AS -13 ACCOUNTING FOR INVESTMENTS

1. AS -13 ACCOUNTING FOR INVESTMENTS Rajiv K. Doshi

2. INTRODUCTION Mandatory • Modes of Investments : - Shares - Buildings - Debt (Other than Long – Short term loan, trade debt usually bearing interest. - Metals Investments – are assets held by an enterprise for earning income by way of dividend, interest, and rentals, for capital appreciation or for other benefit. • Objects of Investment: - Significant Element of operation - Surplus fund - Stock in trade is not investment. • AS-13 does not deal with: - Basis of recognition of interest, dividend, rentals. (AS-9 Revenue Recognition) - Operating or finance lease - Investment of retirement benefit plans & life Insurance enterprise - Mutual funds, AMC, VCF, Banks, Public financial Institute.

3. Classification of Investment Long Term Current Current Investment: - Readily Realisable - intended period of holding < 1 Year - Investment when there are surplus funds and sell them when funds are in short supply Long Term Investment: - Intended period of holding > 1 Year - Readily Realisable or not - Investments held primarily to protect, facilitate or further exiting business or trading relations often called trade investment, are not made with the intention that they will be available as additional cash resources - Property Investments

4. Current Investment Individual Category e.g. Equity, Preference, Convertible Debenture Lower of cost and fair value (i.e. unrealized losses are recognized but unrealized gains are not.) Securities quoted in more then one stock exchange Example: Explain in brief as to how you will deal with the following as the auditor of the company. A Government Company, on the directions of the Central Government, had made investments in the shares of certain other companies. During the accounting year ended 31st March, 1993, the company sold some of those investments at a profit of Rs. 40 Lakhs and treated the same as revenue profit for the year. The value of the remaining investments held as on the date of Balance Sheet as on 31st March, 1993 had fallen by Rs. 36 Lakhs vis-à-vis cost thereof, for which no provision has been made in the accounts. Global (Overall)

5. Long Term Individual Basis • Usually carried at cost • But decline other than temporary need to be reduced from • Charged to P & L • Other than temporary vs. Permanent • Example: • An unquoted long term investment is carried in the books of the investor at Rs. 2 Lakhs. The published accounts of the investee received by the investor subsequent to its own balance sheet date showed that the company was incurring cash losses with declining market share and the investment may not fetch more than Rs. 20,000. • The condition exited on B/S date. • Example: • As a statutory auditor of a Public Limited Company, how would you deal with in the following situation? The company had subscribed to shares of associate companies amounting to Rs.5 crores. These associate companies have incurred substantial losses and have been referred to BIFR for being declared as sick companies. The company does not want to make any provision for the fall in the value of the investments. • It is long term. CFS AS–23

6. qApplicability to NBFC P Prudential Norms • BOD to frame investment policy. • Investment to be classified at the time of investment. • Investment policy to be spelt out. • No inter class transfer on ad hoc basis. • Inter class transfer on 1st April & 1st October with the approval of Board. • Investment can be transferred script wise. • Depreciation in one script cannot be set off against appreciation in another script.

7. Property time sharing limit Whether fixed asset or investment Intention Being used for the purpose to earn income by way of of producing good or capital appreciation providing service and Not for sale in normal course e.g. facility to employees

8. Whether non compete fees is cost of investment! • Investment can be acquired with or without non compete arrangement. • Intangible asset – AS 26

9. Different Stocks for different folks : Accounting for Investments Extent of Control Full Control Joint Control Significant Control Minimum Control • Consolidated Financial Statement AS 21 • Accounting for investment in associate in consolidated Financial Statement AS 23 • Financial Reporting of interest in JV AS 27

10. Cost of Investment: • Acquisition Charges such as Brokerage Fees Duties • Charges Like : Fees paid to SEBI, Merchant bankers, Advertisement Cost for acquiring, legal Costs for pending litigations • Treatment of Incentives : Clearly attributable to the purchase • Investment acquired by issue of shares or other securities, the acquisition cost • is the fair value of the security issued. • Accrued Interest as part of cost cum dividend. • Cum Right Shares: Right Shares • Exchange: Fair value of asset given up or Fair value of asset acquired.

