Figuring out how one farm’s gross margin measures up against another is not like comparing apples to apples. It’s more like com-paring soup to nuts.
Standardizing accounting language, including methods of that calculation, could help farmers see how their bottom lines compare to others and then make changes accordingly.
That language doesn’t exist, said David Sullivan, vice-president of sales and marketing for Global Ag Risk Solutions and a former consultant for accounting firm MNP.
“Gross margins should be a simple thing to calculate,” said Sullivan.
Read Also
Agriculture ministers agree to AgriStability changes
federal government proposed several months ago to increase the compensation rate from 80 to 90 per cent and double the maximum payment from $3 million to $6 million
However, some farmers calculate it as yield multiplied by price to get revenue and then subtract the costs of seed, fertilizer and chemicals.
“Other farms will throw things in like fuel and off-farm labour,” he said.
“There’s different ways to calculate the same number, which creates confusion. Two guys might be talking about gross margin, but they might not actually be talking about the same number. If everyone was on the same page, we could compare each other more easily.”
Sullivan raised the point Nov. 24 at the Agricultural Excellence Conference. Several members of the audience agreed, noting there are attempts underway now by the Accounting Standards Board to revise the language and make it more consistent.
Financial Reporting and Assurance Standards Canada says on its website that it is now reviewing comments received regarding agriculture and how biological assets are recognized in accounting.
For example, should a crop be considered an asset, for accounting purposes, when it is standing, when it is harvested or when it is sold?
On a larger scale, the organization asked respondents if “authoritative guidance with respect to accounting for biological assets and agricultural produce by private enterprise should be developed.”
Sullivan is one who thinks the answer is yes.
“It would be great if they come up with some standard method that’s easy and simple enough for farms to be able to do on their own. It doesn’t need to be overly complex.”
He favours the model used in the United Kingdom, which is the same one used by MNP.
“I’m a big believer in it because of its simplicity. It’s quick and easy to calculate. It’s pretty standard over in the U.K.,” Sullivan said. “Instead of bragging about what their yield was, they brag about what their gross margin was, and everyone knows what they’re talking about, which would be a great place to get to, someday.”
