Applicability of AS 13
This Statement does not deal with:
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The bases for recognition of interest, dividends and rentals earned on investments which are covered by Accounting Standard 9.
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Operating or finance leases covered by Accounting Standard 19.
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Investments of retirement benefit plans and life insurance enterprises covered by Accounting Standard 15
- 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, 2013.
The bases for recognition of interest, dividends and rentals earned on investments which are covered by Accounting Standard 9.
Operating or finance leases covered by Accounting Standard 19.
Investments of retirement benefit plans and life insurance enterprises covered by Accounting Standard 15
Definitions under AS 13
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’.
Current investment is an investment that is by its nature readily realizable 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.
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 realizable 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.
Current Investments
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’.
Current investment is an investment that is by its nature readily realizable 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.
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 realizable 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.
Current Investments
- A current Investment is an investment that is by its nature readily realizable and is intended to be held for not more than one year from the date on which such investment is made.
- The carrying amount for current investments is the lower of cost and fair value.
- 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.
- Any reduction to fair value and any reversals of such reductions are included in the statement of profit and loss.
Long Term Investments
- A long-term investment is an investment other than a current investment.
- Long term investments are usually carried at cost.
- If there is a permanent decline in the value of a long term investment; the carrying amount is reduced to recognize the decline.
- The reduction in carrying amount is charged to the statement of profit and loss.
- 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.
Cost of Investments
- Broker, fees and duties - The cost of an investment includes acquisition charges such as brokerage, fees and duties.
- Non-cash consideration-If an investment is acquired, or partly acquired, by the issue of shares or other securities or another asset, the acquisition cost is the fair value of the securities issued or assets given up. The fair value may not necessarily be equal to the nominal or par value of the securities issued. It may be appropriate to consider the fair value of the investment acquired if it is more clearly evident.
- Interest, dividend etc - Interest, dividends and other 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. If it is difficult to make such an allocation, the cost of investment is normally reduced by dividends receivable only if they clearly represent a recovery of a part of the cost.
- Right Shares - 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
With respect to Current Investments
The more prudent and appropriate method is to carrying current investments individually at the lower of
- Cost and
- Fair value
Any reduction to fair value and any reversals of such reductions are included in the Profit & Loss Statement.
With respect to Long-term Investments
Long-term investments are usually carried at cost. They are carried at a lower cost when there is a decline, other than temporary in nature. 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.
Disposal of Investments
On disposal of an investment, the difference between the carrying amount and the disposal
proceeds, net of expenses, is recognized in the profit and loss statement.
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.
Disclosure
The following disclosures are to be made in financial statements in relation to investments:
With respect to Long-term Investments
Long-term investments are usually carried at cost. They are carried at a lower cost when there is a decline, other than temporary in nature. 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.
Disposal of Investments
On disposal of an investment, the difference between the carrying amount and the disposal
proceeds, net of expenses, is recognized in the profit and loss statement.
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.
Disclosure
The following disclosures are to be made in financial statements in relation to investments:
- The accounting policies applied to determine carrying amount of investments.
- The amounts included in profit and loss statement for:
- Interest, dividends (showing separately dividends from subsidiary companies)
- Rentals on investments (showing separately such income from long term and current investments)
- Amount of income tax deducted at source being included under Advance Taxes Paid.
- Profits and losses on disposal of current investments and changes in carrying amount of such investments.
- 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.