Accounting for hedging to be added to financial guidelines
Recommendations on accounting for hedging transactions on agricultural financial statements will become part of the "Financial Guidelines for Agriculture" as nearly 70 pages will be added to the document when an updated version is released in January 2014. The Guidelines are produced by the Farm Financial Standards Council.
The additional content will focus on examples of how to account for hedge (futures and options) transactions on financial statements for agricultural producers. An important aim of the updated document is to explain how, when, and where to report hedging gains and losses on accrual financial statements.
Futures and options transactions are used to manage price risk faced by agricultural producers for both products produced and inputs purchased, sometimes resulting in large hedging gains and losses. The theory behind hedging is that as the product being produced rises (falls) in value, the hedge position falls (rises) in value so that gains (losses) in the physical market are offset by losses (gains) in the derivatives market.
Todd Doehring, Centrec Consulting, Savoy, Ill., a member of the FFSC Technical Committee, noted that there are two types of hedges discussed in the forthcoming update: fair value hedges and cash flow hedges. “Fair value hedges occur when a producer hedges stored grain that is valued on the balance sheet at its fair market value and is readily available for sale,” Doehring says. “In this case the resulting hedging gains and losses are included in the revenue section of the income statement.” He also stated that “Cash flow hedges occur when a producer hedges items not available for sale, including planned or growing crops or livestock.” These items are valued at cost on the balance sheet, and the resulting hedging gains and losses may be excluded from the income statement.
Doerhing reports that the hedging section of the Guidelines has been nearly two years in the making by the members of the Council’s Technical Committee. The updated Financial Guidelines for Agriculture (previously known as the Financial Guidelines for Agricultural Producers) will become available for purchase through the Council’s Web site at http://www.ffsc.orgin January 2014.
The FFSC is an all-volunteer non-profit group consisting of individuals interested in the improvement of financial and managerial accounting for agricultural producers. Lenders, producers, accountants, farm managers, consultants, academic professionals, software developers, and others comprise the roughly 50-member organization.