William Edwards                                                      Revised September 2006 Iowa State Extension Economist 478C Heady 515.294.6161 wedwards@iastate.edu

Would you like to know more about the current financial situation of your value-added farming operation? A simple listing of the property you own and the debts you owe can provide valuable insights. Such a listing is called a net worth statement, or sometimes a financial statement, or balance sheet.

The net worth statement is based on the relationship:
           assets = liabilities + net worth, or 
             assets - liabilities = net worth

In addition to land, livestock, crops and machinery, most value-added farm businesses are also made up processing and/or marketing facilities and equipment.  These are often acquired with debt (liabilities) or contributed by the operator (net worth or owner's equity). The net worth statement is like a photograph of these assets and liabilities on a given date.

Comparing net worth statements made at the end of each year over several years can help you measure the progress of your farm business. The net worth statement also helps you judge the ability of the farm operation to pay off current debts and take on additional ones.

Developing the Statement

A net worth statement may include only the business, or it may include household and personal assets and debts as well. For business analysis purposes, only information pertaining to the business operation is needed. Information about non-business assets and liabilities can be added in a separate section and used for analyzing debt repayment capacity.

If you have an ownership interest or own specific assets in a value-added partnership or joint venture (ie. processing and/or marketing facilities and equipment), include these in your statement.  Conversely, if you are developing a statement for a  partnership, include only items owned or owed by the partnership, not by the partners individually.

Most value-added businesses make out a net worth statement as of December 31 or January 1 because this is the end of their accounting year. However, it is possible to develop a statement at any date and as often as needed. You can create your own statement using Net Worth Statement.

A typical format for a net worth statement is shown at the end of this publication. Assets are generally listed on the left-hand side and liabilities on the right-hand side. Both assets and liabilities are divided into current and fixed items.

Valuing assets

Accurately valuing assets is important in developing a meaningful new worth statement.

Current Assets

Current assets include cash, bank accounts, crops, livestock, products and supplies that will normally be sold or used within a year.

List the current balances for all your savings and checking accounts used for farm receipts and expenses. If you obtain your current checking account balance from your bank, remember to subtract the value of any checks that are still outstanding.

The key to correctly listing current assets is to accurately estimate both the number and value of items on hand. Ag Decision Maker’s Suggested Closing Inventory Prices is helpful for valuing many current assets.

Market Livestock and Livestock Products -- for market livestock and meat products, begin with an up-to-date inventory of the number of head (including estimated weight for each class of livestock) and quantities of meat and livestock products in inventory.

If you are selling into a niche or local market, value livestock at the current market prices plus premiums, contract price or your expected selling price.

• Value young livestock at feeder animal prices.
• Value heavier livestock at their estimated weight times the current slaughter market price plus premiums or contract price.
• Use an average of feeder and market livestock prices for animals at intermediate weights.

Processed livestock and meat products can be valued at their expected sale value.

Market Crops, Crop Products and Feed -- for crops, feed (including hay, silage, straw, and supplements) and processed crop products.

• Begin with accurate listing of specialty crops and/or crop products including estimates of bushels, bales, pounds, hundredweight, tons,  etc., on hand of each.
• Value crops at current market price plus premiums or contract price.  Deduct transportation costs.
• Value annual specialty crops at their expected sale price into niche or local markets.
• For perennial or long-term crops such as alfalfa, orchard crops, or some vegetables, sum up all the costs incurred for establishing the crop and depreciate that amount over its productive life and list as a fixed asset (below).
• Value processed grain products at their expected sale value.
• Include any crops under a USDA marketing loan. Value it at the current market price or the loan rate, whichever is higher, because you have the option of repaying the loan at a lower rate if the price is below the loan rate. Include the marketing loan as a current liability.
• Value grain that has been hedged by selling a futures contract by subtracting the current basis (current price of the futures contract minus the local cash price) from the price at which the contract was sold (see Example 1).
• Value growing crops at a percentage of their expected value less harvesting and storage costs.  The percentage should correspond to the growth stage of the crop.
• Value commercial feed at its purchase cost.

Other Current Assets – all other current assets that are not included above should be included here.

• Supplies on hand, such as seed corn, chemicals, medications, and fuel.
• Prepaid expenses, such as payment made for feed to be delivered in the coming year. Show this as an asset only if you have already paid for it or if you show the obligation to pay for it as a liability.
• Money invested in a future crop such as for fall-applied fertilizer. Growing crops generally should be given a value equal to the costs of production already incurred.
• Accounts receivable, such as the payment a neighbor might owe you for custom combining, or government payments to be received for past production.

