AS -13

AS-13 INVESTMENTS
Accounting for Investments

IPCC Paper 1 Accounting Chapter 1

CA. Manish Rathi

1
Agenda
Introduction
Meaning of investments
Classification of investments
Cost of investments and valuation
Income from investments
Carrying amount of investments
Investment properties
Disposal
Reclassification
Disclosures in financial statements

2
Introduction

PURPOSE

Accounting for investments in the financial statements of

enterprises and related disclosure requirements.

SCOPE

The following are not covered under this standard:

The bases for recognition of interest, dividends and rentals

earned on investments which are covered by AS 9

3
Scope (contd.)

 Operating or finance leases

 Investments of retirement benefit plans and life insurance
enterprises
 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, 1956.

4
Meaning of 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’.

5
Meaning of Investments

 Some investment 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. building)
 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, solely,
depend on the reported results of this activity.

6
Classification of investments

Current Investment
 An investment that is by its
nature readily realisable and Classification
is intended to be held for not
more than one year from the
date on which such
Investments
investment is made.
Long term Current
Long term Investment
 A long term investment is an
investment other than a
current investment

7
Classification - example

Company A makes an investment in Debenture of Company

B for INR 500,000.

The other facts of the case is as below:

• The Debenture is listed in an stock exchange
• The tenure of the Debenture is for the period of 10 years
• The intention of the management of Company A is to hold
till the prices go up and likely to sell within the next one year
period.

This is a “current investment” as the intentions is to sell

within one year period from the date of purchase.

8
Cost of Investments

INCLUDES

 1. Basic cost - purchase price

 2. Acquisition charges such as

 brokerage

 fees

 Duties like share transfer stamp duty

9
Cost of Investments - example

On 1.4.2010, Mr. K purchased 1,000 equity shares of face

value
INR 100 each in TELCO Ltd @ INR 120 from a broker,
The Broker charged 2% brokerage.
He also incurred 50 paise per INR 100 as cost of share
transfer
stamps.

10
Cost of Investments - Solution

 Cost of equity share purchased on 1.4. 2010

 Purchase price – INR 1000 x INR 120 = 120,000

 Plus Brokerage – 2% x 120,000 = 2400

 Plus stamp duty – ½% x 120,000 = 600

 Total cost = 123,0000

11
Cost of Investments acquired by issue of share

 If an investment is acquired by the issue of shares or

other securities, the acquisition cost is the Fair value of
the securities issued

 For example – Company A acquires a property from B.

The consideration is paid by issue of 100,000 shares
(face value of INR 10 each) by the company A. The fair
value of the equity share of A, as on the date of
purchase was INR 50 per share.

 The cost of property in this would be = 100,000 x 50 =

INR 50,00,000

12
Cost of Investments – exchange of assets

If an investment is acquired in exchange for another

asset:

The acquisition cost of the investment would be

• Fair value of asset given up is used,

• unless fair value of asset received is more clearly

evident

13
Cost of Investments – exchange of assets Example

Company A acquires 100,000 investment in equity share of

Company B from Mr. X. To purchase the shares, Company A
pays in kind i.e. by exchanging its Fixed asset.

Other facts of the case is as follows:

• The face value of equity is INR 10 per share
• The equity share is listed in stock exchange is fair valued at
INR 50 per share
• The fair value of the fixed asset is valued at 55,00,000.

What should be the acquisition cost of the Investment in

equity shares in the books of Company A?

14
Solution

The fair value of the fixed asset is valued at 55,00,000.

The fair value of the equity share is valued at 50,00,000.

Since the shares are listed in stock exchange, one may

argue that the fair value of equity share is more clearly
evident.
Therefore, the cost of equity share will be recorded at
INR
50,00,000.

15
Cost of investments and valuation

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

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

16
Example

R Inc, a manufacturing corporation, has an investment

which it wants to fair value. To arrive at the fair value, it
has obtained bids for the investment from various parties.

Which of these bids would be considered appropriate for

fair value measurement?

Bids received
Bid of INR 2 million received from P Corp, its holding
company
Bid of INR 2.1 million received from M Inc, a fellow
competitor, which has filed for bankruptcy
Bid of INR 1.75 million from R Inc, a fellow competitor,
willing and able to complete the transaction 17
Solution

Bid of INR 1.75 million from R Inc, a fellow competitor,

willing and able to complete the transaction

18
Cost of Investments – Right issue

 When right shares offered are subscribed for, the cost of

the right shares is added to the carrying amount of the
original holding.

