John: If you say...
Haim Kamil: If I'm right?
John: Their loyalty aspires to zero...
Haim Kamil: Their loyalty, wait, I'll say exactly what I'm saying. I say that every year they reconsider who to work with and this is in accordance with the price they are promised that year. And if this is true, there is no asset and nothing. Wait, do you agree with me on that?
Yohanan: Wait a second, that's not what the management agreed.
Haim Kamil: I didn't say that the management agreed. I'll give you a thesis. Is it true that there is no asset, true or false?
John: If you prove..."
Accounting classification of "trust": between "asset" and "expense" and the gap between financial reporting and reporting for tax purposes
- The evidence indicates that Agrexco presented in its balance sheets, over a number of years, items that were registered as assets and whose essence was incentives and financial advances paid to growers, suppliers of agricultural produce. It is possible that these payments were made in order to create a business advantage for Agrexco over its competitors and to tie the growers to continued cooperation with it (paragraphs 80-82 of the defendant's summaries). However, these payments were made without a contractual obligation on the part of the growers to continue marketing their products through Agrexco in the future. Despite the lack of obligation and contractual relationship, the company recognized these payments as an asset on its balance sheet, rather than recording them as an expense at the time of their formation. In fact, this recognition of the asset enabled the company to refrain from recording significant expenses and thus "seduced" the picture of its profits, balance sheet and equity in the financial statements (pp. 7-8 of the Barlev opinion).
- and in this context, a side note regarding the defendant's claim in its summaries. It is true, as I noted in the hearing of June 30, 2025, that there is no denying that there is a tax incentive to recognize payments to growers as an immediate expense, and not as an asset, for the purpose of reducing the tax liability at present value (the defendant's argument in its summaries, at paragraph 72; transcript, p. 865, paras. 8-9). However, accounting is a broad field that includes various specializations intended for reporting, control, and planning purposes: financial accounting focuses on the preparation of external reports (balance sheet report, profit and loss report) in accordance with Israeli and international standards (IFRS); Audit accounting checks and verifies the adequacy of financial statements by an accountant; Tax accounting, on the other hand, deals with calculation, reporting, and tax planning for tax authorities and businesses. Therefore, tax accounting is different from financial accounting, and the incentives are different and sometimes even contradictory. The case law recognized that the reporting system for tax purposes is significantly different from the financial reporting system. While the purpose of financial accounting is to reflect the activity of the business and its financial situation for the taxpayer, investors and creditors, tax accounting is aimed at the tax authorities in order to determine the taxable income in accordance with the fiscal policy of the legislature (Civil Appeal 494/87 Guards and Security Group Company in Tax Appeal v. Tax Assessor for Large Enterprises, 46(4) 795 at para. 4 (1992); Aharon Namdar Income Tax [Foundations and Principals] 655 (2013)). That is, different purposes for different recipients. Accordingly, there is a built-in gap in incentives: in the financial reporting in the financial statements, there may be an interest in the company to "inflate" assets and present profits in order to meet the conventions of the debtholders, or to present an optimistic situation to the investors holding the capital. On the other hand, in reporting to the tax, the interest is to present as low a profit as possible (pp. 25-26 of the Barlev opinion; Civil Appeal 3348/97 Peshmag v. Dikla Mutual Fund Management Company Ltd., IsrSC 561(1), 8-9 (2001); Civil Appeal 8783/14 A.G. Industries in Tax Appeal v. Tel Aviv Assessor at para. 13 [Nevo] (August 23, 2016)). Therefore, the tax incentive, which always exists, does not have the power to affect the process in this parallel, financial universe (see also a similar discussion in audit accounting below).
- And back to the main points of the case. There is no dispute that in the relevant years there was no enforceable contract or legal right that gave the company real control over the resource, i.e., over the loyalty of the growers, or the ability to enforce the growers to supply Agrexco with produce following the receipt of the advances. Claims relating to Coast Forer's internal procedures during this period did not dispute the absence of a contract or written document, but justified the listing as an asset because the expense was related to the future; claimed that the expenses were related to upgrading the infrastructure of the growers' orchards so that Agrexco could receive better produce; The special payments are for additional demands raised by the growers beyond the contract, and in the event that the company does not meet their demand, those growers will transfer the future agricultural produce to a third party; The subsidies are provided in order to enable the grower to continue to supply agricultural produce in the next season despite the losses it has accumulated (Morad's opinion, at p. 7). In these circumstances, according to the liquidators, these incentives did not meet the conditions of the definition of an "intangible asset" under Standard 30, and therefore there was no justification for listing them as an asset on the balance sheet in the first place. I believe that there is substance to this argument.
Implementing the Fundamentals of the Definition in Standard 30: Identification, Control, Future Benefits
- With regard to the element of identifying the resource, I am of the opinion that the special payments to the growers, beyond what is required, did not lead to the creation of an asset that can be identified and separated as separate from the general goodwill of the company, which is usually registered as an asset when it is purchased in the framework of the acquisition of another company - that is, when there is an objective indication of its value in the form of another party that actually paid money for it (as appears from the rationale of the plaintiffs' arguments in their summaries, at paragraphs 50 and 106). Intangible assets are usually identified by means of legal rights such as patents, licenses, binding contracts, etc. (Sections 12-16 of Standard 30), or by the fact that they can be sold or transferred to a third party independently (Section 12(a) of Standard 30). In our case, as stated, the relationship with the growers was not anchored in long-term binding contracts; Agrexco did not have exclusive legal rights to receive produce from those growers, and it did not have the option to sell or transfer this "asset" (the trust of the growers or the array of connections or the expectation of continuing the engagement) to another party.
- Under these circumstances, it seems that farmers have had the choice to switch to working with another marketer over the years. While in Agrexco's early years the company had a monopoly in the agricultural produce export sector, beginning in the early 2000s, there was a decline in Agrexco's exports (investigator's report, at pp. 26 and 153). At the same time, Mehadrin, which was a significant competitor to Agrexco, strengthened (Minutes, at p. 522, paras. 24-25; p. 525, paras. 7-14). In a situation where Agrexco does not have "rigid" contracts or obligations with suppliers, and in light of the growing strength of its competitor Mehadrin, it seems that Agrexco is not a monopoly, the supplier has an alternative to move to the rival company and has no impediment to doing so by virtue of a contract or anything else that would attest to the "solidity" of its relationship with Agrexco. Moreover, unlike Agrexco, it appears that in those years Mehadrin may have recognized suppliers in its financial statements on the basis of existing contractual obligations (transcript of the hearing, at p. 751, questions 17-24; p. 752, questions 10-17; p. 753, questions 19-24):
"Adv. Leibowitz: Now we move on to the section, look at my friend's comments, I forgive him. In paragraph 10.1 of your old opinion, and also today in the discussion, you referred to Mehadrin's financial statements.