Gains and Losses
Chapter Fourteen
Syllabus topic 9, "Treatment of gain and losses and government grants."
Pages 30 to 32 of 110
The two rules
Paragraph 26, on the biological asset, in bold:
A gain or loss arising on initial recognition of a biological asset at fair value less costs to sell and from a change in fair value less costs to sell of a biological asset shall be included in profit or loss for the period in which it arises.
Paragraph 28, on the produce, in bold:
A gain or loss arising on initial recognition of agricultural produce at fair value less costs to sell shall be included in profit or loss for the period in which it arises.
Profit or loss, in the period in which it arises. Not other comprehensive income, and not a reserve. That single fact is the most examinable thing in this part of the standard, and it is where Ind AS 41 differs most visibly from the way a farm's ordinary books behave.
The three occasions on which a gain or loss arises
Paragraph 26 names two of them and paragraph 28 the third.
- On initial recognition of a biological asset. Buying, or a birth.
- On a change in fair value less costs to sell of a biological asset. Remeasurement at the reporting date.
- On initial recognition of agricultural produce. At harvest.
Paragraph 27: why a loss can arise the moment an asset is recognised
A loss may arise on initial recognition of a biological asset, because costs to sell are deducted in determining fair value less costs to sell of a biological asset. A gain may arise on initial recognition of a biological asset, such as when a calf is born.
Both halves are asked.
The loss. A cow is bought at its market price of Rs. 60,000. It is measured immediately at fair value less costs to sell. If costs to sell are 3 per cent, the carrying amount is Rs. 58,200 and there is a loss of Rs. 1,800 on the day of purchase. Nothing has gone wrong. The purchase price and the measurement basis simply differ by the selling cost, and the standard reports the difference at once.
The gain. A calf is born. Nothing was paid, and there is now an asset worth, say, Rs. 12,000 less costs to sell of Rs. 360, so Rs. 11,640. The whole Rs. 11,640 is a gain in the period of the birth. This is the treatment AS 9 expressly refused to deal with, in its exclusion of revenue arising from natural increases in herds, and it is one of the clearest illustrations of what Ind AS 41 adds.
Paragraph 29: why a gain or loss arises at harvest
A gain or loss may arise on initial recognition of agricultural produce as a result of harvesting.
Gains and Losses
At the instant of harvest the produce is recognised at its own fair value less costs to sell, and the biological asset is reduced by the value that has left it. The two figures need not be equal, and the difference is a gain or a loss.
Milk is the plain case. The cow's fair value does not fall by the value of a single milking; the milk appears as an asset at its own fair value less costs to sell; the credit is a gain.
Worked: one herd through one year
Sunehra Farms Private Limited, year ended 31 March 2027. All amounts are fair value less costs to sell.
| Rs. | |
|---|---|
| 50 cows at 1 April 2026, opening carrying amount | 29,10,000 |
| 10 cows purchased on 12 August 2026, at fair value less costs to sell on that date | 5,82,000 |
| 8 calves born on 12 January 2027, at fair value less costs to sell on that date | 93,120 |
| 3 cows sold on 4 March 2027, carrying amount removed | 1,74,600 |
| 60 cows and 8 calves at 31 March 2027, closing carrying amount | 37,42,000 |
The gain for the year is found by difference, and this is the calculation to learn.
| Rs. | |
|---|---|
| Closing carrying amount | 37,42,000 |
| Add: carrying amount of assets removed on sale | 1,74,600 |
| Less: purchases at fair value less costs to sell | (5,82,000) |
| Less: opening carrying amount | (29,10,000) |
| Gain from initial recognition and from change in fair value less costs to sell | 4,24,600 |
Of that Rs. 4,24,600, the Rs. 93,120 recognised on the birth of the calves is a gain on initial recognition under paragraph 27, and the balance of Rs. 3,31,480 is the change in fair value less costs to sell of the assets held.
Both go to profit or loss, and paragraph 40 requires the aggregate to be disclosed.
The three cows sold produce a separate figure. If they realised Rs. 1,80,000 net, the profit on disposal is Rs. 5,400 against the carrying amount removed of Rs. 1,74,600.
The milk, separately
During the year the herd yielded 96,000 litres, measured at the point of harvest under paragraph 13 at fair value less costs to sell of Rs. 34 a litre, so Rs. 32,64,000.
That Rs. 32,64,000 is a gain on initial recognition of agricultural produce under paragraph 28, recognised as the milk is drawn. It also becomes the cost of the milk for Ind AS 2, so milk still in hand at the reporting date sits in inventory at that figure, and milk sold is charged out at it.
What a student most often gets wrong
Waiting for the sale. The gain on the growing herd is recognised at the reporting date whether or not any animal has been sold. That is the design.
Gains and Losses
Netting the gain against the cost of feed. They are separate. Feed, labour, veterinary charges and depreciation are expenses of the period and go to profit or loss as incurred. The fair value movement is a separate line. Nothing is capitalised into the biological asset.
Sending the movement to a revaluation reserve. Ind AS 16 has a revaluation surplus; Ind AS 41 has none. Paragraphs 26 and 28 both say profit or loss.
The rest of this subject
These notes are cut from the University's printed syllabus. Open the syllabus itself, or the past papers, for the same subject.