Cash vs. accrual: Pros and cons of each reference margin reporting option for AgriStability
Cash vs. accrual: Pros and cons of each reference margin reporting option for AgriStability
AgriStability coverage for farmers can be a lifesaver in difficult seasons. But did you know that the way you report your financial information can impact your filing? Depending on whether you’re using cash or accrual reporting, there are nuances to each that can make the process more streamlined, and more accurate.
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.
| Type of reference margin reporting | Pros |
Cons |
|---|---|---|
| Cash |
|
|
| Accrual |
|
|
Structure change implications
When your farm changes in size, your reference margin is adjusted to reflect the new size. With cash basis reporting, those adjustments are based on area averages and will no longer be representative of your farm’s performance.
With accrual reporting, your farm’s reference margin is adjusted for changes in farm size based solely on your financial performance. This will preserve the strong margins that you have built up over the years without diluting them with area average information. If there’s a disaster in the area, your farm will be compensated based only on your performance.
How to determine the best option for you
Assessing which choice is best for your farm is as simple as reaching out to an MNP advisor to go over your operation’s history and what the future could look like.
For more information and to learn which option is best for your farm, contact AJ Gill, Partner, BC Leader Agriculture Services.
AJ Gill
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