1.54 - Query

Hybrid System of Accounting

A company engaged in pisciculture undertook a lease of lake covering an area of 5sq. miles. At the time of lease, this lake contained substantial amount of fish of various kinds and weights. After taking over the lease the company introduced fish spawns—valuing say Rs. 40,000. The company estimates that 60% of the spawns would survive and the 40% will be destroyed in the normal course. It has been estimated that in a period of 12 months, these spawns may develop into an average weight of about 750 grams.

During the first year of its operation, the company caught fish which were mostly out of the ones existing at the time when the lease was undertaken. Since the spawns introduced did not develop into a marketable size the same were not caught during the first year of its operation. The problem faced by us, as the auditor, is as to how the closing stock valuation is to be made in respect of spawns which were introduced during the year and no part of it has been caught, and also how to evaluate a loss arising out of flood during the first year of its operation.

The auditors are of the opinion that in order to tackle these problems the fishing activities of the company can be treated on cash basis. Kindly clarify whether the above method is correct.

As far as the other items of profit and loss account are concerned the company can maintain its accounts on mercantile basis i.e. the company can maintain its books on hybrid system.


September 6, 1979

On the issue of valuation of closing stock of fish, the Committee is of the view that if the quantity of fish in different sizes and variety could be reasonably ascertained on the balance sheet date, the closing stock of fish can be valued in the same manner as is done in the case of livestock i.e. on annual revaluation method. However, practical difficulties would be there to determine reasonably the quantity of fish at any point of time, classified in varieties and sizes. The stock of fish is subject to depredation, decline, loss due to natural and unnatural events like disease, pollution of water, death etc. Therefore, it is a matter of uncertainty. Under the circumstances and having regard to the principles of prudence and conservatism it is considered that a safe method would be to treat the annual spawning expenses as revenue expenses of the period and no part of these should be carried forward as the value of stock. The Committee, therefore, concurs with the views of the querist to treat the expenses of spawning on cash basis.

In the opinion of the Committee, loss of fish due to floods in the first year, does not require any special treatment in accounts. Further, if the loss is occasioned even after spawning undertaken by the lessee, the loss has to be absorbed in the accounts without any special treatment. This follows the Committee’s opinion on the first issue.