11. Fair Value • The amount for which an asset could be exchanged in an ALP between a knowledgeable, willing buyer & seller. • Market value or net realizable value Value of Investment • Market Value • Investee's assets, results and expected cash flow. • Type & extent of investor’s share • Restriction on distribution by investee • Restriction on disposal Example Debt Securities Like public sector Bond Differences in acquisition cost and face value

12. Investment Property • An investment property is an investment in land or building that are not intended to be occupied substantially for use by or in the operations of investing enterprise • The cost of shares of co-operative society etc. Investment property to be valued as Long Term.

13. Controversy • Current vs. Long Term • A marketable investment held for considerable period does not necessarily preclude its clarification as Current Investment. • Similarly investments held primarily to protect, facilitate or further existing business, often called trade investments are not made with the intention that they will be available as additional cash resources and are thus classified as long term. • Temporary vs. Other than Temporary e.g. Index 14000 to 11000

14. Disposal of Investment • Disposal of part of investment – Average Cost • Where regulatory approvals are critical

15. Reclassification of Investment • Long Term to current - Lower of Cost or carrying amount • Current to Long Term - Lower of Cost or fair value

16. Disclosures • Accounting policies for determination of carrying amount of investments. • Classification of Investments • P & L Account • Interest, dividends & rental income separately from long term & current. • Profit/Loss on disposal of current investment and change in carrying amount. • Profit/Loss on disposal of long term investments and changes in carrying amount. • Significant restrictions on the rights of ownership, remittance of income & proceeds of disposal. • Aggregate amount of quoted & unquoted investments, giving aggregate market value of quoted investments.

17. Schedule VI Disclosures • Part I, Schedule VI Note:1 recognize that investments can be disclosed under ‘Current Assets’ as ‘Stock in Trade’, even though there exists a separate head ‘Investment’ e.g. commercial paper. • Deposits with NBFC & other corporate deposits Loans & Advances. • Certificate of Deposits with Scheduled Bank – Cash & Bank.

18. Part I Schedule VI Classification of Investments • Investment in Government Security • Investment in Shares, debentures or bonds with full details. • Immovable Properties • Capital of Partnership Firm  Nature of Investment  Mode of Valuation  Quoted Investment  Unquoted Investment • Trade Investment & other Investments.  Name of body corporate  Same Management  Nature & Extent of such investment  Whether existing or not • Trade Investment means an investment by a company in shares or debentures of other company, not being it subsidiary for the purpose of promoting the trade or business of first company. • An investment company (i.e. a company whose principle business is acquisition of shares etc.) it is sufficient to show only investments existing on B/s. date.

19. Disclosure of Investment as Fixed Assets Example: ABC & Company has acquired 100% of the equity shares of Company ‘A’ during 1998. Company ‘A’ is a defunct company. The net worth of the Company ‘A’ is represented by land and building it owns. ABC & Company acquired the shares of Company ‘A’ only for the land and building owned by it. ABC & Company had proposed to start a software development facility at this site at the time of share purchase. The software development facility has not yet been set up, as the Company’s existing facility itself is under utilized. Investment in land & building intended to be occupied substantially for use by or in operation of investee enterprise cannot be treated as investment.

20. Example: Y Ltd. purchases 25,000 shares of Rs. 10 each of X Ltd. on 15-04-1999 @ Rs. 120 per share (cum – right cum – dividend). The Company paid brokerage 1.5% and stamp duties 1%. It acquires another 30,000 shares of X Ltd. on 25-05-1999 @ Rs. 140 per share (cum – right cum – dividend) and paid for brokerage and stamp duties. The Company offered 1:1 right @ Rs. 80 per share on 30-05-1999. Y Ltd. acquired 35,000 shares exercising the right and sold the right for 20,000 shares @ Rs. 30 per right. The Company received dividend @ 40% on paid-up value of shares for 1999-2000. It sold 15,000 shares @ Rs.110 less brokerage 1.5% on 15-11-1999. Cost of investment sold, carrying amount of unsold investments and profit on sale of investments should be computed as follows:-

24. AS 13 & IT • Not a notified standard for IT purpose • Method adopted in financial statements May differ from method adopted for tax computation. United Commercial Bank 240 ITR 355

25. Thank You