Farming Company accounts are changing
By: Justin Wright Date: 20 May 2017
One of the largest changes to accounting standards in recent years is the introduction of the new reporting requirements under FRS102, FRS102 1a and FRS105 for micro-entities.
Many of our farming clients had become well- accustomed to the accounting treatment, presentation and disclosures under the pre-existing regime but, this effectively changed for accounting periods commencing 1 January 2016 for smaller companies (1 January 2015 for medium sized companies).
Depending on the size of the company, many smaller companies will qualify for micro- entity accounting and reduced disclosures. Larger concerns will fall within the requirements of FRS 102 or FRS 102 1a, with greater reporting and potentially some complex calculations to consider. However, it should be noted that smaller companies still have the option of “scaling up” voluntarily from FRS105 to take advantage of different measurement techniques or reporting.
In this article, I will briefly consider two of the changes most relevant to agriculture but, there will be other potential areas to consider within the “average” farming company.
As far as the standard is concerned, the farm stock or valuation broadly encompasses livestock, inputs and crops grown for sale. Under the criteria set out under FRS102, this can be valued at either “fair value” or historic cost. Under the previous regime, the default was usually the historic cost model and this presented few practical problems. FRS102 now allows the concept of fair values which essentially means market value less realisation costs. Therefore, this could mean that for companies with year ends in the middle of a growing season, the fair value of stock is the present value of the estimated future revenue. Fortunately, the simpler historic cost of production model follows the same logic as previously but, adopting the fair value model has the potential of inflating profits in a rising market. It should be added that it is not possible to revert between the two valuation methods from one year to the next - perhaps to present an optimum result. Once the fair value method is adopted, it must always be applied.
In addition, for those farmers currently holding livestock under the herd basis, generally under fixed assets and valued at tax cost, this will no longer be an option under FRS102. Herd animals are considered to be “biological assets” and will now need to be reported as trading stock/valuation and valued at depreciated cost or fair value. This will typically result in a significant uplift to both balance sheet values and profitability and any material adjustments will potentially also lead to prior year adjustments.
Many of our farmers will receive material amounts in respect of the Basic Payment Scheme “BPS” but, the reporting under FRS102 is now nuanced in how the revenue is recognised. Under FRS102 grants cannot be recognised as income until there is reasonable expectation that the conditions attached to the grant are complied with. For BPS, this cannot occur until 31 December when Greening provisions have been met. For those companies with year ends between May (BPS submission deadline) and December, old rules allowed the use of accrual accounting to include a proportion of the grant. FRS102 now refers to the “performance” model which only allows recognition when all criteria to obtain the grant have been met. In such circumstances, in the first year of FRS102, BPS income may not be recognised and profitability will fall accordingly. This may be seen as a great way of deferring tax but, perhaps not so easy to convince a confused bank manager.
There are some other areas, not necessarily specific to agriculture, that will need to be considered for the larger farming company. In particular, there may be additional disclosure in respect of investment properties, intangible assets, financial instruments and deferred tax and it would be wise to take advice to understand the effects on both the current year and previous year.
With a change of regime comes opportunities and challenges. The requirements under FRS105 for micro-entities are not unduly stringent but the requirements under FRS102 has the potential of affecting profitability, balance sheet strength and distributable reserves. There are some planning considerations particularly involving tax mitigation, dividend strategy, bank solvency ratios and covenants and the overall position in respect of credit scoring. As with all planning, preparation and early advice will be key.