Canada’s professional standards body for accountants is developing new accounting standards for Canadian farms.
A standardized approach will make understanding farm accounts simpler and business more straightforward, the Financial Reporting & Assurance Standards Canada says.
Currently there’s a hodgepodge of ways to do farm accounts, mainly due to the unique nature of these businesses, said Linda Mezon, who chairs the organization’s accounting standards board.
“Right now farm accounts aren’t easy to understand, and they should be,” Mezon said in a telephone interview.
Farmers are using a variety of accounting methodologies. The most common are cash accounting and accrual accounting.
Cash accounting is the simplest and it is commonly used by small businesses and for personal finances. It accounts for revenue only when the money is actually received and expenses only when the money is paid out.
Accrual accounting is a bit more complex and accounts for revenue when it is earned and expenses when they are incurred. This method is commonly used by larger businesses.
There are also certain specialized methods of accounting for certain income and expenses and hybrid systems that incorporate elements of both major systems.
All in all, it’s a confusing system, especially for lenders, who need to decipher the books before they can make any decisions.
“Typically these are the people who have the most trouble understanding what they’re looking at, because it’s not always entirely clear what they are looking at,” Mezon said. “The accounting systems used can vary from farm to farm, even farms in the same sector, and farms doing the same thing right beside each other.”
In practical terms for farmers, this uncertainty translates into just another barrier to doing businesses and perhaps even a barrier to accessing capital, since some lenders will always err on the side of caution.
“We want to make it easier for people to look at farm accounts and understand them,” Mezon said. “We want to have similar operations in completely different parts of the country using the same system so, for example, a chicken producer in Manitoba would be using the same accounting standards as a chicken producer in B.C.”
The intention isn’t to make all sectors of agriculture hew to one universal standard, so much as finding the best solution for each sector and then standardizing accounting practices, she said.
Her organization is holding a series of roundtables across the country seeking feedback on the proposed new standards, including ones in Lethbridge on July 26 and Edmonton on July 27. (See www.frascanada.ca for more information.)
A key challenge to standardizing farm accounting will be how to account for living plants and animals and the produce from them. When are they considered assets? When do they become income? Are they ever considered a liability? For example, is a planted, but not yet harvested, crop considered an asset? Or is it only an asset when the grain is in the bin? Or once it’s sold?
Each sector has its own best model, and Mezon said the proposals currently put forward need industry input for the best results possible.
Parties interested in attending and making presentations should register by July 19 using the online form found here.