Simplifying Accounting for Small-Scale Farmers: A Tax Basis Approach
Introduction to Tax Basis Accounting
For small-scale farmers, the complexities of International Financial Reporting Standards (IFRS) for Small and Medium-sized Entities (SMEs) and the International Accounting Standard 41 (IAS 41) on agriculture can be daunting. These standards, while comprehensive, often require resources and expertise that may not be readily available to those with smaller operations. However, SARS requires information on the operations in a specific format to calculate taxes. The First Schedule of the Income Tax Act applies to farming operations and provides a more straightforward approach. Aligning accounting processes with tax preparation requirements can simplify financial reporting and compliance.
Challenges with IFRS for SMEs and IAS 41
While IFRS for SMEs and IAS 41 aim to provide a standardised approach to accounting, they often pose challenges for small farmers. IAS 41, for example, requires the valuation of biological assets (like crops and livestock) at their fair value, which can fluctuate significantly due to market and environmental conditions. This requirement can lead to complexity and volatility in financial reporting, which small farmers may find difficult to manage and interpret.
Why Tax Basis Accounting?
Tax-basis accounting focuses on preparing financial statements based on the rules established by the local tax laws, i.e. in South Africa this would be in line with Schedule 1 of the Income Tax Act and the Guide on the Taxation of Farming Operations issued by SARS. This way transactions and balances are recorded in a way that directly supports tax filing needs, considering SARS the main users of financial statements. Preparing accounts in line with tax requirements is a practical solution for farmers who need to maintain efficiency in their financial management practices.
Below is a demonstration of the tax-basis accounting for a small farming operation.
Illustration Scenario: Accounting for a Small-Scale Sheep Farm
In this example, we explore a small-scale sheep farmer in the Free State, South Africa. The farmer operates under a model where transactions (purchases and sales) are recorded at market values, but inventory is valued at the standard value set by SARS (R6 per sheep).
The Initial Setup:
The farmer starts the year with 100 sheep. The market purchase price at the beginning of the year is R1,500 per sheep, but for accounting and tax purposes, they are valued at R6 each, totaling R600 for inventory valuation.
During the year, the farmer buys an additional 20 sheep at a market price of R1,600 each (totaling R32,000) and sells 30 sheep at R1,700 each (totaling R51,000).
The farm receives a R10,000 government grant for sustainable farming practices.
By the end of the year, the inventory is adjusted to 90 sheep, valued at R6 each for a total of R540.
Journal Entries
Opening Inventory (100 sheep x R6):
Dr. Inventory R600
Cr. Equity R600
(To record the opening balance of sheep inventory at standard value)
Purchases during the year (Market Value):
Dr. Purchases R32,000
Cr. Cash/Bank R32,000
(To record the purchase of an additional 20 sheep at market value of R1,600 each)
Sales of sheep (Market Value):
Dr. Cash/Bank R51,000
Cr. Revenue R51,000
(To record the revenue from selling 30 sheep at market value of R1,700 each)
Government grant received:
Dr. Cash/Bank R10,000
Cr. Other Income R10,000
(To record the government grant for sustainable practices)
Adjustment for closing inventory at Standard Value:
Dr. Inventory adjustment account R60
Cr. Inventory R60
(To bring inventory on the balance sheet - 90 sheep, valued at standard value of R6 each)
Financial Statements
Income Statement for the Year Ended (Date)
Revenue from Sheep Sales: R51,000
Government Grants: R10,000
Total Revenue: R61,000
Cost of Goods Sold: Opening stock + purchases - closing stock = R600+R32,000-R540 = R31,960
Gross Profit (assuming no further expenses): R28,840
Learn more about tax for farming enrolling to CIBA’s Farming Tax CPD course
WHAT YOU WILL LEARN
By the end of this webinar the participant should:
Know how to calculate farming income.
Know how to apply the relevant ringfencing provisions.
Know how to calculate and apply the relevant farming deductions.
