AS – 13

Accounting for Investments

·        Investment means

Asset held for appreciation or earning income. (Does not include Stock)

·        Current Investment

Short term in nature. These Investment are held for the purpose of disposal within 12 month from the date of acquisition.

·        Permanent Investment

Long term in nature. These are Investment other than Current Investment.

·        Cost of Investment

Purchase Price		x x x
Add : Taxes on purchase	(S.T.T)	x x x
Add : Exp. on purchase	(Commsn)	x x x
Add : Exp. to obtain title	(Stamp dty)	x x x
Less: Pre Acqusition dividend		(x x x )
		x x x

This AS is mandatory in nature and no partial exemption is available

·  Exchanged Investment

Whenever Investment is obtained through exchange their value shall be -

☺Fair value of the Investment obtained or

☺Fair value of the Asset Given

Whichever is lower

Valuation of Investment

Current Investment is valued at Cost or Fair Value whichever is lower. Such should be on each security basis. It is possible that each category of Investment are taken for comparison i.e we can solve it category basis also.

Eg. ABS ltd has the following Investment

Investment In shares		Cost		FV
A	70		60
B	80		85
C	90		95
		240	240

Debentures

L	70	60
M	80	85
N	170	150
	480	470

Mutual Fund

G	200		170
H	220		150
I		270	290
	690		610

Find the value assuming Current Investment Solution

Category Basis	Cost	Fair value	Value
Equity	240	240	240
Debenture	480	470	470
Mutual Fund	690	610	610
			1320

Long term Investment i.e. Permanent Investment are valued at Cost only. However if there is any permanent decline in the value of Investment then provision of such decline should be made.

Noteworthy points

When Current Investment are reclassified as Long Term Investment, they should be valued at Cost or Market price whichever is lower.

When Long term investment are classified as current Investment then they should be valued at cost or Carrying Amount whichever is lower.

Eg. ABS ltd acquired 100 % shares of MNO ltd which is a defunct company having Net worth as Land and Building. Discuss

Solution

As per para 20, the cost of any shares in a company, holding of which is directly related with the right to hold Investment property, is added to the carrying amount of Investment property as Long term Investment.

Say in our example investment in shares is 100 lacs and Land and building is 400 lacs then total investment in ABS ltd is 500 lacs. This shall be disclosed as Long

term investment in ABS ltd, under the head Fixed Asset.

When this Investment is to be converted as Current Investment then it shall be valued at Carrying Amount or Cost whichever is lower.

E.g A.B.S. purchased 1000 shares of Rs.100 on 1/7/2000 at Rs.150000. Brokerage 2 % Stamp Duty Rs.2000. Journalise

Solution
Investment A/c	dr.  155000
(150000 + 2 % of 150000 + 2000)
To Bank	155000

Now say on 1/11/01 , 20 % dividend is received for the year 1/4/2000 to 31/3/01 so the journal would be :

Bank a/c	dr 20000
To Investment (pre acq dividend)		5000
To Dividend Income		15000

Pre- acquisition dividend = 20000 x 3/12

Right Shares

When right shares offered are subscribed  –  Cost to be added to the Carrying

amount of original holding.

When right sold in the market                       -  Sale proceeds charged to

Statememt of profit and loss.

But when Investment are acquired cum-right basis and Market Value of Investment immediately after their becoming ex-right is lower than the cost for which they were acquired then :

Apply sale proceeds of right to reduce the Carrying amount of Investment to

Market Value. ( We have an Eg so don’t worry agar samaj me nai aaya toh )

If the market value of Investment immediately after their becoming ex- right > cost for which they were acquired then Credit sale proceeds to P/L a/c.

Eg. Abs holds 1000 shares at cost Rs 20. He receives right 1 : 2 i.e. 500 shares at Rs. 15. Now consider the following :

Allows the right to lapse = No accounting treatment.

Subscribes to the share =  Investment a/c	dr 7500
To Bank	7500

(This shall be clubbed with Rs 20000 which is our original investment)

Sells the right at Rs.3, the original lot was purchased ex-right

Bank a/c	dr 1500
To Income from right shares	1500

Sells the right at Rs.3. The original lot was purchased cum right

·  If market value of the shares ex-right is Rs. 20 or more

Bank a/c	dr 1500
To P/L	1500

·        If market value of share ex-right is Rs.18.5 ( Now note here that ex– right price is less than Rs 20, the price at which it was acquired )

Bank a/c	dr 1500
To Investment		1500 (1000 x 1.5 )
·  Market value of shares ex-right is 19
Bank a/c		dr 1500
To Investment		1000 (1000 X 1)
To P/L		500

Investment ko utne se kam kar do jitne se daam gira hai

Synopsis

If shares are acquired cum-right and Market value of the investment on becoming ex-right is :

·	Greater than cost - T/f sale proceeds to P/l
·	Less than cost	-Reduce the investment to the extent of it’s original cost.

Investment is associate shall be treated as Long term as they are not intended to be liquidated within one year from the date of it’s acquisition.