We welcome all Michigan State University Extension (MSU-E) agents embarking upon a journey to improve the accuracy and usefulness of Michigan farm record data. We believe that analysis of accurate farm records will enable the farm owner/operator(s) to use his/her (their) farm records as a diagnostic tool that in turn can provide a benchmark for planning. We do recognize that this activity requires a time commitment from the MSU-E agent and also a willingness to bear some responsibility in improving the accuracy and consistency of the farm record database. It is to this problem of farm record consistency that this paper is addressed.Agricultural Finance,

Betz, Roger

Schwab, Gerald

Wittenberg, Eric

English

Research Papers in Economics

Staff Paper
Completing FINAN & Net Worth Statements –
Some Issues
Gerald D. Schwab, Roger Betz, Eric Wittenberg
Staff Paper 04-01                                        January 2004
Department of Agricultural Economics
MICHIGAN STATE UNIVERSITY
East Lansing, Michigan  48824 
MSU is an Affirmative Action/Equal Opportunity InstitutionJan 2004 version 
 
Completing FINAN & Net Worth Statements 
- Some Issues -
1 
 
I. Introduction 
 
  We welcome all Michigan State University Extension (MSU-E) agents embarking upon a 
journey to improve the accuracy and usefulness of Michigan farm record data.  We believe that 
analysis of accurate farm records will enable the farm owner/operator(s) to use his/her (their) 
farm records as a diagnostic tool that in turn can provide a benchmark for planning.  We do 
recognize that this activity requires a time commitment from the MSU-E agent and also a 
willingness to bear some responsibility in improving the accuracy and consistency of the farm 
record database.  It is to this problem of farm record consistency that this paper is addressed. 
 
II.  Net Worth Statement 
 
  A necessary condition that must be met in order to conduct a farm business analysis is to 
have consistent beginning and ending net worth statements (balance sheets).  The term 
“consistent” suggests that similar counting and valuation methods were used on both the 
beginning and ending balance sheets in determining the dollar valuation of the assets and 
liabilities at the point in time stated on the balance sheet. 
 
A. Some  Issues 
 
Issue 1.  Farm Identity 
 
The farm business organization can be complex with multiple owners, multiple 
generations, an operating entity renting land from the owners, etc.  Know and clearly 
identify which farm business organization is being described and analyzed.  It may be 
necessary to have multiple balance sheets – one for each farm business organization and 
one for the whole farm.   
 
Issue 2.  Cost and/or Market Valuation of Assets 
 
Recommendation: A two-column balance sheet that contains both the cost and market 
value of non-current assets is recommended.  By providing both cost and market value of 
the non-current assets (intermediate and long-term), the change in net worth over time 
can be attributed to two sources.  One source is from profits retained in business (retained 
earnings).  A second source is from appreciation in market value of assets.  If time or data 
limit that which can be completed, the market value balance sheet would be preferred. 
 
 
 
                                                 
 
1Prepared by FIRM AoE Team members Gerry Schwab, Roger Betz, and Eric 
Wittenberg; respectively agricultural economist, Extension Farm Management Agent and 
Extension specialist at Michigan State University.  Reviewed by Larry Borton, Manager of the 
Telfarm Center.  The authors accept responsibility for its contents.   2
 
Issue 3.  Date 
 
Recommendation:  Remember that the Net Worth statement is a picture of the farm’s 
assets and liabilities on the date specified.  For a calendar year business analysis, the date 
recommended is the last day of the year; i.e. 12/31/xx. 
 
Issue 4.  Amount of Detailed Data 
 
Recommendation: One guideline is to keep no more detailed data than is or will be useful 
for analysis.  The difficulty is in anticipating what will be useful.  Finpack makes 
possible the descriptive listing of most asset and liability categories.  Keeping these 
details on the data file will avoid reliance upon human memory that often becomes foggy 
in a relatively short period of time. 
 
Issue 5.  Valuation of Current Assets 
 
Recommendation: Current assets, defined as cash or items that will be sold for cash 
within one year, should be valued using the net market price of the asset at the farm site.   
Because of the price differential (basis) that creates unique prices at various geographic 
locations, it is most appropriate that prices appropriate to the area be used. 
 