Example:
 Mr. X acquire 200 shares of a company on cum-right
basis for INR 50,000. He subsequently receives an offer
of right to acquire fresh shares in the company in the
proportion of 1:1 at INR 110 each, X subscribes for the
right issue
 Thus, the total cost of X’s holding of 400 shares would
amount to (50,000 + 110x200) INR 72,000

19
Cost of Investments – Right issue

 If rights are sold, the sale proceeds are treated as

income and credited to profit and loss statement.
 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.

20
Cost of Investments – Right Issue - Example

 Mr. X acquire 200 shares of a company on cum-right

basis for INR 50,000. He subsequently receives an offer
of right to acquire fresh shares in the company in the
proportion of 1:1 at INR 110 each. Mr. X does not
subscribe but sells the rights for INR 15,000.
 The ex-right market value of 200 shares bought by X
immediately after the rights falls to INR 40,000.
 Calculate the amount to be reduced from cost of
acquisition and the amount to be taken to Profit & loss
account?

21
Solution

 The total sales proceed from sale of rights = INR 15,000.

 Price of shares cum right = INR 50,000

 Price of shares ex-right = INR 40,000

 Therefore the amount to be taken to Investment account

= (INR 50,000 – INR 40,000) = INR 10,000

 Amount to be credited to the profit and loss account =

INR (15,000 – 10,000) = INR 5,000

22
Income from Investments

 Interest, dividend and rentals receivable in respect of

such investments are treated as income, except where
such interest or dividend relates to pre - acquisition
period, in which case, such interest or dividend received
is reduced from the acquisition cost.

23
Income from Investments

For example if the transaction is on cum - interest basis, a

part
of purchase price is related to the interest accrued from
the
date of the last interest paid to the date of transaction,
And
hence in this case the cost of investment, has to be
calculated
by subtracting the amount of accrued interest from the
Purchase Price.

24
Question
Mr X purchased 1,000, 6% Government Bonds of Rs 100
each,
on 31 January, 2009 at Rs 95 each. Interest is payable on
30
June and 31st December, The price quoted is cum
interest.
Journalize the transaction.

25
Solution
Interest accrued from the date of the last interest paid to
the
date of transaction i.e. 31st January 2009 = INR 100,000 x
6% x
(1/12) = INR 500
Purchase price = INR 95 x 1,000 = 95,000
Therefore cost of investment = INR (95,000 – 500) 94,500

26
Carrying amount of Current Investments

Valuation of Current Investments

- At Lower of cost or fair value.

 A separate investment account should not be made on

overall (or global) basis.

 May be at individual level or category wise like Equity

shares, Preference Share, Convertible Debenture, etc

27
Example

 For example On 1.10.2010 Company A purchased 1,000

equity shares (current investment) of Rs 100 each in T
Ltd @ INR 120 each. For the year end 31.03.2011, the fair
value of the T Ltd shares are as follows:

 Situation 1: INR 150 per share

 Situation 2: INR 80 per share

28
Solution

 Situation 1: Cost: (1,000 x 120) = INR 120,000

Fair Value: INR 150,000

Therefore, the carrying amount will be INR 120,000

 Situation 2: Cost: (1,000 x 120) = INR 120,000

Fair Value: INR 80,000

Therefore, the carrying amount will be INR 80,000

29
Carrying amount of Investments

 Long term investments - valued at Cost

However, in case of a permanent decline:

 provision for diminution shall be made

 Any reduction in the carrying amount should be charged to the

profit and loss statement

 Such reduction is reversed when there is a rise in the value of

the investment or if the reasons for such reduction no longer
exist

30
Example

 For example On 1.4.2010 Company A purchased 1,000

equity shares of Rs 100 each in T Ltd @ INR 120 each.
The company plans to hold the shares for more than 12
months.
 For the year end 31.03.2011, the fair value of the T Ltd
shares are as follows:
 Situation 1: INR 150 per share
 Situation 2: INR 110 per share (assuming the decline is
temporary)
 Situation 3: INR 80 per share (assuming it is permanent)

31
Solution

 Situation 1: Cost – (1,000 x 120) = INR 120,000

Fair Value - INR 150,000

Therefore, the carrying amount will be INR 120,000

 Situation 2: Cost – (1,000 x 120) = INR 120,000

Fair Value - INR 100,000

Therefore, the carrying amount will be INR 120,000

32
Solution

 Situation 3: Cost – (1,000 x 120) = INR 120,000

Fair Value - INR 80,000

Therefore, the carrying amount will be INR 80,000

The amount of INR 40,000 (120,000-80,000) should be

taken to profit and loss account

33
Question
M/s Innovative garments Manufacturing Company Limited
invested in the shares of another company on 1st October,
2011
at the cost of Rs 250,000. It also earlier purchased Gold of
Rs
400,000 and silver of Rs 200,000 on 1 march 2009.

