AS 13 – Accounting of Investments

Applicability

Accounting for Investments is issued in 1993 and is a mandatory accounting standard applicable to all
level of enterprises as it is a measurement as well as a disclosure standard. Though, an old
Accounting Standard, it is observed that the implications of this standard is high when it comes to
recognition of profits / loss arising from sale of investments as well as when the carrying value of
Investments are ascertained at year end.

Issue 1 :

Which Investments are covered under AS 13, Accounting for Investments?

☞ As per AS 13, Investments are assets held by an enterprise for earning income by way of
dividends, interests and rentals, for Capital appreciation, or for other benefits to the investing
enterprise. Assets held as stock-in-trade are not ‘Investments’.

Investments in shares, debentures, bonds, etc held for the purpose as referred to in above are
considered as Investments.

Similarly, investments in land or building that are not intended to be occupied substantially for
use by, or in the operation of the investing enterprise is covered under AS 13 as Investment
Property.

Issue 2 :

AS 13, Accounting for Investments does not deal with which situations?

☞ AS 13, does not deal with :

(a) The bases of recognition of interest, dividend and rentals earned on investments, which
are covered by AS 9 on Revenue recognition.
(b) Operating or finance leases,
(c) Investments of retirement benefit plans and life insurance enterprises and
(d) Mutual funds and venture capital 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.
Thus, disclosures and valuation of investments held by life insurance enterprises,
Mutual Funds, banks, etc. will be made as per provisions of the respective act governing
them and not as per AS 13.

Issue 3 :
What is difference between Current Investments and Stoke-in-Trade ? Should Stock-in-Trade also be
disclosed under Investments ?
☞ Any asset held for earning income by way of dividends, interest and rentals for capital
appreciation or for other benefits are considered as investments. Current Investment is an
investment that is by its nature readily realisable and is intended to be held for not more than
one year from the date on which such investment is made.

Whereas for example shares, debentures and other securities held for sale in the ordinary
course of business are not investments but ‘stock-in-trade’ and disclosed under the head
‘Current assets’.
Issue 4 :

Premium Investments Ltd. is an investment company. On each buy and sell, along with purchase price
of the equity share, it also pays brokerage, service tax and securities transaction tax. Premium
Investments Ltd. at the time of purchase and sell considers only purchase price as Investments and
debits profit and loss account for the brokerage, service-tax and securities transaction tax. Is the
treatment given by Premium Investments Ltd. in accordance with AS 13 ?

☞ As per AS 13, the cost of an investment includes acquisition charges such as brokerage, fees
and duties. Thus, transaction costs such as fees and commission paid to agents, advisers,
brokers and dealers, levies by regulatory agencies and securities exchanges, and transfer
taxes and duties that are directly attributable to the acquisition and disposal of an Investment
should be included in the cost of investment.

Thus, accounting treatment followed by Premium Investments Ltd. is not in consonance with
the requirements of AS 13. Premium Investments Ltd. should include such cost incurred as part
of investment cost, irrespective of the tax implications.

Issue 5 :

High Returns Ltd., purchased 10,000 cum-dividend units of Fair Growth Mutual Fund at Rs.25 per unit.
The units carry a dividend of Rs.8 per unit. High Returns Ltd. received Rs.80,000 as dividend which is
credited to profit and loss account. Investments in balance sheet is shown at Rs.2,50,000. Is
accounting treatment given by High Returns Ltd. correct?

☞ As per AS 13, when unpaid dividend has accrued before the acquisition of dividend bearing
investment, the same is included as price paid for investment. The subsequent receipt of
dividend is allocated between pre-acquisition and post-acquisition periods. The pre-acquisition
portion is deducted from the cost.

Accordingly, High Returns Ltd., will be required to deduct Rs.80,000 (being dividend on equity
declared from pre-acquisition profits) from cost of investments of Rs.2,50,000. Thus,
investments will be shown at Rs.1,70,000 and not at Rs.2,50,000. Dividend received, will not be
credited to profit and loss account, as the investments were purchased cum-dividend.

Issue 6 :

Miracle Investments Ltd. purchased cum-right 10,000 equity shares of A Ltd. at Rs.100 per share. A
Ltd. has declared a rights issue of 1:1 at Rs.20 per share. Miracle Investments Ltd. instead of
subscribing the rights, sells 10,000 rights shares in the market at Rs.50 per share and thus earns a
profit of Rs.5,00,000. In its balance sheet, it accounted investments in A Ltd. at Rs.10,00,000 and
showed profit on sale of investment of Rs.5,00,000 in its profit and loss account. Is accounting
treatment adopted by Miracle Investments Ltd. appropriate?
☞ As per AS 13, 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.

Thus, Miracle Investments Ltd. should reduce the cost of investments by Rs.5,00,000 instead of
showing profits of Rs.5,00,000.

