Reduced wheat production around the world has resulted in the surge in crop prices in the last quarter or so of 2021. This may continue to be the case in 2022 if the crisis in western Ukraine persists.
I am beginning to see the increased crop prices impact as we are preparing the accounts for our farming clients whether they have year ends in the last 5 months of the 2021 calendar year.
Traditionally, a valuer will establish the value of crops in store at deemed value, which will be 75% of the open market value prevailing at the balance sheet date. This basis of valuation is a pragmatic solution. The valuation should only be based on deemed costs where it is not possible to ascertain actual costs from records or costing books. Deemed value tends to be the default position in reality.
Some valuers, notably David Brooks of Brooks Leney who is a highly respected valuer at national level, computes a precise cost to production when compiling his valuations.
The deemed cost method is normally a safe, solid measure. There will be a deferred profit from the harvest, i.e. the difference between the market value and the deemed cost of the crops in store, which is then recognised in the ensuing financial year.
If prices go up dramatically after the balance sheet date, the following financial year will enjoy that further profit. The effect of this is the deferral of tax on that profit and a cash flow benefit.
Of course, it can cut the other way and have falling prices between the balance sheet date and the eventual sale of the crop will mean a reduced deferred profit. If the price were to fall below the deemed value, at the time that the accounts were being prepared, then one would substitute the lower net realisable value for deemed value, in line with FRS102.
Of course this is less of a problem if the crops from the previous harvest are likely to have been sold prior to the accounting year end, which is more likely to be the case where the year-end is closer to the tax year end, i.e. 31 March or 5 April year ends. From the 2024/25 tax year, the basis of taxing sole traderships and partnerships will change from the existing prior year basis to an actual basis which is likely to mean that the cash flow advantage of the deferred profit will cease.
That is in the future. What I am now seeing in some cases is that the deemed value is actually exceeding the cost of inputs in the trading year with an extreme case being a negative cost of sales. This will happen where there is no labour and just the inputs into the land. Accordingly some of the accounts with year ends from 31 August 2021 to 31 December 2021 will certainly look strange. I am expecting to need to provide more of a breakdown to bankers and other parties interested in the results.
One other point coming out of it, is that agricultural consultants tend to record the summer performance by introducing the crops at their market value, if they have not already been sold. They will not be concerned where the financial year end straddles the harvest sales. In some cases they may look at the market value at the date they draw up their assessment of the 2021 harvest. When preparing the accounts, it is important for us to remember that it is the market value at the date of the year end which is relevant, not any subsequent uplift in the market value post balance sheet.
Establishing the closing crop valuation isn’t always straightforward.
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The views expressed in this article are the personal views of the Author and other professionals may express different views. They may not be the views of Lambert Chapman LLP. The material in the article cannot and should not be considered as exhaustive. Professional advice should be sought in connection with any of the issues contained in the article and the implementation of any actions.