1. ACCOUNTING FOR INVESTMENTS
AS -13
ACCOUNTING FOR INVESTMENTS
Rajiv K. Doshi

2. INTRODUCTION Modes of Investments : - Shares - Buildings
Mandatory
Modes of Investments : - Shares
- Buildings
- Debt (Other than Long – Short term loan, trade debt usually bearing interest.
- Metals
Investments – 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 & life
Insurance enterprise
- Mutual funds, AMC, VCF, Banks, Public
financial Institute.

3. Classification of Investment
Long Term Current
Current Investment: Readily Realisable
- intended period of holding < 1 Year
- Investment when there are surplus funds and sell them when funds are in short supply
Long 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 Debenture
Lower of cost and fair value
(i.e. unrealized losses are recognized
but unrealized gains are not.)
Securities quoted in more then one stock exchange
Example:
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 from
Charged to P & L
Other than temporary vs. Permanent
Example:
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 NBFC
P Prudential Norms
BOD 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 of
Board.
Investment can be transferred script wise.
Depreciation in one script cannot be set off against appreciation in
another script.

7. Property time sharing limit
Whether fixed asset or investment
  Intention
Being used for the purpose to earn income by way of
of producing good or capital appreciation
providing service and
Not for sale in normal course
e.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 Investments
Extent of Control
Full
Control
Joint
Control
Significant
Control
Minimum
Control
Consolidated Financial Statement AS 21
Accounting for investment in associate in consolidated Financial Statement AS 23
Financial 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 Cost
for acquiring, legal Costs for pending litigations
Treatment of Incentives : Clearly attributable to the purchase
Investment acquired by issue of shares or other securities, the acquisition cost
is the fair value of the security issued.
Accrued Interest as part of cost cum dividend.
Cum Right Shares: Right Shares
Exchange: Fair value of asset given up or Fair value of asset acquired.

11. Fair Value
The amount for which an asset could be exchanged in an ALP between a
knowledgeable, willing buyer & seller.
Market value or net realizable value
Value of Investment
Market Value
Investee's assets, results and expected cash flow.
Type & extent of investor’s share
Restriction on distribution by investee
Restriction on disposal
Example
Debt Securities
Like public sector Bond
Differences in acquisition cost and face value

12. Investment Property
An investment property is an investment in land or building that are not intended
to be occupied substantially for use by or in the operations of investing enterprise
The 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 necessarily
preclude its clarification as Current Investment.
Similarly investments held primarily to protect, facilitate or further existing
business, often called trade investments are not made with the intention that they
will be available as additional cash resources and are thus classified as long
term.
Temporary vs. Other than Temporary
e.g. Index to 11000

14. Disposal of Investment
Disposal of part of investment – Average Cost
Where regulatory approvals are critical

15. Reclassification of Investment
Long Term to current - Lower of Cost or carrying amount
Current to Long Term - Lower of Cost or fair value

16. Disclosures
Accounting policies for determination of carrying amount of investments.
Classification of Investments
P & L Account
Interest, dividends & rental income separately from long term & current.
Profit/Loss on disposal of current investment and change in carrying
amount.
Profit/Loss on disposal of long term investments and changes in carrying
Significant restrictions on the rights of ownership, remittance of income &
proceeds of disposal.
Aggregate amount of quoted & unquoted investments, giving aggregate market
value 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 Investments
Investment in Government Security
Investment in Shares, debentures or bonds with full details.
Immovable Properties
Capital of Partnership Firm
 Nature of Investment
 Mode of Valuation
 Quoted Investment
 Unquoted Investment
Trade Investment & other Investments.
 Name of body corporate
 Same Management
 Nature & Extent of such investment
 Whether existing or not
Trade Investment means an investment by a company in shares or debentures of
other company, not being it subsidiary for the purpose of promoting the trade or
business of first company.
An investment company (i.e. a company whose principle business is acquisition
of 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%
30000
Cost of shares
(30000*140)
63000
42000
55000
Cost of right shares
35000
90000

22. Less : Profit on sale of
20000 rights – (20000*30)
600000
Less : Pre-acquisition dividend
On shares
Rs *(40/100)
220000
90000
Less : Cost of investment sold
(using weighted average method)
15000* /90000
15000
Carrying amount investments
75000

23. Profit on disposal of investments:
Sale proceeds (15000*110)
Less : Brokerage 1.5%
24750
Less : Cost
Profit
65250

24. AS 13 & IT Not a notified standard for IT purpose
Not a notified standard for IT purpose
Method adopted in financial statements May differ from method adopted for
tax computation.
United Commercial Bank 240 ITR 355

25. Thank You