Inventory valuation of plants

watergal(z6/7 Westminster, MD)June 21, 2007

What is the correct/best way to value inventory for IRS purposes when your inventory is live plants? Plants can increase or decrease in value over time as they grow and decline. They also come in different quality grades. I'm confused - please help.

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watergal(z6/7 Westminster, MD)

OK, too confusing to explain? How about a recommendation for software that handles it well for our industry? Thanks!

    Bookmark   June 22, 2007 at 9:51PM
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I'm not sure if this is of help to you, but all inventory at my nursery is valued at cost. I'm not sure how that would relate to a growing operation as opposed to a resaler, but that is an IRS standard for any retail enterprise. Have you asked your accountant (you do have an accountant, yes???)? Another resource would be local trade oragnizations you are a member of.

As I have just gone through a rather rigorous budgeting process, I can tell you exactly to the dollar what my inventory is currently valued at for accounting purposes :-) Not what it is worth if sold or liquidated - that is an entirely different situation.

    Bookmark   June 23, 2007 at 10:23AM
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Sherwood Botsford(3a)

And there's the rub. Your end of the year balance sheet should reflect the state of the business. Inventory at cost is not a good indicator, expecially if you grow the inventory for several years.

I grow trees. I am in a partnership with my wife.

I hire local kids on a part time basis to help on the farm.

Labour tasks can be roughly divided into the following categories:

1, Planting, & transplanting trees.
2. Maintenance activities on trees -- mostly weeding, watering, & fertilizing.
3. Infrastructure -- new irrigation systems, displays, pot yardvsupport systems, making pots from pails.
4. Infrastrucutre repair. -- fixing things, lawn mowing, pruning display trees, emptying dead trees from pots.

I work with them on these tasks. In addition there are tasks that only I do. Working on the web site, handling sales.

I don't track hours on the various sections. I may change activities dozens of times per day. Kids when they come in for a shift may switch activities twice during a shift. (Variety is one of the key attractions I have to get and hold workers)

We're in the process of graduating out of the shoebox method of accounting, and are stuck with how to put a value on inventory for tax purposes and for doing an end of the year balance sheet.

One advisor tells us that we record inventory at cost of acquisition, since it is an item to be sold.

This however seriously degrades the value of our farm at the end of the year.

I think my advisor is thinking in terms of a company that buys widgets to resell them essentially unchanged. In my case value is incrementally added by my use of the land and my labour. Seedlings are closer to that of a raw material used to create a manufactured product, where the raw material is insignificant compared to the labour.

Let me illustrate with an example:

I buy a box of fir seedlings at 40 cents per tree.

A week later they are in styrofoam block planters. Freshly planted they have a value of zero to negative. (A fraction will die. The rest cannot be sold at this point, as they are effectively a manufactured product in process.)

Depending on the species, and the growing conditions, the seedlings will be in the styroblocks for one to two years. After 2 months in the styroblock, they have rooted well enough that they are saleable. They retail for $5 each, wholesale for about 3.50 each.

The next spring they are transplanted to a 2 gallon container. They remain in this container for two years. Some are sold in this container for $8 per foot.

Two years pass.

The firs, mostly 3-4 feet tall, are transplanted to either #7 pots or #10 grow bags

The ones in pots will remain there for 2-3 years and be sold as 6-8 foot trees, the ones in grow bags will remain there for 4-5 years and be sold as 9-12 foot trees.

Styroblocks cost $3.75 each for a 15 cell block (25 cents per cell) and can be reused several times. Under ideal circumstances they can be reused about 6 times, but there is also about a 10% per year loss rate from breaking.

2 gallon pots can be reused indefinitely, but some go away with trees in them, and some are damaged. I buy my pots from landscape contractors for $100 per cord. A cord can have from 2000-3500 gallons of pots depending on the manufacturer, how well sorted they are, and the individual details of the mix. I figure roughly 5 cents per gallon
for used pots.

#7 pots cost me no money up front, but are made on site from salvaged pails. The time to make them is variable, mostly depending on the skill level of the worker and the nature of the previous material in the pail. Converting a pail to a pot is a 4 stage process spanning about 6 weeks.