Market value as on 31 March 2012 are as follows:

 Shares Rs. 225,000
 Silver Rs. 350,000
 Gold Rs. 600,000

How above investments will be shown in the books of

accounts
as per AS 13 for the year ending 31 March 2012.
Solution

Shares:

- As per AS 13, if the investment is purchased with an

intention to hold for short term, then it will be shown at
the realizable value of Rs 225,000 as on 31 march 2012.

- If the equity shares are acquired with an intention to hold

for a long term, it will continue to be shown at cost in the
balance sheet of the company. However provision of
diminution shall be made to recognize a decline, if other
than temporary, in the value of investments.
Solution
Gold and Silver are generally purchased with an intention
to
hold the same for a long term, until and unless given
otherwise.
Hence, the investments in Gold and Silver (purchased on 1
March 2009) shall continue to be shown at cost as on 31
March
2012 i.e. Rs 400,000 and Rs. 200,000 respectively, though
their
realizable values have been increased.
Investment Properties

 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.

 Property = land or a building (or part of a building) or

both

 Investment property is property held for

 Rentals

 Capital appreciation

37
Investment Properties

 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.

38
Disposal

 When investment is sold,

Difference between carrying charged or credited

to

the amount & net sale proceeds P&L account

39
Example – Disposal of shares

 On 1.4.2010 Mr. Krishna purchased 1,000 equity shares

of Rs 100 each in T Ltd @ 120 each.

 On 31.3.2011 Mr. Krishna sold the shares.

Calculate the amount of profit/loss if the sales value is

 Situation 1: Sale proceeds value is 170,000

 Situation 2: Sale proceeds value is 100,000

40
Solution

Situation 1:
Sale proceeds value is 170,000
Cost of Purchase is 120,000
Therefore the profit on sale to be credited to P/L account
– INR 50,000

Situation 2:
Sale proceeds value is 100,000
Cost of Purchase is 120,000
Therefore the loss on sale to be debited to P/L account –
INR 20,000
41
Partial Disposal

 In case of partial disposal, 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.

42
Example – Disposal of shares

On 1.4.2010 Mr. Krishna purchased 1,000 equity shares of

Rs
100 each in TELCO Ltd @ 120 each from a Broker. who
charged
2% brokerage. He incurred 50 paisa per Rs 100 as cost of
share
transfer stamps. On 31.3.2011 Mr. Krishna sold half of the
shares.

Calculate the amount of profit/loss if the sales value is

 Situation 1: Sale proceeds value is 70,000

 Situation 2: Sale proceeds value is 30,000

43
Solution

Cost of equity share purchased on 1.4.2010

 Purchase price – INR 1000 x INR 120 = 120,000

 Plus Brokerage – 2% x 120,000 = 2400

 Plus stamp duty – ½% x 120,000 = 600

 Total cost = INR 123,000

44
Solution

Situation 1:

Profit on sale of shares on 31st March, 2011

 Sale Proceeds – 70,000

 Average cost of shares sold = 123000 x (500/1000) = INR

61,500

 Therefore, the profit = (70000 – 61500) = INR 8,500

45
Solution

Situation 2:

Loss on sale of shares on 31st March, 2011

 Sale Proceeds – 30,000

 Average cost of shares sold = 123000 x (500 /1000) = INR

61,500

 Therefore, the LOSS = (30,000 – 61,500) = INR 31,500

46
Bonus Shares

 Where an investment is acquired by way of issue of

bonus shares:

no amount is entered in the capital column of

investment account since the investor has not to pay
anything

47
Example - Bonus Shares

 On 1.4.2010 Mr. Krishna purchased 1,000 equity shares

of Rs 100 each in TELCO Ltd @ 120 each from a Broker.
who charged 2% brokerage. He incurred 50 paisa per Rs
100 as cost of shares transfer stamps. On 31.1.2011
Bonus Was declared in the ratio of 1:2. Before and after
the record date of bonus shares, the shares were quoted
at INR 175 per share and INR 90 per share respectively.
On 31.3.2011 Mr. Krishna sold bonus shares to Broker,
who charged 2% brokerage.

48
Example

 Show the Investment Account in the books of Mr.

Krishna who held the shares as Current assets and
closing value of investments shall be made at Cost or
Market value whichever is lower.

