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Statements of Accounting Standards
(AS 13)
Accounting for Investments
The following is the text of Accounting
Standard (AS) 13, 'Accounting for Investments', issued by the
Council of the Institute of Chartered Accountants of India.
Introduction
1. This Statement deals with accounting
for investments in the financial statements of enterprises and
related disclosure requirements.
2. This Statement does not deal with:
(a) the bases for recognition of interest,
dividends and rentals earned on investments which are covered
by Accounting Standard 9 on Revenue Recognition;
(b) operating or finance leases;
(c) investments of retirement benefit
plans and life insurance enterprises; and
(d) mutual funds and/or the related
asset management companies, banks and public financial institutions
formed under a Central or State Government Act or so declared
under the Companies Act, 1956.
Definitions
3. The following terms are used in
this Statement with the meanings assigned:
Investments are assets held
by an enterprise for earning income by way of dividends, interest,
and rentals, for capital appreciation, or for other benefits to
the investing enterprise. Assets held as stock-in-trade are not
'investments'.
A current investment is an
investment that is by its nature readily realisable and is intended
to be held for not more than one year from the date on which such
investment is made.
A long term investment is an
investment other than a current investment.
An investment property is an
investment in land or buildings that are not intended to be occupied
substantially for use by, or in the operations of, the investing
enterprise.
Fair value is the amount for
which an asset could be exchanged between a knowledgeable, willing
buyer and a knowledgeable, willing seller in an arm's length transaction.
Under appropriate circumstances, market value or net realisable
value provides an evidence of fair value.
Market value is the amount
obtainable from the sale of an investment in an open market, net
of expenses necessarily to be incurred on or before disposal.
Explanation
Forms of Investments
4. Enterprises hold investments for
diverse reasons. For some enterprises, investment activity is
a significant element of operations, and assessment of the performance
of the enterprise may largely, or solely, depend on the reported
results of this activity.
5. Some investments have no physical
existence and are represented merely by certificates or similar
documents (e.g., shares) while others exist in a physical form
(e.g., buildings). The nature of an investment may be that of
a debt, other than a short or long term loan or a trade debt,
representing a monetary amount owing to the holder and usually
bearing interest; alternatively, it may be a stake in the results
and net assets of an enterprise such as an equity share. Most
investments represent financial rights, but some are tangible,
such as certain investments in land or buildings.
6. For some investments, an active
market exists from which a market value can be established. For
such investments, market value generally provides the best evidence
of fair value. For other investments, an active market does not
exist and other means are used to determine fair value.
Classification of Investments
7. Enterprises present financial statements
that classify fixed assets, investments and current assets into
separate categories. Investments are classified as long term investments
and current investments. Current investments are in the nature
of current assets, although the common practice may be to include
them in investments.
8. Investments other than current
investments are classified as long term investments, even though
they may be readily marketable.
Cost of Investments
9. The cost of an investment includes
acquisition charges such as brokerage, fees and duties.
10. If an investment is acquired,
or partly acquired, by the issue of shares or other securities,
the acquisition cost is the fair value of the securities issued
(which, in appropriate cases, may be indicated by the issue price
as determined by statutory authorities). The fair value may not
necessarily be equal to the nominal or par value of the securities
issued.
11. If an investment is acquired in
exchange, or part exchange, for another asset, the acquisition
cost of the investment is determined by reference to the fair
value of the asset given up. It may be appropriate to consider
the fair value of the investment acquired if it is more clearly
evident.
12. Interest, dividends and rentals
receivables in connection with an investment are generally regarded
as income, being the return on the investment. However, in some
circumstances, such inflows represent a recovery of cost and do
not form part of income. For example, when unpaid interest has
accrued before the acquisition of an interest-bearing investment
and is therefore included in the price paid for the investment,
the subsequent receipt of interest is allocated between pre-acquisition
and post-acquisition periods; the pre-acquisition portion is deducted
from cost. When dividends on equity are declared from pre-acquisition
profits, a similar treatment may apply. If it is difficult to
make such an allocation except on an arbitrary basis, the cost
of investment is normally reduced by dividends receivable only
if they clearly represent a recovery of a part of the cost.
13. When right shares offered are
subscribed for, the cost of the right shares is added to the carrying
amount of the original holding. If rights are not subscribed for
but are sold in the market, the sale proceeds are taken to the
profit and loss statement. However, where the investments are
acquired on cum-right basis and the market value of investments
immediately after their becoming ex-right is lower than the cost
for which they were acquired, it may be appropriate to apply the
sale proceeds of rights to reduce the carrying amount of such
investments to the market value.
Carrying Amount of Investments
Current Investments
14. The carrying amount for current
investments is the lower of cost and fair value. In respect of
investments for which an active market exists, market value generally
provides the best evidence of fair value. The valuation of current
investments at lower of cost and fair value provides a prudent
method of determining the carrying amount to be stated in the
balance sheet.
15. Valuation of current investments
on overall (or global) basis is not considered appropriate. Sometimes,
the concern of an enterprise may be with the value of a category
of related current investments and not with each individual investment,
and accordingly the investments may be carried at the lower of
cost and fair value computed categorywise (i.e. equity shares,
preference shares, convertible debentures, etc.). However, the
more prudent and appropriate method is to carry investments individually
at the lower of cost and fair value.
16. For current investments, any reduction
to fair value and any reversals of such reductions are included
in the profit and loss statement.