Similarly, if Miracle Investments Ltd. preferred to subscribe 10,000 equity shares of A Ltd. at
Rs.20 per share, then the cost of the right shares should be added to the carrying amount of
the original holding. In this case, 20,000 equity shares of A Ltd. should be valued at
Rs.12,00,000 showing an average purchase price of Rs.60 per share and not to be valued at
Rs.100 and Rs.20 separately.
Issue 7 :

Unreliable Investments Ltd. is holding following securities as current investments at the balance sheet
date.

Equity No. of Cost Market

A Ltd. 5,000 2,50,000 3,00,000

Debentures
M Ltd. 1,000 1,00,000 1,05,000
O Ltd. 5,000 5,50,000 4,50,000
(b) 6,50,000 5,55,000
(a) + (b) 19,80,000 19,05,000

Unreliable Investments Ltd., has made a provision for diminution in value of current investments of
Rs.75,000 as at the balance sheet date, comparing total cost of Rs.19,80,000 as against market value
of Rs.19,05,000. Is diminution in value of current investments of Rs.75,000 made by Unreliable
Investments Ltd. in compliance of AS 13 ? What provision for diminution in value of investments be
required if the investments were considered as long term investments ?
☞ The carrying amount for current investments is the lower of cost and fair value. As per AS 13,
two options are available of comparing cost with fair value. The more prudent and appropriate
method is to carry investments individually at the lower of cost and fair value. Alternatively,
investments may be carried at the lower of cost and fair value computed category-wise i.e.
equity shares, preference shares, convertible debentures, etc. AS 13, donot permit valuation of
current investments on overall (or global) basis.

Unreliable Investments Ltd. has two options, either to value lower of cost and fair value
individually or at the most category wise but not on global basis.

Thus, Unreliable Investments Ltd. can value current investments individually. In that case,
diminution for equity will come to Rs.50,000 and for debentures to Rs.1,00,000. If it opts to
value category wise, diminution for equity will be Rs.Nil, whereas for debentures a diminution of
Rs.95,000 will have to be provided. Provision of Rs.75,000 made by Unreliable Investments
Ltd. is not appropriate.

If the above investments were considered as long term investments, than carrying amount
would differ. Long term investments are carried at cost. However, when there is a decline, other
than temporary, in the value of a long term investment, the carrying amount is reduced to
recognise the decline. The carrying amount of long-term investments is determined on an
individual investment basis. Value of investment are obtained by reference to market value, the
investee’s assets and results, the expected cash flows, type and extent of the investor’s, stake,
etc.

Thus, Unreliable Investments Ltd. will value its long term investments at cost unless the decline
in value is other than temporary. If O Ltd. is not a healthy company and that the chances of full
redemption are weak, than provision of Rs.1,00,000 may be called for as a diminution in value
of long term investment.
Issue 8 :

Quick gains Ltd., is an investment company. It holds following shares of R Ltd as long term
investments.

No. of Cost
Shares
1,000 5,00,000
800 4,80,000
1,200 8,40,000
1,500 11,50,000
4,500 29,70,000

The above shares were purchased on different dates over the past two years. Quick gains Ltd. has
sold 2,000 equity shares of R Ltd. for total value of Rs. 17,00,000. Quick gains Ltd. reported a profit of
Rs.5,80,000 on sale of long term investments. Is the Profit computed by Quick gains Ltd. in
consonance with the requirements of AS 13 ?

☞ As per AS 13, when disposing of a part of holding of an individual investment, 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.

Thus, Quick gains Ltd., need to work out the average carrying amount of investments at the
time of sale. The average carrying amount for 4,500 equity shares in R Ltd. comes to Rs.660.
As against this average cost, the sale proceeds is Rs.850 per equity share giving a net profit of
Rs.190 per share. Total profit on sale of 2,000 equity shares at the rate of Rs.190 per share will
come to Rs.3,80,000 and not Rs.5,80,000 as accounted by Quick gains Ltd.

However, the situation would be different, if the shares in R Ltd. were treated as stock-in-trade.
In that case as per AS 2, the cost of stocks disposed of is determined by applying an
appropriate cost formula e.g. first-in-first out or average cost. The profit computed by Quick
gains Ltd. would be correct, if the company had treated R Ltd. shares as stock-in-trade and had
followed FIFO method for its valuation.

Issue 9 :

Prima Products Ltd. has its registered office in a building, which is a co-operative society. As per the
bye-laws, Prime Products Ltd. is allotted certain shares in the co-operative society towards the
property. Prime Products Ltd. has shown, the property under fixed assets whereas shares in co-
operative society are shown under Investments. Is the accounting treatment given by Prime Products
Ltd. proper ?

☞ As per AS 13, 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.

Conversly, if any property is held as fixed asset, than the cost of any shares in a co-operative
society or a company, the holding of which is directly related with the fixed asset, is added to
the value of the fixed asset and not shown separately as Investment.

