Cash vs. accrual: Pros and cons of each reference margin reporting option for AgriStability

Do you know what each option means for your financial future as it relates to AgriStability coverage?

AgriStability currently uses a modified accrual approach to calculate reference margins for all farms. Recently, governments agreed to an optional new model for AgriStability that would enable applicable provinces to choose either cash or accrual reporting. In a statement from the federal government, the optional model “ensures producers have access to the program in a manner that meets their needs.”

Details of how this might work or when it might be available are still unclear, and implementation of the changes might vary by region.  There is a strong possibility individual farms will face a decision soon on whether they wish to have their AgriStability reference margins handled on a cash or accrual basis. 

This is a complex decision, so it is wise to seek appropriate advice and inform yourself early about implications. What is clear is the choice will not be “the better of” on an annual basis. Farmers will be expected to decide in advance of the new rules being implemented. The decision will be in effect for multiple years and annual switching will not be permitted.

Understanding the implications, consequences, and benefits of each option is vital. The options will work differently, depending on the facts of each farm situation, and you will need to make an informed decision on what works best for your farm for the months and years ahead.  

What are cash and accrual reporting?

Put simply, cash margins represent how much cash you collected and spent during the year, whereas accrual margins represent how your farm performed during the year.

For example: Say you purchased for cash a large quantity of fertilizer at the end of your fiscal year, but you don’t use any of it until the following year. Your accrual margin is going to put those fertilizer expenses in the year they were used, and the cash margins will put the expenses in the year the cash outlay was made.

Accrual margins reflect the market value of inventories, or unsold production, at the beginning and end of each year.  On this basis alone, there could be significant variations between cash and accrual reference margins based on inventory quantities on hand and market prices.

Pros and cons of cash and accrual reporting

Over a very long timeframe, the AgriStability payments based on cash and accrual reference margins should be similar.  On a year-by-year basis, however, cash basis reference margins may produce coverage levels and payment calculations that are not realistic compared to actual farm performance.