Appendix V Basic Grain Accounting for Hedge Accounts

Transcription

1 Basic Grain Accounting for Hedge Accounts Grain accounting is unique because the value of the commodity that is being dealt with changes over time. Unlike other businesses that have inventory at a set cost, an elevator's inventory can have a dramatic change in value from one accounting period to the next. As a result, elevator accounting practices must allow for the change in the value of inventory and open contracts in order to accurately reflect the profit and loss for the accounting period. The practice of valuing grain at current market price is referred to as "marking it to the market." There are three components of an elevator's profit and loss statement which must be accounted for at the end of each accounting period. 1) Inventory 2) Closed Futures Contracts (Realized Hedging Gains and Losses) 3) Open Cash and Futures Contracts (Unrealized Hedging Gains and Losses) The worksheets in this appendix will help you collect and organize the information necessary to make these end-of-the-month adjustments and sort out the appropriate entry to be made to each account. As a result, you will be able to simplify your adjustments so that only a few entries need to be made at the end of each month. The worksheets include: 1) Inventory Monthly Adjustment Worksheet 2) Futures Account Monthly Adjustment Worksheet 3) Contracts & Open Futures Position Monthly Adjustment Worksheet The information to complete the worksheets is obtained from several sources. Below is a list of what you will need to get started and a list of accounts that should be set up in the company's records. 1) Accounts Set-Up In Your Bookkeeping Records: Balance Sheet Cash on Deposit / Futures Account* Cash on Deposit / Option Account * Inventory Income Statement Cost of Sales: (for all crops that apply) (i.e. wheat, corn, etc.) Interest Income * If you are new to hedging, these two accounts will need to be added to your Balance Sheet. All other accounts should already be a part of your bookkeeping records. 417

2 2) Copy of Futures Account "Statement of Monthly Activity" 3) End-of-the-month Cash Prices Elevator's bid to producer. Best available resell price. 4) Grain Hedge Position Report 5) List of Open Purchase Contracts (Should include bushels, delivery period and contract price) 6) List of Open Sales Contracts (Should include bushels, delivery period and sale price) Inventory Monthly Adjustment Worksheet Purpose: Mark-to-the-market the elevator's company owned inventory. Valuing inventory is a common practice in any business that handles a commodity. The only difference in the way an elevator's inventory is treated is that it is valued at its current market price, rather than its actual cost. The Inventory Monthly Adjustment Worksheet is used to make this valuation. The information to complete this worksheet is obtained from your Grain Hedge Position Report and current Pricing Board (bids to farmers). The ending inventory for each crop is listed separately along with the your nearby cash price. The two numbers are multiplied in order to determine the value of the inventory at the month end. A debit is made to the Inventory asset account and a credit is made to the Cost of Sales income account for each crop. Example Crop Inventory Monthly Adjustment Worksheet Company Owned Inventory Elevator's Bid to Producer ENDING INVENTORY INVENTORY (Asset) DEBIT (Income) CREDIT WHEAT 238, $815, $815, CORN 1, $3, $3, NOTE: This entry is reversed on the first of the month and recalculated again at the end of each month. 418

3 Basic Grain Accounting for Hedge Accounts Wheat 8/31 601, ,346 74, ,491 COMPANY OWNED INVENTORY comes from Grain Hedge Position Report Corn 8/31 363, ,405 7,843 7,843 January 8,000 September 38,368 3,004 3,432 8,000 December 2 5,000 March 235,000 6,436 1, ,405 October October 5,000-1,963 5,000 July 5,000 December 15,000 20,000 26,407 ELEVATOR'S BID TO PRODUCERS comes from Pricing Board + 1,407 ELEVATOR'S PRICING BOARD CROP IMD. OCT JAN APR New Crop WHEAT N/A 3.15 CORN

4 Futures Account Monthly Adjustment Worksheet Purpose: Record company's realized hedging gains and losses for the month. The information to complete this worksheet is obtained from the monthly statement received from your futures clearing firm. Open Futures Positions are not included on this worksheet. It is only activity during the month which resulted in a Cash, P & S or Adjustment to your futures account. Each transaction that occurred in your futures account during the month is listed on the worksheet. A debit or credit is made to the Cash on Deposit/Futures Account (herein indicated as "Futures Account") with an offsetting entry to another account (see below). NOTE: Each transaction must have an equal debit and credit. IMPORTANT! When a transaction is a debit on your futures statement, it is posted as a credit to the "Futures Account" in the elevator's bookkeeping records. When a transaction is a credit on your futures statement, it is posted as a debit to the "Futures Account" in the elevator's bookkeeping records. Here are some of the most common transactions that will occur in the futures account and the corresponding entry to be made on the Futures Account Monthly Adjustment Worksheet. Description of Activity Debit Credit Commodity P & S (gain) Futures Account Cost of Sales (crop) Commodity P & S (loss) Cost of Sales (crop) Futures Account Interest Received Futures Account Interest Income Interest Paid Interest Income Futures Account Commission Rebate Futures Account Cost of Sales (crop) Money Transferred to Option Acct. Option Account Futures Account Conversion Adjustment (expense) Futures Account Cost of Sales (crop) After all the transactions on the monthly statement are accounted for, each column is totalled. You then net out the debits and credits so that one entry per account remains. (If the entries have been done correctly the Net Totals when added and subtracted, should equal zero). This is the entry to be made to the company's bookkeeping records. NOTE: These entries are NOT reversed on the first of the month. Wire transfers in and out of the futures account are recorded at the time the transaction is made and will not require an adjusting entry at the end of the month. Any reference to wire transfers on the futures account monthly statement should be ignored when making end-of-the-month adjustments. 420

