating $400 billion dollars annually. It is a unique industry in that there are many relatively small producers (compared to other industries) producing many different crops and livestock.

Over the years the degree of capitalization required per dollar of output has increased dramatically. Also, the complexity of financial transactions and the volatility of market prices have increased the need for good farm financial reporting.

Meanwhile, the accounting profession has provided limited help on agricultural issues.

Both lenders and farmers can benefit from better financial recordkeeping

The owners of most farm operations have limited training in finance and accounting and record systems have been designed for simplicity and ease of use. Most systems are cash-based and produce tax information and a limited amount of production data.

Today, only a small percentage of producers use double-entry records that allow easy, periodic generation of financial statements.

The primary external users of farm financial statements have been lenders, who rely on financial statements as indicators of financial position and performance. Most cash-based records are designed to create a cash-basis tax return; as a result, many non-cash transactions (inventory increase, prepaid expenses, or deferred income, for example) are never reported.

To meet with members of FFSC and boost your financial skills, attend the Farm Futures Ag Finance Boot Camp, Jan. 6, 2015, at the Hilton Ballpark Hotel St. Louis.

Several changes have taken place in agriculture that has increased the need for more complete and accurate farm financial information. These changes include increased volatility in farm income, increased complexity of the ownership and financial structure of farm businesses, and more stringent loan review requirements of lenders.

Lenders and others have responded to this need with many types of tools to help producers provide more complete financial information. Most of these tools simply take income and expense information provided by a tax return and combine them with balance sheet adjustments that may or may not cover the same time period as the tax return, or use valuations that are the same from the beginning to the end of the time period.

Given the diversity of production agriculture in the U.S. and the wide variation of financial knowledge of producers, the "standards" set out in the Financial Guidelines for Agriculture are intended to:

1. Promote uniformity in financial reporting by presenting methods that are theoretically correct and technically sound;

2. Present standardized definitions and methods for calculating financial measures used to measure financial position and performance;

3. Identify issues to consider when benchmarking financial information.

Brought to you by Farm Financial Standards Council. The opinions of Jim Kelm are not necessarily those of Farm Futures or the Penton Farm Progress Group.  For more information on the Farm Financial Standards Council go to the website or email Carroll Merry at [email protected].

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