An Analysis of the Accounting Principles Applied By the European Farm Accountancy Data Network

In spite of its relative importance in the economy of many countries and its growing interrelationships with other sectors, agriculture has traditionally not received much attention from accounting researchers, practitioners and standard setters. Consequently, farm financial statements typically do not respond very well to the particular characteristics of agricultural business and the information needs of farmers and their stakeholders. Together with other reasons, like a generally lower level of managerial sophistication, this has led to a situation in which farmers are more reluctant to prepare accounting reports and use this kind of information to a lesser extent than the agents in other economic sectors (Poppe, 1991; Poppe and Breembroek, 1992). Several authors, like Kroll (1987), André (1987), or Sabaté and Enciso (1997), have pointed out that when farmers use accounts, it is mainly to comply with tax and subsidy requirements.

On the other hand, it is generally believed that accounting can improve farm management and lead to better farm performance (see for example, Luening, 1989; Allen, 1994). Furthermore, agricultural lenders often claim more and better accounting information (Bronstien, 1995; Crane and Leatham, 1995), which is consistent with empirical evidence that accounting data makes a significant contribution to explaining and predicting farm failure (Argilés, 1998). Given the government interference in many agricultural markets in many countries, also policy makers have a need for accounting information.

In Europe, the Common Agricultural Policy (CAP) has been one of the cornerstones of the economic and political integration process, and to date the European Union’s Directorate for agriculture still is the one with by far the largest budget. It is logical therefore that the Commission of the European Community (CEC) has a need for information on the financial performance and condition of farms to support decision making for and control of the CAP. This information need is not limited to aggregate macro-economic data, but also extends to the level of individual farms, and the European Commission had to make an effort to obtain standardized information. For this reason the Council of the European Commission created the Farm Accountancy Data Network (FADN)¹. This network collects accounting information at the level of individual farms, and gathers every year data from a rotating sample of 60.000 professional farms across all member states.

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