CAIS P1/P2 Inventory Valuation

Coralee Foster, CA

History

The federal and provincial governments have both committed to a change from the inventory valuation method that has been used for CAIS and its predecessor programs. Under the original rules, opening and closing inventory carried over year-end were both valued at the closing (P2) inventory values. While contrary to normal accounting practices, which would value opening inventory (P1) at opening values and closing inventory (P2) at closing values, these rules prevailed from the inception of the disaster programs in 1998.

There are transitional rules to apply this change retroactively to 2003, 2004 and 2005 applications and indications that this will be the standard for future years. This will allow losses in inventory that has declined in value to be recognized by the CAIS program.

It is important to note that this change will not have any impact for producers who did not carry inventory over their year-end or for those who file their tax returns on an accrual basis with Canada Revenue Agency.

Payments will be made to eligible producers based upon information previously filed with their CAIS application. No further application needs to be made. In order to determine eligibility, a producer’s CAIS application will be recalculated using the new P1/P2 inventory valuation method. Any payment triggered will be paid as a CAIS Inventory Transition Initiative (CITI) federally and as an Ontario Inventory
Transition Initiative (OITI) provincially.

It is expected that there will be insufficient funding available both federally and provincially to fully cover the payments that may be triggered, so the governments have proposed the following payments:

2003 – federal will be 1/2 of the calculated payment, provincial will be 2/3 of the federal payment
2004 – federal will be 1/2 of the calculated payment, provincial will be 2/3 of the federal payment
2005 – federal and provincial final percentage will not be determined until 2003 and 2004 payments are completed

Example

To illustrate the potential impact in a year for a corn producer, we are going to look at three examples for 2004 and 2005 – one for producers who market their entire crop before year-end, one for those who carry their crop over year-end and another for producers who feed their entire crop to livestock.

2004

• Producer A, B & C – grow 500 acres of corn, average yield is 130 bushels/acre, total yield is 65,000 bushels
  
• CAIS assigned values – December 2003 = $3.08/bu and at December 2004 = $2.33, so there has been a decline in commodity value during the year.
  
• Producer A – sells 65,000 bushels for $2.50/bu = $162,500 prior to year end, no opening or closing inventory
  
• Producer B – opening inventory of 65,000 bushels from 2003 sold in January 2004 for $3.50, closing inventory of 65,000 bushels from 2004 not sold until 2005
  
• Producer C – stores all of their crop to feed and carries over 65,000 bushels from 2003 to 2004 and from 2004 to 2005
  

Under either set of rules, Producer A has the true value of the 2004 crop production in his 2004 margin. Under the old rules, Producer B’s margin for 2004 effectively reports the margin on the 2003 crop; they will not get recognition for the fact that the 2004 crop is worth less until it is sold the following year. Under the new rules, they will recognize the value of their crop at year-end, plus the gain they had on the 2003 crop in 2004 by holding it from January 1 until they sold it. Producer C, who does not sell the crop in any year, is able to recognize the fact that the inventory has declined in value, under the new rules, even though it will be fed, not sold.

Producers B and C will have a reduction in their 2004 CAIS margin, which may be sufficient to trigger payments, if they were not previously in a payment position, or will enhance payments at rates ranging from 50% to 80% depending on their previous CAIS situation. It is important to note that these will not translate into additional payments of $48,750 for the two producers. The $48,750 represents the amount by which their margins were overstated under the previous CAIS calculations.

2005

Using the same data for 2005 would net the following changes. The CAIS assigned inventory value at December 31, 2005 is $2.68, an increase from $2.33 at the beginning of the year.

Producer A sold the 2005 crop for $2.40 prior to year-end, Producer B sold the 2004 crop in 2005 for $2.30 in February 2005 and the 2005 crop in 2006. Producer C fed all crop in the subsequent year.

In this situation, Producer B and Producer C will see an increase in their margin for the 2005 year. This is because the value of the commodity they are carrying has increased in value during the year and that increase is being recognized immediately. Under the old rules, their 2005 margin was understated.

Conclusion

In summary, producers who held a commodity, which declined in value, over year-end, will have an advantage under the new rules, as that decline will be recognized immediately for CAIS. Conversely, producers who held a commodity over year-end that increased in value during the year would have been better off under the old rules. The retroactive application to 2003, 2004 and 2005 will not penalize anyone who did benefit from the old rules. If producers would have been better off with the new P1/P2 inventory valuation, they will receive an additional payment. If the P2/P2 valuation resulted in a higher payment then it will not be taken back. However, in future years, it appears that only P1/P2 will be used. The rules will not distinguish crop held for resale or held for feed; both will be treated the same.

Everyone’s situation will be different, depending on the amount of crop carried over year-ends, the selling price when eventually sold and the fiscal year-end of the producer. However, in general, the new regime more closely reflects traditional accounting practices and places the decline or increase in commodity values in the proper production year.

Coralee Foster is a chartered accountant and partner with BDO Dunwoody serving clients from the Mitchell and Woodstock offices. Her client base is primarily agricultural and agri-business operations. Coralee and her husband and sons participate in a family farm cash crop and beef enterprise in Perth County.