Financial statement reporting for farmers: Does cash or accrual make more sense?

Growing a business is hard work. When it comes to the agriculture industry across Canada, it’s doubly hard for you to expand at a time when interest rates are high and other outside influences can have significant impacts on business.

Combine those things with being denied a loan for new equipment or land because of insufficient or incorrect financial statement information and its likely time to rethink your reporting methods.

Cash reporting has it’s benefits but accrual reporting might be the better choice.

Pros and cons

Cash reporting

Cash basis accounting records transactions when cash actually changes hands. It reflects cash inflows and outflows when they occur regardless of when revenue is earned, or expenses are incurred.

This can make it more straightforward to implement and can work well for small-scale farmers with simple financial structures. But these days, few agricultural operations in Canada are straightforward.

Pros

Some benefits include:

• Simplified record-keeping
• Clear view of actual cash flow
• Easy to understand and implement without advanced accounting knowledge

Cons

Some downsides include:

• May not accurately represent financial performance
• Could cause discrepancies in financial reporting
• No balance sheet

Accrual reporting

Accrual basis accounting recognizes revenue when it’s earned and expenses when they’re incurred, regardless of when cash transactions occur. This method aims to match revenues with expenses to reflect the true financial position of the farm.

Accrual financial statements include a balance sheet that details what the farm owns and owes including capital assets and long-term debt as well as an income statement that reflects what the farm produced in the year irrespective of when it was sold.

Pros

Some benefits include:

• Accurate reflection of financial performance by matching revenue with expenses
• Clearer understanding of financial situation
• Illustrates clearly with is owned and owed
• Compares performance year over year – provides insights into long-term profitability and financial health
• Clearer picture of farm profitability, debt to equity, and cash flow ratio

Cons

Some downsides include:

• Costs may be higher
• Involves more work
• It may take longer

In the end, the greatest benefits of converting to accrual reporting will mean that your farm is in a better position to capitalize on opportunities. Working closely with an advisor, you can make the switch to accrual reporting that may make the difference between growth and stagnancy.

MNP’s dedicated team of professionals in our agriculture services line can help you determine what might need to be done to make the switch and highlight the potential benefits and downsides to the various types of financial statements reporting.