Valuation of InvestmentsValuation of Investments

AS-13: Accounting for AS-13: Accounting for Investments Investments

Meaning and significance of Meaning and significance of InvestmentsInvestments

Scope and coverageScope and coverage Forms of investmentsForms of investments Principles and normsPrinciples and norms Disclosure requirementsDisclosure requirements

Meaning and significanceMeaning and significance

Investments – are assets held by an Investments – are assets held by an enterprise for earning income by way enterprise for earning income by way of dividends, interest and rentals, for of dividends, interest and rentals, for capital appreciation, or for other capital appreciation, or for other benefits. Assets held as stock-in-benefits. Assets held as stock-in-trade are not ‘investments’ trade are not ‘investments’

Scope and coverageScope and coverage

AS 13 does not deal withAS 13 does not deal with The bases for recognition of interest, The bases for recognition of interest,

dividends and rentals earned on dividends and rentals earned on investments (AS 9 – Revenue recognition)investments (AS 9 – Revenue recognition)

Operating or financing leases (AS 19)Operating or financing leases (AS 19) Investment in retirement benefit plans and Investment in retirement benefit plans and

life insurance enterpriseslife insurance enterprises Mutual funds and venture capital funds and/ Mutual funds and venture capital funds and/

or related AMCs, banks and public FIs.or related AMCs, banks and public FIs.

Forms of investmentsForms of investments

Physical existencePhysical existence No physical existenceNo physical existence

Principles and NormsPrinciples and Norms

Classification of investments – current Classification of investments – current investments and long-term investmentsinvestments and long-term investments

Current Investments – readily realizable Current Investments – readily realizable and is intended to be held for not more and is intended to be held for not more than one year from the date on which than one year from the date on which such investments are made.such investments are made.

Long-term investments – investments Long-term investments – investments other than current (properties) other than current (properties)

Principles and NormsPrinciples and Norms

Cost of InvestmentsCost of Investments The cost includes, in addition to the The cost includes, in addition to the

prime cost, acquisition charges.prime cost, acquisition charges.

Cost of investment-sharesCost of investment-shares

Bombay Dyeing Ltd – sought the advise of an investment advisor for deploying surplus cash. The advisor advised to invest in Reliance Industries and charged Rs.5000 as his fee. Accordingly, the company bought 5000 shares of face value Rs.10 each of RIL @Rs.356 per share from the NSE through a broker. The broker charged a fee of 0.5%. Determine the cost of investment

Cost of InvestmentsCost of Investments

When an investment is acquired, partly When an investment is acquired, partly or fully, by the issue of shares or other or fully, by the issue of shares or other securities, the acquisition cost is the securities, the acquisition cost is the fair value of the securities issued fair value of the securities issued (determined as issue price by statutory (determined as issue price by statutory authorities). The fair value may not authorities). The fair value may not necessarily be equal to the nominal or necessarily be equal to the nominal or par value of the securities issued.par value of the securities issued.

Cost of Investments-Cost of Investments-propertyproperty

Reliance Energy buys a building for the purpose of investments. It issues 65,000 equity shares of its company, which are quoted on the day of the deal at Rs.180 share at BSE. The company also pays brokerage of Rs.2 lakhs to the property dealer involved in the deal. The stamp duty is also incurred @8% of the value of the building. Determine the value of this investment property.

Cost of InvestmentsCost of Investments

When acquired in exchange for When acquired in exchange for another, its cost is determined with another, its cost is determined with reference to the fair value of the reference to the fair value of the asset given up or the investment asset given up or the investment acquired, if it is more clearly evident.acquired, if it is more clearly evident.

In some circumstances, income from In some circumstances, income from investments represents a recovery investments represents a recovery cost and not revenuecost and not revenue

Cost of Investments - cumCost of Investments - cumBombay dyeing purchases 10,000 8% secured redeemable bonds of face value Rs.100 each of TNPL on July 1 for a consideration of Rs.10,60,000 net of brokerage. The interest on the bonds is payable every six months on 30th September and 31st March. Determine the cost of this investment on 30th September.

