Farm Accounting: Where Have the Intermediate Assets and Liabilities Gone?

One popular method of balance sheet reporting format for agriculture is to break up assets into current, intermediate, and long term categories.  Current assets are those items that will be turned into cash in the next 12 months, like grain inventory for sale or actual cash in a bank account.  Intermediate assets are those items that will be turned into cash in the time frame of 13-120 months.  Long term assets are those that are more permanent in nature and generally will not be turned into cash until after 10 years.  Liabilities are judged in the same manner with short term liabilities-those items that are paid within the next 12 months, intermediate liabilities are debts that are paid between 12-120 months, and long term liabilities are those with longer maturities.

Oftentimes the purpose of dividing up the balance sheet in these parts is to see if the debt structure lines up with the term of the asset.  I.e. you would not want to fund farm ground on a note with a maturity of under a year!  Many analysts will find it useful to comparing short, intermediate, and long term assets with liabilities of the same maturity to see if the financing structure is correct.

There has always been some challenges with determining what is “intermediate”.  Many will put equipment in the intermediate category. Yet most farmers I grew up with owned the same tractor for decades!  I can attest to an affinity I had with my old 1940s Ford 8 N.  What a piece of machinery!  Anyway, the ag credit departments I have worked in took a more conservative approach and only left items such as breeding stock or seed that was used for the next year’s crop in the intermediate category.

The Farm Financial Standards Council (FFSC) sets the standard for accounting principles for farm and ranch accounting.  In their January 2014 update of the Financial Guidelines for Agriculture, the FFSC sets standards for balance sheet formats.  At a minimum they recommend both assets and liabilities be divided into current and non-current categories.  The non-current balance sheet assets should contain at a minimum divisions by machinery and equipment, breeding livestock, buildings and improvements, and land.  Other non-current asset accounts such as investments in capital leases, cooperatives, or other entities may also be used.  With smaller farmers, we often see personal assets on this side of the sheet.  At a minimum, the liability side should be split between real estate debt and other notes payable that are non-real estate related. 

The new FFSC standards advise the removal of the intermediate asset and liability category, thus leaving the only division among assets and liabilities as short and long term.  The Council does recommend that a structure of overall financial analysis should include a study of the current and proposed farm debt structure to see if it is applicable to the assets being funded.  The intermediate/long term categories do not add substantively to an analyst’s ability to perform their analysis.  FFSC also contends that as diversification in the types of holdings and financing terms grows, it is difficult to accurately determine what is intermediate and what is long.  An example here is a real estate loan with a balloon in five years.  Should that be classified as intermediate because of the maturity or long term because of the asset?  The intermediate/long term classification also forces certain liabilities such as deferred taxes and personal liabilities into categories that are not meaningful.

Because of these reasons, the FFSC believes that moving away from the popular three category sheet is necessary.  They do believe that going back to the three category sheet is acceptable in cases where the preparer believes the categories are very well defined and that the division provides meaningful information.  In the majority of other cases, the current/non-current split with the proper divisions among non-current assets as mentioned above is most appropriate.