49
Solution

Cost of equity share purchased on 1.4. 2010

 Purchase price – INR 1000 x INR 120 = 120,000

 Plus Brokerage – 2% x 120,000 = 2400

 Plus stamp duty – ½% x 120,000 = 600

 Total cost = 123,0000

50
Solution

Sale proceeds of equity shares sold on 31sf March, 2011

 Sale proceeds = 500 x INR 90 = INR 45,000

 Less Brokerage = 2% of INR 45,000 = INR 900

 Total proceeds = INR 45,000 – 900 = INR 44,100

51
Cost of Investments

Profit on sale of bonus shares on 31st March, 2011

 Sale Proceeds – 44,100

 Average cost of shares sold = 123000 x (50,000

/1,50,000) = INR 41,000

 Therefore, the profit = (44,100 – 41,000) = INR 3,100

52
Cost of Investments

Valuation of equity shares sold on 31st March, 2011

 Cost = 1,23,000 x (100,000 /1,50,000) = INR 82,000

 Market Value = 1,000 shares x 90 = INR 90,000

 Closing balance has been valued at INR 82,000 (being

lower than the market value)

53
Cost of Investments

54
Reclassification

Transfers are made at the lower

of:
Long term to Current i. Cost and
ii. Carrying amount at the date
of transfer

 Current to long -term

Lower of:
i. Cost and
ii. Fair value at the date of
transfer

55
Question

ABC Limited wants to re classify its investments in

Accordance with AS 13. Decide and state the amount of
transfer, based on the following information:

A portion of current investments purchased for Rs 20

lakhs, to
be re-classified as long term investments, as the
company
decided to retain them . The market value as on date of
balance sheet was Rs 25 Lakhs.
Solution

As per AS 13 Investments are reclassified from current to

long
term, transfers are made at the lower of cost and fair
value at
the date of transfer.

In the first case, the market value of the investments is Rs

25
lakhs, which is higher than its cost i.e. 20 lakhs. Therefore,
the
transfer to long term investments should be carried at cost
i.e.
Rs 20 lakhs.
Question

ABC Limited wants to re classify its investments in

accordance with AS 13. Decide and state the amount of
transfer, based on the following information:
Another portion of current investments purchased for Rs
15
Lakhs to be reclassified as long term investments.
Market value as on date was Rs 6.5 Lakhs
Solution
In the second case , the market value of investments is Rs
6.5
lakhs which is lower than its cost. Therefore transfer to
long
term investments should be carried in the books at the
market
value i.e. 6.5 lakhs. The loss of Rs 8.5 lakhs should be
charged
in profit and loss account . As per AS 13 , where long term
investments are re – classified as current investments,
transfers
are made at the lower of cost and carrying amount at the
date of
transfer.
Question

ABC Limited wants to re-classify its investments in

accordance
with AS 13. Decide and state the amount of transfer, based
on
the following information:

Certain long term investments no longer considered for

holding purposes, to be reclassified as current
investments.
The original cost of these was Rs 18 Lakhs but had been
written down to Rs 12 Lakhs to recognize permanent
decline
as per AS-13.
Solution

As per AS 13 Investments are reclassified from long term

to
current, Transfers are made at the lower of cost and
carrying
amount at the date of transfer.
In the third case, the book value of investments is Rs 12
lakhs,
which is lower then its cost ie 18 lakhs. Here the transfer
should
be at carrying amount and hence this reclassified current
investments should be carried at Rs 12 lakhs.
Disclosures

1. The accounting policies for determination of carrying

amount of Investments

2. The amounts included in profit and loss statement for:

 interest, dividends, rentals on investments (separately from

long term and current)

 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

62
Disclosures

3. Significant restrictions on the right of ownership,

realizability of investments or the remittance of income and
proceeds of disposal like minimum holding period for sale,
utilisation of sale proceeds or non-remittance of sale
proceeds of investment held outside India.

4. The aggregate amount of quoted and unquoted

investments, giving the aggregate market value of quoted
investments

5. Other disclosures as specifically required by the relevant

statute governing the enterprise.

63
Summary

Summary:
• Copyright and Ex Right Issue
• Bonus Shares
Reclassification:
From Current to Permanent - Valuation at. Cost or Fair value,
whichever is lower
From Permanent to Current - Valuation at Cost or Carrying
Amount, whichever is lower
Disposal of Investment:
Difference between carrying amount and disposal proceeds is
transferred to Profit & Loss A/c
In case of partial sale, weighted average method to be used.
• Disclosure Requirements
• Investment Properties and Incomes of Investment 64
Any questions?

Answers

&

Questions

65
MCQs

Current investment is an investment held for:

i. Not more than three months

ii. Not more than six months
iii. Not more than one year
iv. None of the above

66
MCQs

Answer (iii)

Current investment is an investment held for Not more than one year

67
MCQs

Long term investment is usually carried at:

i. Fair value

ii. Market value

iii. Cost

iv. Least of the above

68
MCQs

Answer (iii)

Long term investment is usually carried at cost. 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.

69
Thank You