Plowing the Back 40: Accounting and Technology Issues for Agribusiness Clients

Similar to other niche industries, agribusiness has its own set of particular
accounting challenges. Whether consulting on technology specifically related
to farming and ranching, or accounting and compliance issues related to federal
control of food production, accounting firms must speak a unique language to
work in this competitive environment.

“You
have to know the industry and the lingo,” says Christopher W. Hesse, CPA,
director of Taxation and a member of LeMaster Daniels PLLC, a full-service accounting
firm in Spokane, Wash. One of the firm’s niche industries it services
is agriculture. “Many of our CPAs grew up on farms, and those who didn’t
have a genuine interest in agriculture and demonstrate the passion that provides
comfort to the client. If you don’t know the terminology, it won’t
be possible to convince the client that you know his or her business.”

Again, similar to other industries, there are nuances to learn in order to
deliver tax, assurance and consulting services. For example, Hesse says knowing
the approximate prices of farm commodities and the direction in which prices
are currently moving is important because it demonstrates not only a level of
knowledge of the agriculture industry, but a passion and genuine concern.

Agriculture Accounting Requires Specific Solutions
Although the industry may be different, the need for core accounting services
is still the norm with agribusiness clients. But there are specific needs based
on various situations.

Timothy P. Moag, CPA, a tax director and leader of the Agriculture Business
Specialization Group for Freed, Maxick & Battaglia, P.C. in Buffalo, N.Y.,
says more clients ask for a computerized general ledger bookkeeping and financial
reporting system than anything else. The twist, in this case, is to make the
GL applicable to the client’s business.

“Typically, we apply our agricultural expertise to assist the client
in the design of the accounting system and chart of accounts with standardized
account titles and account numbers that we tailor to the client situation,”
says Moag. “The primary differences in a chart of accounts for a dairy
farm versus a crop farm are within the revenue accounts. Clients also often
ask for assistance with setting up on-farm payroll preparation as part of their
accounting system. We will assist in the payroll module set up, and provide
instruction to the client on payroll reporting requirements.”

Affiliated with RSM McGladrey, Freed Maxick’s larger agricultural clients
are more frequently being asked by their lenders to prepare accrual basis review-level
financial statements.

“This
level of financial reporting requires the farm client to provide accounts receivable
and accounts payable information,” says Moag. “While this information
can be maintained in their accounting system, providing inventory amounts proves
to be more challenging.”

For example, he says most clients develop off-books spreadsheets to track
and monitor crop and cattle inventory. The firm incorporates this information
into the clients’ GAAP financial statements, adjusting the inventory amounts
at the end of each reporting period.

“Accounting standards require that we evaluate key financial ratios
and document our variation analysis,” he says. “We need detailed
financial information so we work with clients to provide accurate data to us
in a concise electronic format.”

In the Management Advisory Services arena, Moag says many of his dairy farm
clients request financial benchmarking analysis. To meet this need, Freed Maxick
developed its own tool to analyze financial results on a per cow and per hundred
weight basis.

“This report allows the farm managers to compare their financial performance
to industry standards and peer groups of similar sized dairy operations,”
he says. “The key to providing this level of analysis is standardizing
the financial information we receive from our clients’ internal accounting
systems.”

Tax Planning & Technology
Across the country at LeMaster Daniels, Hesse and his team provide tax planning
services for many of the firm’s agricultural clients. However, the income
tax methods for production agriculture are unlike the methods for any other
industry.

“Because we have so many agricultural clients, we often don’t
realize how specialized our expertise is,” he says. “Pre year-end
planning allows us to target a specific level of taxable income for each taxpayer’s
unique facts and circumstances, taking into account entity structure, family
considerations, other tax benefits available and tax law changes between years.
The clients understand the benefit, and it is a benefit we can quantify so that
they understand the value of the service that they are provided.”

The firm has a substantial practice in advising clients as to Farm Service
Agency (USDA) program benefits. Entity structuring, for example, is a key component
of this planning. The firm also assists many clients in preparing their filings
with the FSA.

“We have a former banker who is not a CPA on board to assist our clients
in alternative financing arrangements,” says Hesse. “This is particularly
beneficial if the client is having a difficult time finding financing. However,
it is also used for obtaining financing for client expansion into processing
or non-traditional marketing.”

Another part of the practice involves estate planning and estate tax planning
challenges. Hesse says farmers and ranchers are traditionally asset-heavy and
cash-poor, with liquidity an issue for paying estate tax.