Issue 6.  Value of Growing Crops 
 
Recommendation: Winter wheat and perennial alfalfa to be harvested are two of the more 
common crops that ought to be included as a current asset when preparing a Net Worth 
Statement that is dated during the winter non-growing season.  The value per acre of an 
annual crop like winter wheat is often determined by the cost of the inputs in getting the 
seeding established.   The value per acre of a perennial crop like alfalfa can be 
conservatively estimated as the annualized cost of establishing the seeding plus the net 
value of the legume; e.g. nitrogen credits that benefit the next crop in the rotation system.  
 
Issue 7. Government Program Payments  
 
Recommendation:  Enter as an account receivable those guaranteed government 
payments that have been earned but not yet received.  Similarly, enter as a negative 
account receivable those government payments that were received early before being 
earned.  Examples are: 
 
a.  Direct Payments -- based on historical crop acres for program crops as corn, 
soybeans and wheat; respective proven historical yields, and respective direct 
payment rates for each commodity; for last year that are received this year are 
an asset under accounts receivable (AR). 
 
b.  Direct Payments for next year that were received this year – are a negative AR.  
   3
c.  Conservation Payments for past year – Conservation Reserve Payments (CRP) 
that are elected to be received in the year after being earned are an AR 
 
d.  Homestead Property Tax Credit -- Homestead property taxes that have been 
paid and exceed 3.5% of your household income can be claimed as a credit on 
your state of Michigan income taxes for past year’s earnings.  This income tax 
credit (can not exceed a maximum of $1200.) to be received is a current asset 
on the net worth statement. 
 
e.  Farmland Preservation Tax Credit – P.A. 116 is a State of Michigan law that 
refunds to farmland owners the property taxes in excess of 3.5% of household 
income on property covered by a Farmland Development Rights Agreement 
with Michigan Department of Agriculture.  The credit to be received is a 
current asset. 
 
Issue 8.  Patronage Dividends 
 
Recommendation:  Patronage dividends are often received as a split between cash and 
certificates.  Although the entire amount should be declared as income on the farm 
accounts, the certificate portion of the dividend should remain on the farm’s net worth 
statement as a non-current (intermediate) asset identified with the cooperative. 
 
Issue 9.  Cost Value of Raised Breeding Livestock 
 
Recommendation: Using the “Base Value” method, a value is established for each 
defined category of livestock.  As raised animals progress through their life cycle; e.g., 
open heifer, bred heifer, milk cow to cull cow; the value of the animal changes as it 
changes categories.  (Please note that this treatment of raised breeding livestock differs 
from rules used by the Internal Revenue Service (IRS) whereby the cost basis for all 
raised livestock is zero.)  By assigning a value to these raised breeding livestock, more 
realistic profitability measures as net farm income and return on investment can be 
calculated. 
 
Issue 10.  Cost Value of Purchased Breeding Livestock 
 
Recommendation:  The cost value of purchased breeding livestock categories should be 
the same as the raised livestock using the “Base Value” method.  Thus, cost values are 
identical within the same category of breeding livestock, be it raised or purchased.  It 
may be desirable to foot note the current tax basis which is the original cost basis minus 
accumulated depreciation.  
 
Issue 11.  Market Value of Breeding Livestock 
 
Recommendation: Use the “Base Value” method.  Base Value for the various defined 
categories of breeding and working livestock would be adjusted every 3 to 5 years.  
These “Base Values” are driven by the profitability of the livestock industry but are not 
adjusted as often as are values for market livestock.  With the “Base Value” method,   4
values of breeding livestock within the same descriptive category will be identical for 
both the cost and market value net worth statements.  For breeding livestock to be culled 
during the year, it is appropriate to list these animals at their cull value as current assets 
under market livestock.  Do not double count. 
 
Issue 12.  Cost Value of Farm Improvements on Real Estate 
 
Recommendation: The cost value of the bare land should be separated from the 
improvements as facilities, tile, and perennial crops such as orchards.  The cost value of 
an improvement is the original cost basis minus the accumulated depreciation. 
 
Issue 13.  Market Value of Farm Improvements on Real Estate 
 
Recommendation: Bare land and improvements ought to be valued together if they can 
not be separated for sale; e.g. subsurface drainage tile. 
 