Growbags are used once and are discarded/sold with tree. They are about $3 each.

At each stage on the farm, trees need to be watered, weeded,
fertilized. The farm is in it's formative stages yet. A lot of work goes into building infrastructure.

Time is not tracked by individual task: E.g. I do not know how much time I spent weeding firs this year. Nor do I know how much time Ispent watering firs. Heck, I don't know how much time I spent watering! (I told Laura, my better half who actually does the books: "I can do the work, or I can track what I do. I can't do both.")

Suppose that my inventory at a given time is:

400 fir seedlings fresh from the forestry nursery.
350 1 year old fir seedlings in styroblocks.
330 2 year old fir seedlings in styroblocks.
300 3 year old fir seedlings in 2 gallon pots.
150 4 year old fir seedlings in #7 pots
100 4 year old fir seedlings in grow bags.
140 5 year old fir seedligns in # 7 pots.
90 5 year old fir seedlings in grow bags.
130 6 year old fir seedlings in #7 pots.
85 6 year old fir seedlings in grow bags.

(If it were only this simple: I have 40 species of trees. I don't have the same number starting each year. Some grow faster than others... Some I start from seed swiped off trees in a local park, or raise from cuttings from stool beds I established for that purpose.)

Now the cost of acquiring goods is 40 cents per tree. But some of these trees came in 6 years ago, and have been increasing in value ever since. So 40 cents is unreasonably low.

The only other business that has similar situation are whiskey distillers. They ahve a product that they can sell at almost any time, but with age increases in value.

The method I suggested to my tax advisor is 1/3 of the retail value of
the trees. He doesn't accept this.

What is the GAAP way to deal with situations like this?


Sherwood of Sherwood's Forests

    Bookmark   August 1, 2010 at 6:08PM
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Only a qualified CPA would be able to say what the GAAP method, and/or IRS method, of handling the situation is because it will be highly specific. I'm in training to be a CPA but still, each situation is so different, it's tough to say.

Sherwood, IRS regulations are not the same as GAAP requirements...quite a few things that the IRS requires, GAAP does not require/allow. i.e. depreciation schedules, etc. So, the question is, what would an appropriate valuation scheme for the IRS look like. An appropriate valuation scheme following GAAP guidelines, for the purpose of a financial statement, may be different.

We go more in depth on inventory valuations in my next accounting class, so can't be of immediate help, sorry.

Sherwood, that is correct, you can't arbitrarily decide to value your inventory at 1/3 of retail value, there has to be some basis of calculating the value.

Like an above poster mentioned, valuations for a grower/nursery as opposed to a reseller/retail shop could be very different, so definitely a CPA is in order to avoid IRS scrutiny.

And moving out of the shoebox is the best thing you can ever do!!!!! Nothing better than a software system that lets you know real time the value of your business.

Watergal, it sounds like you need a CPA. Concerning GAAP, not the IRS, the reality is that inventory for most businesses can, and does change, based on demand, supply, costs, the economy, etc. Non-living inventory can also degrade, suffer from "shrinkage" (employee stealing!), or break. And, of course, inventory in most places also comes in different grades - i.e. if you have oil in an inventory, some oil may be sweet light crude, some may be heavy crude, etc. If you are using a computerized system, real-time adjustments in inventory are very easy.

A CPA should be able to help you determine how to properly value your inventory, and what cost methods to use (LIFO, FIFO, average, etc.). Generally speaking, cost is not always the best way to value inventory, as it does not properly reflect the amount of money that the company expected to realize upon sale or disposal of the item, or any value-added time/money spent on the inventory item.

    Bookmark   August 14, 2010 at 5:25PM
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This is an interesting thread. Did a quick search & found the federal crop insurance people have nursery valuation software available for download, so you can determine value if you insure (or have to make a claim).
Hope my nursery grows enough to worry anou this.

Here is a link that might be useful: Nursery inventory software USDA

    Bookmark   October 21, 2010 at 7:10PM
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