5 Basic Grain Accounting for Hedge Accounts Futures Account Monthly Adjustment Worksheet DATE CASH ON DEPOSIT FUTURES ACCOUNT (ASSET) CASH ON DEPOSIT OPTION ACCOUNT (ASSET) WHEAT (INCOME) CORN (INCOME) SOYBEAN (INCOME) INTEREST (INCOME) 8/ /29 1, , /30 2, , /31 8/31 1, , , , , , , , **** MONTHLY COMMODITY STATEMENT**** * * * * * * * * * * * * * * YOUR ACTIVITY THIS MONTH * * * * * * * * * * * * TRADE AT LONG SHORT DESCRIPTION PRICE/LEGEND CC DEBIT CREDIT 8/ DEC KC WHEAT P&S US /26 01 WIRE TRANSFER RECEIVED CASH US 20, / DEC KC WHEAT P&S US 1, / DEC CORN P&S US 2, /31 01 COMM REBATE CASH US 1, / DEC KC WHEAT P&S US * * * * * * * * * * * * * * POSITIONS IN YOUR ACCOUNT * * * * * * * * * * * 8/13 5 DEC CORN 2.72 US 2, /16 10 DEC CORN 2.75 US 5, * OPEN TRADE EQUITY 2.22¾ US 7,687.50* 8/30 5 JUL CORN 2.41¾ US * OPEN TRADE EQUITY 2.42¾ US 50.00* 8/1 25 DEC KC WHEAT 3.83 US * OPEN TRADE EQUITY 3.82¾ US 62.50* 421

6 Contracts & Open Futures Position Monthly Adjustment Worksheet Purpose: Record company's unrealized hedging gains and losses. The information to complete this worksheet is obtained from the Position Report, Pricing Board, FOB Resell Values and Statement of Monthly Activity (see following pages). This worksheet marks to the market all open contracts (cash and futures) for one crop. A separate worksheet needs to be completed for each crop. There are three sections to the Worksheet: #1 Purchase Contracts. These are the bushels that the elevator has purchased and priced but not yet received. (It is usually designated as Un-received Grain Bought & Priced on the Grain Hedge Position Report.) The bushels for each delivery period are totaled and posted on the Monthly Adjustment Worksheet as Open Bushels. The Contract Price is the average purchase price for all contracts for the same delivery period. The Ending Price is the elevator s current cash bid to producers for the designated delivery period. The Difference is the change in value between the Contract Price and the Ending Price and will result in a gain/loss for the period. A gain in the contract price will result in a debit to Inventory and a credit to Cost of Sales. A loss in the contract price will result in a credit to Inventory and a debit to Cost of Sales. #2 Sales Contracts. These are the bushels that the elevator has sold and priced but not yet delivered. (It is usually designated as Un-delivered Grain Sold & Priced on the Grain Hedge Position Report). The bushels for each delivery period are totaled and posted on the Monthly Adjustment Worksheet as Open Bushels. The Contract Price is the average sale price for all contracts for the same delivery period. The Ending Price is the elevator s current FOB selling price for the same delivery period. The Difference is the change in value between the Contract Price and the Ending Price and will result in a gain/loss for the period. A gain in the contract price will result in a debit to Inventory and a credit to Cost of Sales. A loss in the contract price will result in a credit to Inventory and a debit to Cost of Sales. #3 Open Trade Equity. This is the net value of the elevator s open futures position by commodity. This information is obtained from the Positions in Your Account section of the elevator s Monthly Commodity Statement. The open trade equity is totaled by crop and posted to the worksheet. A debit (loss) on the monthly statement will result in a credit to Inventory and a debit to Cost of Sales. A credit (profit) on the monthly statement will result in a debit to Inventory and a credit to Cost of Sales. Once all sections of the worksheet are completed, the columns are totaled and the debits and credits netted out so that you are left with one entry per crop. NOTE: This entry is reversed on the first of the month and recalculated again at the end of each month. 422

7 Basic Grain Accounting for Hedge Accounts Contracts & Open Futures Position Monthly Adjustment Worksheet Wheat Jan ,000 1,600 1,600 Sept ,368 4, , ,700 36,700 1,600 41, , , , ,600 Contracts & Open Futures Position Monthly Adjustment Worksheet Corn Oct ,000 8,000 Oct ,000 1,600 1,600 7, , , , ,000 8,000 9, , Please refer to the following pages to see where these numbers come from. 423