  Issue 14.  Market Value of Land 
 
Recommendation:  The market value of farmland is driven not only by agricultural 
productivity, but also by its location and associated amenities.  It is recommended that the 
agricultural component of land value be included as a long-term farm asset, but that the 
component of land value associated with non-agricultural demand factors be included as 
a long-term non-farm asset.   
 
Issue 15.  Non-farm Assets & Liabilities 
 
Recommendation: Non-farm Assets and Liabilities need to be separated from farm assets 
and liabilities.  This separation enables more accurate calculation of financial 
performance measures for the farm business.  For those assets that may have a dual 
purpose for farm and non-farm uses, if the asset is listed on the depreciation schedule, 
consider it a farm asset. 
 
  Issue 16.  Credit Cards 
 
Recommendation:  Some farm expenditures can be quickly and easily made through use 
of credit cards.  It is important that the amount of any unsecured outstanding short-term 
credit card obligation be accurately reported on the net worth statement.   The issue is 
whether the farm expenditures on the credit card are currently being claimed as an 
expense, or not being claimed as an expense until being paid. The key words are “Has it 
been expensed yet?”  If expenditures on a credit card are being claimed as an expense 
before the bill is actually paid, the outstanding amount should be a current liability under 
an operating loan.  The position of the IRS is that a credit card purchase for farm items is 
an expense because the credit card company is loaning the money to the credit card user.  
However, if the practice consistently used on the farm is that expenditures on a credit 
card are not being claimed as an expense until the bill is actually paid, the outstanding 
amount should be a current liability under accounts payable.    
   5
Issue 17.  Term Loans (Liabilities) 
 
Recommendation:  Term (non-current) loans are by definition financed over more than 
one year.  The interest rate and length of each loan should be specified in order to 
accurately calculate the balance sheet ratios.  However, some constraints on data 
availability or time may necessitate the need to group loans by category.  For 
intermediate loans, it is suggested that an average 7% annual percentage rate of interest 
(APR) and 5 years be used.  For long-term loans, it is suggested that an average 6.5% 
APR and 15 years be used.  These default parameters permit calculation of the current 
portion of the intermediate and long-term loans in order to estimate the balance sheet 
ratios. 
 
  Issue 18.  Capital Leases 
 
Leasing provides an alternative way to control the services provided by capital assets as 
machinery, equipment, and buildings.  Producers use leasing for various reasons; e.g. to 
expense out the entire payment, to provide flexibility, to enable quicker control of asset, 
and to avoid creditor constraints. 
 
Leasing provides to the farmer/lessee an opportunity (risk) of equity increase (decrease) 
in the capital asset as lease payments are made over the years of the lease.  The remaining 
total of lease payments on the date of the net worth statement can be considered as a 
liability.  An offsetting asset is the fair market value of the leased item which may be 
more than (gain in equity) or less than (lose in equity) the obligation of lease payments. 
 
Issue 19.  Contingent Liabilities 
 
Recommendation: Knowledge of contingent liabilities is critical in accurately 
determining a market value balance sheet.  However, to simplify the balance sheet 
preparation, this section may be omitted with the admonition that contingent liabilities 
owed to the IRS because of a farm sale are important for those farms planning to sell or 
evaluating estate planning alternatives.  
 
III. FINAN  Input 
 
Issue 1.  Input Description (Page 1) 
 
Recommendation: Most of our FINAN runs will be for the calendar year that is specified.  
The alternative is that some farms may be on a fiscal year that does not start in January 
and end in December.  Regardless, beginning and ending balance sheets for the specified 
period must be identified.  The type of analysis will be “whole farm” only.  We would 
like the farm data to be included in a group summary by entering “yes.” 
 
Issue 2.  Farm Identification (Page 2) 
 
Recommendation: Page 2 occurs if a “yes” is entered in response to the group summary 
question.  Each farm needs to have a unique identification to enable an audit trail.  The   6
farm number being suggested is the TELFARM number preceded by the Crop Reporting 
District.  For example, number 7140025 would indicate that southwest crop reporting 
district (#7), Cass County (#14), and farm #25 in that county.  For farms not on the 
TELFARM system, a unique number needs to be created whose first three digits should 
indicate the crop reporting district and the county followed by a digit sequence not 
previously used in that county. 
 
