Don’t get called to account over stocktaking
Those who undertake farm stocktaking valuations as part of their year-end procedures should be aware, if you are not already, that the introduction of FRS102/FRS105 accounting standards has potentially changed the reporting requirements for farmers whose production herds (cattle, sheep etc) are treated for tax purposes as being under the “herd basis”. These standards derive from International Accounting Standards (IAS) and particularly IAS 41 on agriculture.
Production animals are those that have given birth and are retained for breeding purposes. For example, in-calf heifers will move into the “herd” once they have had their first calf and should be valued separately until that time.
Under a herd basis election herd animals are not treated as trading stock for tax purposes but as a single asset. Replacements are charged to the profit and loss account but increases in the number or quality of the animals are capitalised. As a result, any profit or loss on the disposal of all or a substantial part of the herd is not charged to tax. This is important when, for example, the farmer gives up milking and sells the herd.
The new standards require the value of the animals to be shown even when a herd basis election has been made. It is then for the accountant to make to make the necessary computational adjustment to turn these into the figures needed for the tax return.
Customarily, livestock under the herd basis (usually the dairy herd) has not been considered in any detail when undertaking the valuation other than recording the number of cattle in the herd in the Summary, net of culls and calved heifers and purchases.
There has been great confusion both in the valuation and accountancy world as to the valuation and taxation treatment of elected herd animals. The basis of value is either at cost or “Fair Value”. However, most farmers are likely to use the option to allow assessment on the traditional basis of the lower of cost (including the deemed cost option for home-bred stock of 60% (cattle) or 75% (sheep and pigs) of market value when actual costs are unknown) or net realisable value.
There will, therefore, need to be a change in accounting policy (with an accompanying prior year adjustment in the year of implementation) moving the value of the production herd from “tax cost” to “cost” as defined by the new Financial Reporting Standards, typically resulting in an increase in value and a potential one off tax liability.
Farming businesses now need to include the value of production herds in their accounts alongside all other livestock. The stocktaking valuation will therefore need to report that value with any change in the number or quality of animals in the production herd. Early contact needs to be made between the farmer, his valuer and accountant before undertaking the valuation so that the changes are understood and the necessary records made available.
Simon is a Partner, based in Winchester, who advises clients throughout southern England on a wide range of rural property, valuation and management issues. His expertise includes farm and estate mana...