freddie barnard, paul ellinger christine wilson measurement issues in assessing farm profitability...
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Freddie Barnard, Paul Ellinger
Christine Wilson
Measurement Issues in Assessing
Farm Profitability through Cash Tax
Returns
Outline• Use 2001-2006 IL FBFM data
• Compare accrual income reporting to cash basis income tax reporting (not simply cash v accrual)
• Test the myth “it averages out over time”
• Income/Expense accounts that result in higher discrepancies
Previous Research
• Using 1984-1990 data:
- Absolute mean difference : 70% - leverage greater than 40% : 140%
Data• Schedule F income and expenses
• FBFM “defined” accrual adjusted financial statements
• Tax v Economic Depreciation
• 2001-2006 (pre high income years)
• 1045 Grain farms
Demographics
2002 2006
Tillable Acres 914 968
Percent Land Owned 18% 20%
Total Assets ($millions) 1.17 1.69
Age 50 54
Net Farm Income 32,145 96,340
Schedule F v Accrual
20022003
20042005
20065 Year
Average
0
25,000
50,000
75,000
100,000
Schedule F Income Accrual Income
Differences
2002 2003 2004 2005 20060
10,000
20,000
30,000
40,000
50,000
60,000
70,000
ActualAbsolute
2002 2003 2004 2005 20060%
10%
20%
30%
40%
50%
60%
70%
ActualAbsolute
3 and 5 Year Averages
(2002-04) (2003-05) (2004-06) (2002-06)0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
50,000
Actual
Absolute
(2002-04) (2003-05) (2004-06) (2002-06)49%
50%
51%
52%
53%
54%
Actual
Absolute
Schedule F v AccrualEconomic depreciation constant
20032004
20052006
5 Year Average
0
25,000
50,000
75,000
100,000
Schedule F Adj Depreciation Accrual Adjusted
Absolute Differences
2003 2004 2005 2006 5 Year Average
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
Crop Inventory ChangeLivestock Inventory ChangeAccts Receivable ChangePrepaid Expenses ChangeAccts Payable ChangeAccrued Interest ChangeDifference in Depreciation
Differencesby revenue growth rate
(2002-04) (2003-05) (2004-06) (2002-06)0.000
0.100
0.200
0.300
0.400
0.500
0.600
0.700
Less Than 5%5 to 10%Greater than 10%
Differences by Leverage
(2002-04) (2003-05) (2004-06) (2002-06)0.000
0.100
0.200
0.300
0.400
0.500
0.600
0.700
Less than 0.2020 to 40%greater than 40%
Summary• Average annual difference 59%
• 52% when 3 or 5 year averages used
• Depreciation, crop inventory changes and prepaids
• Impacts profitability-based financial ratios