Presentation on theme: "ACCOUNTING FOR INVESTMENTS"— Presentation transcript:
1 ACCOUNTING FOR INVESTMENTS AS -13ACCOUNTING FOR INVESTMENTSRajiv K. Doshi
2 INTRODUCTION Modes of Investments : - Shares - Buildings MandatoryModes of Investments : - Shares- Buildings- Debt (Other than Long – Short term loan, trade debt usually bearing interest.- MetalsInvestments – are assets held by an enterprise for earning income by way of dividend, interest, and rentals, for capital appreciation or for other benefit.Objects of Investment: - Significant Element of operation- Surplus fund- Stock in trade is not investment.AS-13 does not deal with: - Basis of recognition of interest, dividend, rentals.(AS-9 Revenue Recognition)- Operating or finance lease- Investment of retirement benefit plans & lifeInsurance enterprise- Mutual funds, AMC, VCF, Banks, Publicfinancial Institute.
3 Classification of Investment Long Term CurrentCurrent Investment: Readily Realisable- intended period of holding < 1 Year- Investment when there are surplus funds and sell them when funds are in short supplyLong Term Investment: - Intended period of holding > 1 Year- Readily Realisable or not- Investments held primarily to protect, facilitate or further exiting business or trading relations often called trade investment, are not made with the intention that they will be available as additional cash resources- Property Investments
4 Current Investment Individual Category e.g. Equity, Preference, Convertible DebentureLower of cost and fair value(i.e. unrealized losses are recognizedbut unrealized gains are not.)Securities quoted in more then one stock exchangeExample:Explain in brief as to how you will deal with the following as the auditor of the company. A Government Company, on the directions of the Central Government, had made investments in the shares of certain other companies. During the accounting year ended 31st March, 1993, the company sold some of those investments at a profit of Rs. 40 Lakhs and treated the same as revenue profit for the year. The value of the remaining investments held as on the date of Balance Sheet as on 31st March, 1993 had fallen by Rs. 36 Lakhs vis-à-vis cost thereof, for which no provision has been made in the accounts.Global(Overall)
5 Long Term Individual Basis Usually carried at cost But decline other than temporary need to be reduced fromCharged to P & LOther than temporary vs. PermanentExample:An unquoted long term investment is carried in the books of the investor at Rs. 2 Lakhs. The published accounts of the investee received by the investor subsequent to its own balance sheet date showed that the company was incurring cash losses with declining market share and the investment may not fetch more than Rs. 20,000.The condition exited on B/S date.As a statutory auditor of a Public Limited Company, how would you deal with in the following situation? The company had subscribed to shares of associate companies amounting to Rs.5 crores. These associate companies have incurred substantial losses and have been referred to BIFR for being declared as sick companies. The company does not want to make any provision for the fall in the value of the investments.It is long term. CFS AS–23
6 P Prudential Norms BOD to frame investment policy. q Applicability to NBFCP Prudential NormsBOD to frame investment policy.Investment to be classified at the time of investment.Investment policy to be spelt out.No inter class transfer on ad hoc basis.Inter class transfer on 1st April & 1st October with the approval ofBoard.Investment can be transferred script wise.Depreciation in one script cannot be set off against appreciation inanother script.
7 Property time sharing limit Whether fixed asset or investment IntentionBeing used for the purpose to earn income by way ofof producing good or capital appreciationproviding service andNot for sale in normal coursee.g. facility to employees
8 Whether non compete fees is cost of investment! Investment can be acquired with or without non compete arrangement.Intangible asset – AS 26
9 Different Stocks for different folks : Accounting for InvestmentsExtent of ControlFullControlJointControlSignificantControlMinimumControlConsolidated Financial Statement AS 21Accounting for investment in associate in consolidated Financial Statement AS 23Financial Reporting of interest in JV AS 27
10 Cost of Investment: Acquisition Charges such as Brokerage Fees Duties Charges Like : Fees paid to SEBI, Merchant bankers, Advertisement Costfor acquiring, legal Costs for pending litigationsTreatment of Incentives : Clearly attributable to the purchaseInvestment acquired by issue of shares or other securities, the acquisition costis the fair value of the security issued.Accrued Interest as part of cost cum dividend.Cum Right Shares: Right SharesExchange: Fair value of asset given up or Fair value of asset acquired.