Fixed Assets

Fixed assets are those used in farm production and processing, but not intended to be sold or converted directly into marketable products during the year (except for breeding livestock to be culled).  On some statements, fixed assets are divided into intermediate and long-term assets

Breeding and Dairy -- For valuing breeding and dairy livestock, review the points below:

• Begin with an accurate count of each species and type of livestock.
• Cows or ewes should be valued according to a conservative dairy or breeding value. For sows which are replaced more rapidly, an estimated slaughter value is suggested.
• Avoid making large year-to-year changes in values placed on breeding stock, which can cause large paper increases or decreases in net worth. Establishing a base value for each class of breeding stock and using it each year is recommended.

Machinery, Processing Equipment and Vehicles -- For valuing machinery, processing equipment and vehicles, review the points below:

• Your tax depreciation schedule should provide a complete inventory.
• Use the depreciated or remaining value (cost minus total depreciation allowed, including depreciation for the past year), under the cost value column.
• Once a total remaining value has been determined, it can be adjusted in following years by this formula:
  
  • Value of machinery (or equipment or vehicles) at the beginning of the year
  • + net cost of machinery added (purchases or cash difference on a trade, minus the value of machinery sold or junked)
  • - depreciation expense for the year
  • = machinery value at the end of the year (see Example 2).

• Use a conservative market value under the market value column, or adjust the previous year's value for purchases, sales, and depreciation. Use the same depreciation expense value that you show on your net income statement.

Do not include machinery, equipment or breeding livestock that you are leasing, unless they are shown on your tax depreciation schedule.

Land and Buildings -- Other fixed assets include land, buildings, and other improvements. They often have the largest dollar value of any assets on the net worth statement..

List the cost basis of farm real estate under the cost value column:

Your original basis is the price you paid for the farm.

• If you received the property through gift, you retain the giver's basis.
• If you inherited the property, the basis is the value used for calculating Federal Estate Taxes.
• Adjust the original basis by adding the cost of improvements made and subtracting the depreciation taken on improvements.

List market value of farm real estate under the market value column:

• Value the assets at a conservative current market value.
• List the value of improvements separately from real estate. Use the remaining value for depreciable improvements.
• Reduce market value land prices to allow for broker's commission and other selling costs that might have to be paid if the farm were sold.

Value-Added Businesses -- List your ownership interest (value of shares) in value-added processing and/or marketing businesses (ie. cooperatives, LLCs, partnership, etc.).

Personal Assets

Personal assets such as family bank accounts, retirement accounts, stocks and bonds, household goods, vehicles, housing or other real estate can be listed separately at the bottom of the assets side of the statement.

Listing liabilities

Liabilities are generally listed on the right-hand side of the net worth statement and include all debts and obligations to pay which the farm business or family has on the date of the statement. Liabilities are usually listed according to the length of time before they become due. You may want to list the creditor's name and the purpose of each liability, as well as the amount, on a separate page.

Current Liabilities

Current liabilities are those due within the next 12 months.

• Include debts such as operating notes, feeder livestock notes, or the outstanding balance on a credit line with a bank or other lender.
• Accounts payable, such as an unpaid open account with a feed mill or attorney, should also be shown, as well as unpaid wages, custom charges, and farm property taxes due.
• Contractual obligations, such as a cash rent leasing agreement or a machinery operating lease, are generally not shown. However, if they are included in liabilities, the value of the rights that you have as a result of the contract should also be shown as an asset. These are generally given the same value as the liability.
• List principal payments due on fixed liabilities within the next 12 months (see Example 3).
• Calculate the amount of unpaid interest accrued on all liabilities as of the date of the statement. Multiply the outstanding principal of each debt by its respective interest rate, then multiply by the fraction of a year that has passed since the last payment, or since the loan was received if no payments have been made yet (see Example 4).

Fixed Liabilities

Fixed liabilities include debts payable more than one year in the future.

• Loans for processing equipment and facilities, breeding stock, machinery, land, or farm improvements usually fall into the fixed category.
• A mortgage or contract on real estate is usually a fixed liability, too.
• Show the unpaid balance minus the principal due in the coming year (it has already been shown as a current liability).

Personal Liabilities

Personal liabilities can be shown at the bottom of the liabilities column. These include consumer debts, credit card balances, home mortgages and bills to pay.



Net Worth

The difference between total farm assets and total farm liabilities is the net worth, or equity, at the time the statement is made. It is the current value of your own investment in the farming operation. Adding net worth to total liabilities (which is the share of assets contributed by creditors) gives you a figure equal to total assets and serves as a check on your arithmetic.

The cost value net worth shows the value of your own investment excluding changes in the market values of machinery or real estate, while market value net worth does include these changes.

Farm and personal net worth can be added together to find the total family net worth.


* Adapted from Ag Decision Maker, Iowa State University Extension, “Your Farm Income Statement”, www.extension.iastate.edu/agdm.