Accounting for Investments
1
This Standard deals with accounting for investments in the financial statements of enterprises and related disclosure requirements.
2
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 formed under a Central or State Government Act or so declared under the Companies Act, 2013.
3
The following terms are used in this Standard with the meanings assigned:
3.1
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’.
3.2
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.
3.3
A long term investment is an investment other than a current investment.
3.4
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.
3.5
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.
3.6
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.
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.
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.
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.
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 category-wise (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.
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.
20
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.
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.
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.
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.
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.
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.
30
An enterprise holding investment properties should account for them in accordance with cost model as prescribed in AS 10, Property, Plant and Equipment.
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.
33
Any reduction in the carrying amount and any reversals of such reductions should be charged or credited to the profit and loss statement.
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.
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.
Notes, amendments & references (7)
[This Accounting Standard includes paragraphs set in bold italic type and plain type, which have equal authority. Paragraphs in bold italic type indicate the main principles. This Accounting Standard should be read in the context of the Preface to the Statements of Accounting Standards and the ‘Applicability of Accounting Standards to Various Entities’ (see Appendix 1 to this Compendium).]
* A limited revision to this Standard was made in 2003, pursuant to which paragraph 2 (d) of this Standard was revised to include ‘and venture capital funds’. The Standard was further revised by the Ministry of Corporate Affairs, Government of India, vide Notification dated 30th March, 2016, which was relevant for companies following Companies (Accounting Standards) Rules, 2006, and which should be used for preparation of accounts for accounting periods commencing on or after the date of notification. The Standard was revised for entities other than companies in 2016 by the Council of the ICAI and is mandatory for accounting periods commencing on or after April 1, 2017 (see Announcement XLV). Consequent to this revision, paragraphs 2(d), 20 & 30 were revised, footnote 5 was added and paragraph 36 was omitted. The Standard has been notified as part of Companies (Accounting Standards) Rules, 2021, under Companies Act, 2013.
1 Attention is specifically drawn to paragraph 4.3 of the Preface, according to which Accounting Standards are intended to apply only to items which are material.
2 Shares, debentures and other securities held as stock-in-trade (i.e., for sale in the ordinary course of business) are not ‘investments’ as defined in this Standard. However, the manner in which they are accounted for and disclosed in the financial statements is quite similar to that applicable in respect of current investments. Accordingly, the provisions of this Standard, to the extent that they relate to current investments, are also applicable to shares, debentures and other securities held as stock-in-trade, with suitable modifications as specified in this Standard.
3 Shares, debentures and other securities held for sale in the ordinary course of business are disclosed as ‘stock-in-trade’ under the head ‘current assets’.
4 In respect of shares, debentures and other securities held as stock-in-trade, the cost of stocks disposed of is determined by applying an appropriate cost formula (e.g. first-in, first-out; average cost, etc.). These cost formulae are the same as those specified in Accounting Standard (AS) 2, in respect of Valuation of Inventories.
5 As defined in AS 21, Consolidated Financial Statements.