Recognition
Chapter Eleven
Syllabus topic 7, "Recognition"
Pages 22 to 23 of 110
The rule
Paragraph 10, in bold. Note the phrase when, and only when, which makes the three conditions exhaustive as well as necessary.
An entity shall recognise a biological asset or agricultural produce when, and only when:
(a) the entity controls the asset as a result of past events;
(b) it is probable that future economic benefits associated with the asset will flow to the entity; and
(c) the fair value or cost of the asset can be measured reliably.
All three. If any one fails, nothing is recognised.
These are the same three conditions the Conceptual Framework applies to any asset. Ind AS 41 restates them because they need working out on a farm, which is what paragraph 11 does.
Condition (a): control as a result of past events
Control means the entity can direct the use of the asset and obtain its benefits, and can stop others from doing so. Paragraph 11 gives the farm evidence:
In agricultural activity, control may be evidenced by, for example, legal ownership of cattle and the branding or otherwise marking of the cattle on acquisition, birth, or weaning.
So the evidence is ownership plus identification: the brand, the ear tag, the collar. On a crop, control follows from the right to the land and the fact of having sown it.
The words as a result of past events matter. The event must have happened. A calf expected next month is not controlled; a calf born last night is.
Condition (b): probable future economic benefits
Paragraph 11 again:
The future benefits are normally assessed by measuring the significant physical attributes.
Weight, age, fat cover, milk yield, the number of buds, the height of the stand. On a farm the physical attribute is the evidence of the benefit, which is one more reason the records of Module II have to carry quantities and not only rupees.
Probable means more likely than not.
Condition (c): fair value or cost measurable reliably
Note that the condition is satisfied by either measure. Fair value is the normal one; cost is available where paragraph 30 lets the fair value presumption be rebutted.
For agricultural produce this condition is never a difficulty. Paragraph 32 says the fair value of agricultural produce at the point of harvest can always be measured reliably.
When each is recognised
A biological asset is recognised when the three conditions are first met: on purchase, on birth, on sowing, or on acquisition in a business combination.
Agricultural produce is recognised at the point of harvest, and only then. The moment of harvest is both the recognition of the produce and the derecognition of that part of the biological asset.
Recognition
Worked, on one farm
Sunehra Farms Private Limited, a company applying Ind AS, has a year ending 31 March 2027.
1. Fifty cows purchased on 4 April 2026. Control by ownership and by ear tag, benefit from milk and from calves, fair value from the district cattle market. All three conditions met on 4 April. Recognised.
2. Eight calves born on 12 January 2027. Control on birth and marking, benefit probable, fair value available for calves of that age. Recognised on 12 January, and paragraph 27 says the gain on that initial recognition goes to profit or loss.
3. A cow that dies on 3 February 2027. No longer controlled, and no future benefit. Derecognised, and the loss goes to profit or loss.
4. Wheat sown on 15 November 2026 and standing at 31 March 2027. Control through the land and the sowing, benefit probable from the expected harvest, fair value measurable from the market for standing crops or by reference to the expected produce. Recognised as a biological asset.
5. Milk drawn on 31 March 2027 and still in the tank. Harvested, so it is agricultural produce. Recognised at the point of harvest and measured under paragraph 13. From the next day it is inventory under Ind AS 2.
6. A calf the company expects in May 2027. No past event. Not recognised.
7. Twenty cows the company has agreed to buy, delivery in April 2027. No control yet. Not recognised, though the contract may need disclosure under paragraph 49(b) as a commitment for the acquisition of biological assets.
The most common error
Recognising the crop when it is sold rather than when it is growing. The whole design of Ind AS 41 is that the growing is recognised as it happens. A standing crop that meets the three conditions is an asset on the balance sheet at the reporting date, whatever the state of the sale.
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.