Paul Short: Valuing Farm Tenancies on the Balance Sheet

Paul Short Accountant EssexPosted by Paul Short:

I sometimes think that we can miss a trick when presenting the balance sheets of farming companies and indeed farming partnerships as part of an application for finance.

Very often the business will farm land under tenancy,  ie under an old style Agricultural Holdings Act tenancy or a post-1995 Farm Business Tenancy (FBT).

In both cases it is probably unlikely that any monies will have changed hands for the granting of the tenancy or, if it did, it has not been capitalised and does not sit on the balance sheet. 

A tenancy would be classified as an intangible asset, ie an identifiable asset that does not have a physical substance but where the controlling entity has access to future economic benefits generated by the asset, either through custody or legal protection of the asset.

I think we can say a tenancy would tick the box here. 

Only intangible assets capable of separate recognition for goodwill can be capitalised.  Again, I think a tenancy ticks the box here. 

The relevant Financial Reporting Standard (FRS) requires that intangible assets acquired separately should be recognised separately.  However, the recognition should be at cost where there is unlikely to be any, in the case of our tenancies.

If the tenancy is exchanged for non-monetary assets, then it can be valued at fair value, also unlikely with tenancies, though not impossible.

So the tenancy exists, it has a value but perhaps no original cost.  What I would like to do is to revalue the tenancy, particularly the old AHA Tenancy, to reflect its value on the balance sheet.

After all, where the tenancy is a limited company, then the company could occupy the land in perpetuity.

In order to eject the company to secure vacant possession, the landowner might have to make a payment of between 30% and 40% of the market value of the land. 

Unfortunately, the FRS does not permit any revaluation of intangibles, where there is no original cost involved.

That is the position with regard to published accounts.  Why don’t we prepare additional “re-stated” accounts to show that the real value is in the business?

We could show the tenancies at their market value.  If one is not sure it may be worth securing a valuation from any of the very many excellent land agents in the region.

The tenant and the landowner may be connected but we would still be entitled to reflect the tenancy at its market value as between two unconnected parties.

It may be that the FBT has to be amortised over its term and hence there is a diminishing impact on the balance sheet valuation.

Amortisation should not be necessary for an old style AHA tenancy.

The consequence is that the company has a much stronger balance sheet and it provides a more realistic canvas of the company’s financial position.

It is then a help to remind the banker of the asset cover available.

It also makes sense to revalue the land in these unofficial financial statements.  There is no need to adhere to the requirements of the FRS and provide for tax on the revaluation.

I believe that showing this strengthened unofficial balance sheet can help where, for example, a loan is being sought from the bank.

The banker will be comfortable at looking at a lending proportion and assessing the value of Freehold land, but this can be obscured and may not be totally evident if the Freehold property is stated at historic cost, going back to before 1982 when land was around £1,600 to £1,700 per acre.  I always feel it sensible to make sure that the banker is aware of the land involved.

It is much more so the case when the value of AHA’s or FBT’s are involved.  The re-stated balance sheet makes sure that they are so informed.  It could just mean that the proposal to buy the land suddenly becomes much more plausible. 

June 2018

Disclaimer

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.

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