Accounting Standard (AS) 13: Accounting for Investments (Revised)
Investment is the assets held for earning income by way of dividend, interest and rentals, for capital appreciation or for other benefits to the investing enterprise. Assets held as stock-in-trade are not ‘investments’.
Scope of AS 13
This Standard deals with accounting for investments in the financial statements of enterprises and related disclosure requirements.
This Standard 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 venture capital funds and/or the related asset management companies, banks and public financial institutions.
The following terms are used in this Standard with the meanings assigned:
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.
Long term investment is an investment other than a current investment.
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. For example, if a company purchases land or building not for its business use but for earning the rent by letting the land or building, the land or building is not fixed asset but it is an investment or even if building is not let out but held with the intention to earn capital appreciation, then it is an investment.
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.
Classification of investment
Investment is classified as long-term investment and current investment as defined above.
Cost of Investment
The cost of an investment includes acquisition charges such as brokerage, fees and duties.
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. 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, 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.
When interest has accrued in pre-acquisition period and was included in cost of investment at the time of acquisition, then subsequent receipt of such pre-acquisition interest is deducted from the cost of investment.
Dividend – When dividend is declared from pre-acquisition profits, and later on received by the purchaser of investment, then such amount of dividend is deducted from the cost of investment.
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 investment
Carrying amount of each current investment is the lower of cost and realisable value.
Any reduction in realisable value is debited to profit and loss account and if realisable value of investment is increased subsequently, the increase in value of current investment to the level of the cost is credited to profit and loss account.
It is usually carried / valued at cost.
If there is a decline in value of investment and, if such decline is not temporary, then carrying amount of investment is reduced by the amount of such decline. The resultant reduction in carrying amount is charged to the profit and loss account. This reduction amount is reversed when there is a rise in the value of investment but such rise in value should not be temporary.
Indicators of the value of an investment:
(a) its market value,
(b) the investee’s assets and results,
(c) the expected cash flows from the investment,
(d) the type and extent of the investor’s stake in the investee,
(e) restrictions on distribution by the investee or on disposal by the investor.
An investment property is accounted for in accordance with cost model as prescribed in Accounting Standard (AS) 10, Property, Plant and Equipment. 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 Investment
When an investment is disposed of, the difference between the carrying amount and net sale proceeds (gross sale less expenses) is recognized in the profit and loss account.
When only a part of total investment is disposed of, the carrying amount of that part of investment is determined on the basis of the average carrying amount of the total investment.
Reclassification of Investments
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.
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.
The accounting policies for the determination of carrying amount of investments.
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;
Significant restrictions on the right of ownership, realisability of investments or the remittance of income and proceeds of disposal;
The aggregate amount of quoted and unquoted investments, giving the aggregate market value of quoted investments;
Other disclosures as specifically required by the relevant statute governing the enterprise.