“Let’s face it: no one wants to pay estate tax,” he says.
“For estate planning, the older generation wants to pass some of the estate
to the non-farm children. Each person has his/her own ideas as to how the estate
is to be shared. Our goal is to inform and consult with the client as to the
opportunities available, without imposing one ‘best’ solution. The
client’s goals are the most important; we work with the clients to assist
them in achieving those goals.”

LeMaster Daniels’ sister company, TROI IT Solutions, manages specific
technology-related matters, including IP Telephony, managed technology services,
technology consulting, help desk support, and server and infrastructure management.

“This isn’t agricultural industry specific, but as our agricultural
and agribusiness clients expand, their technology needs expand,” says
Hesse. “Rather than hire in-house technology experts, TROI allows the
client to access technology expertise when, how often and how long they need
it.”

Agribusiness Technology Solutions
While LeMaster Daniels does not consult or resell any specific technology solution,
Moag says the largest percentage of Freed Maxick’s agricultural clients
use QuickBooks Pro; in fact, the firm has a Certified QuickBooks Pro Advisor
working in its agricultural specialization group.
Clients also use the Red Wing Business Systems AgChek accounting and financial
management package designed specifically for agriculture. For the large farms
and agribusiness clients with multiple entities, the firm suggests QuickBooks
Enterprise. Here, clients use the software for payroll preparation, accounts
receivable for billing and the accounts payable module for bill payment.

“When we meet with clients to evaluate various accounting software solutions,
we attempt to determine through conversation with them the end use of the data,”
says Moag. “Most farmers are allowed to maintain the cash basis of accounting
for income tax purposes; most of our larger farm clients, say above $5 million
in gross receipts, generally maintain their books on a modified accrual basis.”

In this scenario, expenses are recorded on the accrual method with an accounts
payable function. Sales are recorded on an accrual basis with monthly accounts
receivable aging. Inventory is adjusted at month end to underlying spreadsheets
tracking harvested and growing crops or dairy cattle counts and movements. Prepaid
expenses are recorded over the crop year cycle. As a result, Moag says the firm
directs the client toward an accounting solution that provides income tax and
monthly management information at a reasonable cost for their size farm or agribusiness.

“We make a real effort to get out to the farm office and work with the
accounting personnel. Engaging the client in the software selection, standardization
of the chart of accounts and on-site training accelerates the transition and
acceptance of the technology. We are also working more closely with clients
to elevate the level of their internal financial reporting, moving away from
cash basis to accrual basis reporting.

“Developing accounting systems internal control methodologies improves
the quality of the financial information we receive from the client,”
Moag continues. “It also provides the opportunity for us to provide higher
value consulting services to management and be responsive to lender requests
and identify the key farm business success drivers.”

Bringing Value to Green Acres
Bringing value to their clients, especially in this niche environment, is key
to success. Hesse tells a story involving the government in economic and social
policy. A relatively new client that intended on building a new house, and many
farmers live on the land on which they farm. C corporations may provide meals
and lodging tax-free to employees who are required to live on the farm.

“This client fully intended to build a house, yet Congress, in its wisdom
to provide economic incentives, granted bonus depreciation under Section 168(k)
to properties at a cost recovery period of 20 years or less. Farm buildings
have a cost recovery period of 20 years.

“Consequently, a house, or a farm building if used by the farm, constructed
in 2008 and 2009 qualified for bonus depreciation,” says Hesse. “Structured
properly, the client was provided a windfall benefit, even though its intent
was to build the house anyway. As it turned out, 2008 was a bumper crop and
price year, and the resulting depreciation on the house was welcome news.

“This result wouldn’t have been achieved for most industries,”
he says. “Lawyers, for example, don’t live in their law offices,
and retailers usually don’t live at the retail store. However, farmers
have a unique business, which provides unique income and estate, and USDA agricultural
program tax problems and solutions. We have become known as the experts for
agriculture in our market area, and we are becoming known nationwide, all because
we have a passion for our farm clients.”

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For more than 20 years, Scott H. Cytron, ABC, has worked with CPAs and accountants,
providing public relations, marketing and communications services. Author of
The CPA Technology Advisor’s MarketingWorks column, he works
with firms and companies in professional services, including accounting, healthcare,
legal, financial planning, collections and debt, and high-tech. Contact him
at scottcytron@cpata.com.