Cost of InvestmentsCost of Investments

When right shares offered are subscribed for, the When right shares offered are subscribed for, the cost of the right shares is added to the carrying cost of the right shares is added to the carrying amount of the original holding.amount of the original holding.

If rights are not subscribed for, but are sold in the If rights are not subscribed for, but are sold in the market, the sale proceeds are taken to P&L market, the sale proceeds are taken to P&L statement.statement.

Where the investments are acquired on cum-Where the investments are acquired on cum-rights and the market value of investments rights and the market value of investments immediately after their becoming ex-rights is immediately after their becoming ex-rights is lower than the cost for which they were acquired, lower than the cost for which they were acquired, apply the sale proceeds of rights to reduce the apply the sale proceeds of rights to reduce the carrying amount to the market value.carrying amount to the market value.

Reclassification of Reclassification of InvestmentsInvestments

Where long-term investments are Where long-term investments are reclassified as current investments, reclassified as current investments, transfers are made at the lower of the transfers are made at the lower of the cost and carrying amount at the date of cost and carrying amount at the date of transfer.transfer.

Where investments are classified from Where investments are classified from current to long-term, made at the lower current to long-term, made at the lower of cost and fair value at the date of of cost and fair value at the date of transfer.transfer.

ReclassificationReclassificationBombay dyeing had intended to keep the shares

in RIL as current. But, looking at the long-term prospects, it now wants to reclassify the same as long-term. At what amount will it make the transfer in the following two situations

1.The quoted price as on date is Rs.370 per share and a brokerage of 0.5% is payable

2.The quoted price as on date is Rs.350 per share and a brokerage of 0.5% is payable.

Carrying amount of Carrying amount of InvestmentsInvestments

Current investments are carried in the Current investments are carried in the balance sheet at the lower of cost and fair balance sheet at the lower of cost and fair value determined on an individual basis.value determined on an individual basis.

Lon-term investments are carried at cost. Lon-term investments are carried at cost. Any reduction in the carrying amount Any reduction in the carrying amount

and any reversal of such reduction is and any reversal of such reduction is charged or credited to the profit and loss charged or credited to the profit and loss account as loss or revenue as the case account as loss or revenue as the case may be.may be.

Carrying amount Carrying amount determinationdetermination

If Bombay dyeing were to continue with the classification of RIL as current investments, and the fair market value as on the balance sheet date was Rs.17,65,000, at what value will the investment be carried in the balance sheet as on date?

Disposal of investmentsDisposal of investments

When an investment is disposed off, When an investment is disposed off, the difference between the carrying the difference between the carrying amount and the net disposal amount and the net disposal proceeds, that is, disposal proceeds proceeds, that is, disposal proceeds minus expenses of disposal should minus expenses of disposal should be charged or credited to the profit be charged or credited to the profit and loss statement. and loss statement.

Investments of Indian Investments of Indian Companies Companies

Types of InvestmentsTypes of Investments G-Secs G-Secs Real estatesReal estates Share application moneyShare application money Cash and Bank balancesCash and Bank balances ICDsICDs Exposure to subsidiaries and affiliates as loans Exposure to subsidiaries and affiliates as loans

and advancesand advances Non-cash exposure Non-cash exposure

ExamplesExamples

Cos with ‘nil’ investments – Cos with ‘nil’ investments – Glaxosmithkline Consumer Glaxosmithkline Consumer Healthcare ltd, Indrarastha Gas, Healthcare ltd, Indrarastha Gas, Hindustan CopperHindustan Copper

Cos with significant investments – Cos with significant investments – Bharti Televentures ltd (99.32% of Bharti Televentures ltd (99.32% of total assets), Tata Tea (64%), Hero total assets), Tata Tea (64%), Hero Honda Motors (59%)Honda Motors (59%)

investminvestmentsents

Tata Tata TeaTea

Hero Hero HondaHonda

Bajaj Bajaj AutoAuto

HLLHLL

Subsi / Subsi / affiliateaffiliatess

81%81% 14%14%

G-SecG-Sec

85%85%91%91%

34%34%MFsMFs 10%10% 8%8%

Loans Loans and Advand Adv

5%5% 7%7%

OthersOthers 3%3% 15%15% 16%16%