ATTRA Question of the Week

P.P.
Wisconsin

Answer: Thank you for contacting ATTRA for information on the difference between business accounting and accounting for agricultural operations. There is a set of Generally Accepted Accounting Principles (GAAP) which determines how accounting is done for most enterprises. Agricultural accounting is also based on GAAP but as you note, there are some differences. According to the Farm Financial Standards Council, the "financial statements" that are being used by many agricultural producers and lenders today are, in fact, abbreviated accounting systems. They are designed to arrive at an accrual adjusted income figure for the operation by adjusting balance sheet and cash basis income information supplied by the agricultural producer. While this use of financial statements to replace accounting systems may perhaps seem like a minor distinction, it is the cause for many of the problems faced by the FFSC in dealing with consistent reporting and analysis. “

The Farm Financial Standards Council (Council) has produced a publication that provides detailed explanation of the recommendations of the Council for financial reporting and analysis. This publication also contains examples of financial statements prepared in accordance with the recommendations found in the Financial Guidelines for Agricultural Producers.

The specific example you cite, treatment of livestock, is addressed in the Guidelines. Breeding livestock is depreciated. Raised breeding livestock’s asset value can be calculated either using the full cost absorption method(producer accumulates all costs associated with raising breeding livestock and upon entry to the breeding herd, the accumulated costs of raising the animals would then be depreciated over the expected useful life of the animals. Market values of the breeding herd would be separately disclosed) or the base value method (a “base value” is established for various categories of raised breeding stock, and as livestock move through those categories in their normal life cycle, valuation is established for that particular category at the time the valuation is done. Both the change in value of raised breeding livestock--from either moving into a higher value category or an increased number of raised replacements--and income or loss from sale of those animals is counted as income. Cost of raising replacement breeding animals is included in expenses.) Note that the full cost absorption method is rarely used.

Purchased breeding livestock is treated like any other purchased capital asset –cost on the balance sheet is cost of the item less depreciation taken, and market value is established in the same way as for raised replacements. Depreciation of the livestock is included as an expense—not the actual purchase price of the livestock. Gain or loss on the sale of this livestock is the sale price less the undepreciated balance at time of sale, and this gain or loss is included as gross revenue on the income statement.

As you can see, accounting for agricultural operations can be complex. For more assistance with accounting for your specific operation, I would suggest contacting your county extension agent and the FARM Team of the University of Wisconsin Cooperative Extension. The team’s purpose is to help Wisconsin farmers improve business profitability and lifestyles through informed decision-making. Contact:

Robert K. Cropp
Pepin County - UW Extension
715-672-5214
robert.k.cropp@ces.uwex.edu

Phillip E. Harris
University of Wisconsin-Madison
608-262-9490
peharris@wisc.edu