Long-term Investments
17. Long-term investments are usually
carried at cost. However, when there is a decline, other than
temporary, in the value of a long term investment, the carrying
amount is reduced to recognise the decline. Indicators of the
value of an investment are obtained by reference to its market
value, the investee's assets and results and the expected cash
flows from the investment. The type and extent of the investor's
stake in the investee are also taken into account. Restrictions
on distributions by the investee or on disposal by the investor
may affect the value attributed to the investment.
18. Long-term investments are usually
of individual importance to the investing enterprise. The carrying
amount of long-term investments is therefore determined on an
individual investment basis.
19. Where there is a decline, other
than temporary, in the carrying amounts of long term investments,
the resultant reduction in the carrying amount is charged to the
profit and loss statement. The reduction in carrying amount is
reversed when there is a rise in the value of the investment,
or if the reasons for the reduction no longer exist.
Investment Properties
20. The cost of any shares in a co-operative
society or a company, the holding of which is directly related
to the right to hold the investment property, is added to the
carrying amount of the investment property.
Disposal of Investments
21. On disposal of an investment,
the difference between the carrying amount and the disposal proceeds,
net of expenses, is recognised in the profit and loss statement.
22. When disposing of a part of the
holding of an individual investment, the carrying amount to be
allocated to that part is to be determined on the basis of the
average carrying amount of the total holding of the investment.
Reclassification of Investments
23. Where long-term investments are
reclassified as current investments, transfers are made at the
lower of cost and carrying amount at the date of transfer.
24. Where investments are reclassified
from current to long-term, transfers are made at the lower of
cost and fair value at the date of transfer.
Disclosure
25. The following disclosures in financial
statements in relation to investments are appropriate:—
(a) the accounting policies for the
determination of carrying amount of investments;
(b) the amounts included in profit
and loss statement for:
(i) interest, dividends (showing separately
dividends from subsidiary companies), and rentals on investments
showing separately such income from long term and current investments.
Gross income should be stated, the amount of income tax deducted
at source being included under Advance Taxes Paid;
(ii) profits and losses on disposal
of current investments and changes in carrying amount of such
investments;
(iii) profits and losses on disposal
of long term investments and changes in the carrying amount of
such investments;
(c) significant restrictions on the
right of ownership, realisability of investments or the remittance
of income and proceeds of disposal;
(d) the aggregate amount of quoted
and unquoted investments, giving the aggregate market value of
quoted investments;
(e) other disclosures as specifically
required by the relevant statute governing the enterprise.
Accounting Standard
(The Accounting Standard comprises
paragraphs 26–35 of this Statement. The Standard should be read
in the context of paragraphs 1–25 of this Statement and of the
'Preface to the Statements of Accounting Standards'.)
Classification of Investments
26. An enterprise should disclose
current investments and long term investments distinctly in its
financial statements.
27. Further classification of current
and long-term investments should be as specified in the statute
governing the enterprise. In the absence of a statutory requirement,
such further classification should disclose, where applicable,
investments in:
(a) Government or Trust securities
(b) Shares, debentures or bonds
(c) Investment properties
(d) Others—specifying nature.
Cost of Investments
28. The cost of an investment should
include acquisition charges such as brokerage, fees and duties.
29. If an investment is acquired,
or partly acquired, by the issue of shares or other securities,
the acquisition cost should be the fair value of the securities
issued (which in appropriate cases may be indicated by the issue
price as determined by statutory authorities). The fair value
may not necessarily be equal to the nominal or par value of the
securities issued. If an investment is acquired in exchange for
another asset, the acquisition cost of the investment should be
determined by reference to the fair value of the asset given up.
Alternatively, the acquisition cost of the investment may be determined
with reference to the fair value of the investment acquired if
it is more clearly evident.
Investment Properties
30. An enterprise holding investment
properties should account for them as long term investments.
Carrying Amount of Investments
31. Investments classified as current
investments should be carried in the financial statements at the
lower of cost and fair value determined either on an individual
investment basis or by category of investment, but not on an overall
(or global) basis.
32. Investments classified as long
term investments should be carried in the financial statements
at cost. However, provision for diminution shall be made to recognise
a decline, other than temporary, in the value of the investments,
such reduction being determined and made for each investment individually.
Changes in Carrying Amounts of Investments
33. Any reduction in the carrying
amount and any reversals of such reductions should be charged
or credited to the profit and loss statement.
Disposal of Investments
34. On disposal of an investment,
the difference between the carrying amount and net disposal proceeds
should be charged or credited to the profit and loss statement.
Disclosure
35. The following information should
be disclosed in the financial statements:
(a) the accounting policies for
determination of carrying amount of investments;
(b) classification of investments
as specified in paragraphs 26 and 27 above;
(c) the amounts included in profit
and loss statement for:
(i) interest, dividends (showing
separately dividends from subsidiary companies), and rentals on
investments showing separately such income from long term and
current investments. Gross income should be stated, the amount
of income tax deducted at source being included under Advance
Taxes Paid;
(ii) profits and losses on disposal
of current investments and changes in the carrying amount of such
investments; and
(iii) profits and losses on disposal
of long term investments and changes in the carrying amount of
such investments;
(d) significant restrictions on
the right of ownership, realisability of investments or the remittance
of income and proceeds of disposal;
(e) the aggregate amount of quoted
and unquoted investments, giving the aggregate market value of
quoted investments;
(f) other disclosures as specifically
required by the relevant statute governing the enterprise.
Effective Date
36. This Accounting Standard comes
into effect for financial statements covering periods commencing
on or after April 1, 1995.
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