Issue 3.  Farm Business Defined 
 
Recommendation: Be clear about the defined boundaries of the farm business in order to 
avoid problems with internal transactions and double counting.  Consider the case of a 
farm partnership renting land to be farmed.  If cash farm rent were included as an 
expense of the farm business, the rented farm acreage would not be an asset of the 
business being analyzed. 
 
Issue 4.  Income from Sales of Cull Breeding Livestock 
 
Recommendation: Income created by normal culling of breeding livestock should be 
entered on page 11 under “Cull breeding livestock” and should not be on page 3 under 
“Capital Sales.” If the herd is sold or a reduction in breeding herd numbers was a desired 
goal, then show this reduction in capital sales.  Sales and exchanges of capital assets that 
are held longer than one year, that are used in business to produce income, are defined by 
IRS as 1231 transactions.   
 
Issue 5.  Estimated Value of Labor and Management (Page 16) 
 
Recommendation: It is important that a realistic estimate be provided for the value of 
unpaid family labor and management.  This estimate in entered in the “other information” 
section of the input.  This amount is subtracted from net income in determining return on 
investment for the farm business. In FINLRB, a calculated estimate using 7 dollar per 
hour ($7/hr) plus 5 per cent of the value of farm production (5% * $VFP) is provided.  
The value per hour needs to be consistent with lower paid employees who do not have 
management responsibilities. The value of unpaid family labor and management may or 
may not be reflective of the amount spent for family living expenses. 
 
Issue 6.  Estimate Hours of Unpaid Labor and Management (Page 17) 
 
Recommendation:  An estimate of the unpaid hours of labor and management provided 
by the farm family is entered in the “Labor” page.  These hours should be consistent with 
the dollar value of labor and management discussed above. 
 
Issue 7.  Size of Crop and Livestock Enterprises (Pages 19…) 
 
Recommendation: To have a complete FINAN input form capable of providing sufficient 
data for business analysis, it is necessary that the enterprise information be entered. 
   7
Issue 8.  Depreciation 
 
Clarification: The non-cash expense of depreciation is calculated, not entered on the 
FINAN input form.  Depreciation is calculated based on data from the beginning and 
ending balance sheet combined with capital sales and purchases.  The calculated 
depreciation amount is the difference between:  
 
 
  +  $ Ending Asset Value 
  +  $ Capital Assets Sold 
 And 
  -$ Beginning Asset Value 
 -$Capital  Assets  Purchased. 
 
The result above (a negative number) should match the tax depreciation on IRS form 
4562 plus the gain or loss on capital items sold during the year shown on IRS form 4797. 
 
Issue 9. Capital Leases  
 
For business analysis we need to treat leasing similarly to a purchase with borrowed 
money.   A commitment has been made to make future payments that are analogous to 
borrowing money for capital asset purchase.   To ignore leasing commitments 
misrepresents the business’s financial position. 
 
The lease payment is an expense for business analysis purposes.  A trade-in of old 
machinery for payment on the initial lease payment would be considered a capital sale, 
and the offsetting lease payment an expense. 
 
If lease transactions are entered correctly, the net effect of the lease on capital 
adjustments as summarized in the “Other Assets” of the “Depreciation and Other Capital 
Adjustments” section in the FINAN Income Statement should net out to zero.   
 
IV. Summary 
 
  Better information is the keystone to better decision-making.  It is necessary that 
Beginning and Ending Net Worth Statements be accurate and consistent in order to prepare a 
reliable financial analysis of the individual farm business.  As the individual farm analyses are 
improved, the comparative database that can then be built will have increased validity as a 
management tool for each farm’s use. 
 
  MSU-E agents involved in agriculture have the opportunity to exploit our comparative 
advantage in accessibility to data and to farmers.  By positively contributing to the management 
information system of many of Michigan’s finest farm businesses, MSU-E and Michigan 
agriculture can create a win-win situation.  It is with this goal in mind that this paper makes some 
small contribution to enhancing our capacity to help others. 

COMPLETING FINAN & NET WORTH STATEMENTS SOME ISSUES

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