Prime Products Ltd. would be advised to club the value of shares in co-operative society with
the value of property under the head fixed assets. The particulars of investments in co-
operative society be disclosed by way of foot-note to the schedule of fixed assets.
Issue 10 :

Fair Investments Ltd., a listed company, is in investments of infrastructure projects. The company
initially gives infrastructure Companies, advance money to be converted into equity later on. Fair
Investments has borrowing and utilizes such borrowings also for advancing. In its financial statements,
Fair Investments Ltd., adds interest paid on such borrowings to advances and when shares are allotted
(at par) by the infrastructure companies, capitalises the entire advance towards equity along with
interest. So what actually happens, that though equity are issued at PAR, the shares are capitalsed as
if Premium is paid on those shares as it includes interest element. Is the treatment given by Fair
Investments Ltd. correct ?

☞ As per AS 13, cost of investment includes acquisition charges such as brokerage, fees and
duties. Meaning thereby AS 13 is silent as to whether interest on such advances, which are
towards equity, can be included. Hence, AS 16, dealing with borrowing cost will have to be
referred to. As per AS 16, a qualifying asset is an asset that necessarily takes a substantial
period of time to get ready for its intended use or sale.

In this case, what Fair Investments Ltd. acquires is equity in infrastructure companies. The
nature remains the same but the entities are different i.e. Investment in equity by Fair
Investments and creation of asset by infrastructure companies. The borrowings are made by
Fair Investments Ltd. and not by infrastructure companies. Further, Infrastructure companies
will not be capitalising any interest on borrowings made by Fair Investments Ltd. They will show
and issue equity capital of only that amount received by them from Fair Investments Ltd. Thus,
Fair Investments Ltd., cannot be said to have created asset taking substantial period of time. In
short, advance for equity cannot be said to have given rise to a qualifying asset. Accordingly,
Fair Investments Ltd. will have to write off the interest in its profit and loss account in the year of
payment, irrespective of the fact that advances for equity shares still remains in its financial
statements at the year end.

Issue 11 :

Toyhonda Ltd. is in manufacture of Automobiles. It has equity investments in various auto ancillary
units. In its balance sheet it has shown these as investments, whereas dividend received from them is
shown as dividend and whenever sales are made, profit or loss is shown as profit or loss on sale of
investments. Is Toyhonda Ltd., following the disclosure requirements of AS 13 ?

☞ As per AS 13, Investments have to be classified as long term and Current Investments.
Toyhonda Ltd. will have to segregate Investments into long term and current investments for
the purpose of disclosure under “ Investments “. Further AS 13, also requires dividends,
interest and rentals on investments to be separately shown as income from long term and
current investment. Thus, Toyhonda Ltd. will have to show dividend income received from
investments either as long term or short term depending upon the classification of investments
made in balance sheet. Further, profits and losses on disposal of long term and current
investments have also to be shown separately. Thus, on disposal of investments, profits /
losses from long term investments will have to be shown separately and profits / losses from
short term investments also will have to be shown separately.
Issue 12 :

Prime Investments Ltd. has equity investments in A Ltd. as follows :

Date Qty. Amount

05-10-99 5,000 5,00,000

Prime Investments Ltd. sold 8,000 equity shares of A Ltd. on 10/01/2005 at Rs.250 per equity share
aggregating to Rs.20,00,000. Prime Investments Ltd. showed a profit of Rs.15,00,000 in its profit and
loss account as Profit on sale of long term Investments. Is profit computed by Prime Investments
correct ?
☞ As per para 22 of AS 13, when disposing of a part of the holding of an individual investment,
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.

Hence, when shares are sold subsequently, the average price should be considered and not on
specific identification method. The actual profits would come to Rs.13,60,000 considering
average purchase price of Rs.80 per share.

It is very important to note that the accounting treatment in case of accounting of investments is
completly different from the Indian Income Tax Act and one should not be guided by the
taxation laws as to its accounting.

Accounting Policies relating to Investments of selected Companies are as under:

1. Reliance Industries Limited (2004-05)

Current investments are carried at the lower of cost and quoted / fair value, computed category
wise. Long term Investments are stated at cost. Provision for diminution in the value of long-
term investments is made only if such a decline is other than temporary in the opinion of the
management.

2. Larsen & Toubro Limited (2004-05)

Current investments are carried at lower of cost or market value. The determination of the
carrying costs of such investments is done on the basis of specific identification. Long-term
investments (including interests in Joint Ventures which are in the nature of Jointly Controlled
Entities) are carried at cost, after providing for any diminution in value, if such diminution is of a
permanent nature.

3. Tata Steel Limited (2004-05)

Long term investments are carried at cost less provision for permanent diminution in value of
such investments. Current investments are carried at lower of cost and fair value. When
investments is made in partly convertible debentures with a view to retain only the convertible
portion of the debentures, the excess of the face value of the non-convertible portion over the
realisation on sale of such portion is treated as a part of the cost of acquisition of the
convertible portion of the debenture.