8 ELEVATOR'S PRICING BOARD CROP IMD. OCT JAN APR New Crop WHEAT N/A 3.15 CORN Purchase Contracts Ending Price Wheat 8/31 601, , ,346 74,740 Purchase Contracts Open Bushels 363,086 Sales Contracts Open Bushels 238,405 January 8,000 September 38,368 8,000 38,368 December 2 5,000 March 235, , , ,368-1,

9 Basic Grain Accounting for Hedge Accounts Corn 8/31 7,843 7,843 Purchase Contracts Open Bushels 3,004 3,432 6,436 October 1,407 October 5,000 Sales Contracts Open Bushels 5,000 July 5,000 December 15,000 20,000 26,407-1,407 Sales Contracts Ending Price ELEVATOR'S FOB RESELL VALUES as of month end CROP IMD. OCT JAN APR New Crop WHEAT N/A 3.25 CORN

10 **** MONTHLY COMMODITY STATEMENT**** * * * * * * * * * * * * * * YOUR ACTIVITY THIS MONTH * * * * * * * * * * * * TRADE AT LONG SHORT DESCRIPTION PRICE/LEGEND CC DEBIT CREDIT 8/ DEC KC WHEAT P&S US /26 01 WIRE TRANSFER RECEIVED CASH US 20, / DEC KC WHEAT P&S US 1, / DEC CORN P&S US 2, /31 01 COMM REBATE CASH US 1, / DEC KC WHEAT P&S US * * * * * * * POSITIONS IN YOUR ACCOUNT * * * * * * * * 8/13 5 DEC CORN 2.72 US 2, /16 10 DEC CORN 2.75 US 5, * OPEN TRADE EQUITY 2.22¾ US 7,687.50* 8/30 5 JUL CORN 2.41¾ US * OPEN TRADE EQUITY 2.42¾ US 50.00* 8/1 25 DEC KC WHEAT 3.83 US * OPEN TRADE EQUITY 3.82¾ US 62.50* 8/15 15 MAR KC WHEAT 3.61 US 3, /16 15 MAR KC WHEAT 3.65½ US 2, /16 15 MAR KC WHEAT 3.66 US 2, /17 5 MAR KC WHEAT 3.66¼ US /17 15 MAR KC WHEAT 3.66½ US 2, /18 75 MAR KC WHEAT 3.67 US 13, /22 10 MAR KC WHEAT 3.70¼ US 1, /25 50 MAR KC WHEAT 3.70 US 7, /28 5 MAR KC WHEAT 3.76 US /28 5 MAR KC WHEAT 3.77½ US /31 25 MAR KC WHEAT 3.84 US * OPEN TRADE EQUITY 3.85 US 36,637.50* *** US DOLLARS*** BEGINNING BALANCE.00 THIS MONTH'S ACTIVITY 25, ENDING BALANCE 25, NET FUTURES PROFIT OR LOSS 5, FUTURES OPEN TRADE EQUITY 29, ACCOUNT VALUE AT MARKET 3, CONVERTED MARKET VALUE 3, *** CURRENT MONTH*** ***YEAR-TO-DATE*** CREDIT INTEREST US.00 1, FUTURES PROFIT OR LOSS US 5, ,

11 Basic Grain Accounting for Hedge Accounts Review of Adjusting Entries The sample worksheets indicate that the following adjustments need to be made to the company's Profit & Loss statment. The adjustments are done as end-of-month general journal entries. From the Inventory Monthly Adjustment Worksheet Debit Credit Inventory (Asset) 815, Wheat Cost of Sales (Income) 815, Inventory (Asset) 3, Corn Cost of Sales (Income) 3, From the Futures Account Monthly Adjustment Worksheet Debit Credit Cash on Deposit Futures Account (Asset) 5, Wheat Cost of Sales (Income) 2, Corn Cost of Sales (Income) 2, From the Contracts & Open Futures Position Monthly Adjustment Worksheet Debit Credit Inventory (Asset) 39, Wheat Cost of Sales (Income) 39, Inventory (Asset) 1, Corn Cost of Sales (Income) 1, These examples show how to reflect the change in the value of grain from the previous month. Some accountants prefer to revalue grain each month based on the beginning of the accounting period. Either way is correct, as long as you are consistent in your methods. Grain accounting involves much more detail then we can devote in this material. The point we want to convey is that elevators have specialized accounting needs and must mark to the market their grain positions in order to produce an accurate Profit & Loss statement. It is important that you have an accountant who understands the special needs of your business and how merchandising affects its bottom line. An accountant who does not understand hedging procedures and how they are interpreted by the IRS may not reflect the value of your positions accurately, resulting in erroneous P&L statements. If possible, you should look for an accountant with experience in grain accounting. If you cannot find one, it is vital that you help educate your accountant about grain merchandising, or put him in contact with others who have experience in the field. 427