11 Fair ValueThe amount for which an asset could be exchanged in an ALP between aknowledgeable, willing buyer & seller.Market value or net realizable valueValue of InvestmentMarket ValueInvestee's assets, results and expected cash flow.Type & extent of investor’s shareRestriction on distribution by investeeRestriction on disposalExampleDebt SecuritiesLike public sector BondDifferences in acquisition cost and face value
12 Investment PropertyAn investment property is an investment in land or building that are not intendedto be occupied substantially for use by or in the operations of investing enterpriseThe cost of shares of co-operative society etc.Investment property to be valued as Long Term.
13 Controversy Current vs. Long Term A marketable investment held for considerable period does not necessarilypreclude its clarification as Current Investment.Similarly investments held primarily to protect, facilitate or further existingbusiness, often called trade investments are not made with the intention that theywill be available as additional cash resources and are thus classified as longterm.Temporary vs. Other than Temporarye.g. Index to 11000
14 Disposal of Investment Disposal of part of investment – Average CostWhere regulatory approvals are critical
15 Reclassification of Investment Long Term to current - Lower of Cost or carrying amountCurrent to Long Term - Lower of Cost or fair value
16 DisclosuresAccounting policies for determination of carrying amount of investments.Classification of InvestmentsP & L AccountInterest, dividends & rental income separately from long term & current.Profit/Loss on disposal of current investment and change in carryingamount.Profit/Loss on disposal of long term investments and changes in carryingSignificant restrictions on the rights of ownership, remittance of income &proceeds of disposal.Aggregate amount of quoted & unquoted investments, giving aggregate marketvalue of quoted investments.
17 Schedule VI Disclosures Part I, Schedule VI Note:1 recognize that investments can be disclosed under‘Current Assets’ as ‘Stock in Trade’, even though there exists a separate head‘Investment’ e.g. commercial paper.Deposits with NBFC & other corporate deposits Loans & Advances.Certificate of Deposits with Scheduled Bank – Cash & Bank.
18 Part I Schedule VI Investment in Government Security Classification of InvestmentsInvestment in Government SecurityInvestment in Shares, debentures or bonds with full details.Immovable PropertiesCapital of Partnership Firm Nature of Investment Mode of Valuation Quoted Investment Unquoted InvestmentTrade Investment & other Investments. Name of body corporate Same Management Nature & Extent of such investment Whether existing or notTrade Investment means an investment by a company in shares or debentures ofother company, not being it subsidiary for the purpose of promoting the trade orbusiness of first company.An investment company (i.e. a company whose principle business is acquisitionof shares etc.) it is sufficient to show only investments existing on B/s. date.
19 Disclosure of Investment as Fixed Assets Example:ABC & Company has acquired 100% of the equity shares of Company ‘A’ during Company ‘A’ is a defunct company. The net worth of the Company ‘A’ is represented by land and building it owns. ABC & Company acquired the shares of Company ‘A’ only for the land and building owned by it. ABC & Company had proposed to start a software development facility at this site at the time of share purchase. The software development facility has not yet been set up, as the Company’s existing facility itself is under utilized.Investment in land & building intended to be occupied substantially for use by or in operation of investee enterprise cannot be treated as investment.
20 Example: Y Ltd. purchases 25,000 shares of Rs. 10 each of X Ltd Example: Y Ltd. purchases 25,000 shares of Rs. 10 each of X Ltd. on Rs. 120 per share (cum – right cum – dividend). The Company paid brokerage 1.5% and stamp duties 1%. It acquires another 30,000 shares of X Ltd. on Rs. 140 per share (cum – right cum – dividend) and paid for brokerage and stamp duties. The Company offered 1:1 Rs. 80 per share on Y Ltd. acquired 35,000 shares exercising the right and sold the right for 20,000 Rs. 30 per right. The Company received 40% on paid-up value of shares for It sold 15,000 Rs.110 less brokerage 1.5% on Cost of investment sold, carrying amount of unsold investments and profit on sale of investments should be computed as follows:-
21 No.Rs.Cist of shares(25000*120)25000+ 1.5%45000+ Stamp 1.0%30000Cost of shares(30000*140)630004200055000Cost of right shares3500090000
22 Less : Profit on sale of20000 rights – (20000*30)600000Less : Pre-acquisition dividendOn sharesRs *(40/100)22000090000Less : Cost of investment sold(using weighted average method)15000* /9000015000Carrying amount investments75000
23 Profit on disposal of investments: Sale proceeds (15000*110)Less : Brokerage 1.5%24750Less : CostProfit65250
24 AS 13 & IT Not a notified standard for IT purpose Not a notified standard for IT purposeMethod adopted in financial statements May differ from method adopted fortax computation.United Commercial Bank 240 ITR 355