Until this year, there was no standardized method for valuing and reporting assets that were alive or still growing. As a result, these “biological assets” were often reported inconsistently. A new accounting standard, Section 3041-Agriculture, should help create financial statements that are more comparable year-over-year and between farms.
The new guidance, effective for entities with fiscal years beginning on or after January 1, 2022, is expected to have an impact on agricultural producers that prepare audited or reviewed financial statements according to the Accounting Standards for Private Enterprise (ASPE). This standard will have no impact on entities that produce compilation financial statements or only file personal or corporate tax returns.
“The idea behind the new regulations,” says Armand Capisciolto, BDO Canada's National Accounting Standards Partner, “is to help lenders and other users of the financial statements of agricultural producers make meaningful comparisons. This will ultimately lead to better decisions by the users of financial statements.”
Who do these changes impact?
The new standard, ASPE Section 3041, will impact various activities, including producing crops, livestock, fruits and vegetables, and aquaculture.
Why these changes are important to know now
It's important to understand and apply the new standards now because a discrepancy between the new standards and how they currently account for agricultural assets could immediately affect their relationships with lenders, and other users of their financial statements.
Here's what producers need to know about ASPE Section 3041 and how to get ahead of its commercial impact.
Change 1: Current value can no longer be applied to all livestock and crops
Often livestock and crops are measured and reported at the sales price (or current value). This is now termed as “net realizable value” under the new standard.
Under the new rules, these assets can only be recorded at net realizable value when the following three conditions are met:
- The product has a fair and proven market price that it could sell for right now. This could be a firm sales contract you have with a buyer or a price quote in an active market such as a commodity exchange, auction, local dealer, or trade publication.
- The product is available for immediate delivery. It can be transferred to a buyer as is or with a financially insignificant expense.
- The product has measurable and predictable costs of disposal. If an asset previously reported at current value no longer meets the above criteria, agricultural producers will need to change to the cost method.
This change could have a significant impact on asset values.
Change 2: Crops that are not yet harvested must be recorded at cost
Crops that have not yet been harvested must be recorded using the cost method because they are not available for immediate delivery. For farms that report after harvest is complete, this should not pose a significant problem to year-end reporting. However, for farms that report mid-year or have biennial crops this could significantly impact asset values.
Change 3: Cost method—an accounting policy choice
There is specific guidance on how the cost is determined, and entities will have a policy choice over which method to apply: input cost or full cost method. The policy should be applied consistently for all inventory of a similar nature.
Input cost method
Input costs such as feed, fertilizer, pesticides, and replacement livestock should include purchase prices, import duties and other taxes, labour, and transportation, less any discounts and rebates.
Full cost method
The full cost method includes the input costs above, plus an allocation of fixed and variable production overheads like rent, management salaries, tools and small equipment, energy bills, and any other fees to develop and harvest the goods.
The input cost method is more straightforward. However, it may not show the actual cost of your inventory and would result in lower inventory values than the full cost method.
Change 4: “Repeatedly harvested assets” must be measured at cost
Also called “productive biological assets”, these plants and livestock are kept for a production quota or harvested product over several years. Examples of productive biological assets include dairy cattle, fruit trees, and grapevines.
However, these assets are not productive immediately. Trees need to grow. Animals need to mature. Plants classified as productive biological assets will need to have annual feed, fertilizer, and labour costs added to their value annually until it begins bearing fruit. Livestock, such as dairy cattle, would be considered agricultural inventory until in productive use, which may allow for measurement at net realizable value.
Why do these new standards matter?
The new standard aims to improve financial reporting across the industry, making it easier to compare your financial position and performance to your peers. This will enhance the efficiency of the lending process and assist lenders in their decision-making, which will ultimately be good for you.
The new standard will cause some inconvenience for those that have previously accounted for their inventory at current value and are now required to move to a cost basis. This will change asset values and net income, which could negatively impact bank covenants. As a result, it is vital to get ahead of these changes to determine what changes your business needs to implement before December 31, 2022.
How BDO can help
BDO can help you get ahead of these changes and ensure your farms' financials meet these new standards before potential problems arise. Our trusted advisors can ensure this new reporting aligns to your loans' terms and your farms' goals.
If ASPE Section 3041 significantly changes your financial reporting, waiting until next year-end to implement the new reporting standards could be too late. Contact BDO's Accounting Advisory Services and Agriculture industry professionals today to get it done and start moving forward.
For more information, please contact:
National Accounting Standards Partner
Senior Manager, National Accounting Standards
Partner, National Agriculture Leader