S.Y B.COM
SEMESTER - III
HIGHER FINANCIAL ACCOUNTING
(HFA)
UNIT-IV
INVESTMENTS ACCOUNTS: AS-13
INVESTMENT: It is the assets held for earning income by way of dividend, interest and rentals, for capital appreciation or for other benefits.
SCOPE: This statement deals with accounting for investment in the financial statements. However, as per opinion issued by ICAI, this AS to the extent it relates to current investment is also applicable to shares, debentures and other securities held as "Stock in trade" with suitable modification. The standard deals with the following aspects:
● Classificaticon of investment
● Cost of investment
● Carrying amount/valuation of investment
● Disposal of investments
● Reclassification of investments
● Disclosure of investment in the financial statements
APPLICABILITY: The Accounting standard does not deal with the following-
● The basis for recognition of interest, dividend and rentals earned on investment.
● Operating or finance leases.
● Investiment of retirement benefit plans and life insurance enterprises.
● Mutual funds, venture capital fund and/or the related asset management companies, banks and public financial institutions.
DEFINITIONS: 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'.
CURRENT INVESTMENT: Such investment is readily realizable and is intended to be held for not more than one year from the date on which such investment is made.
LONG TERM INVESTMENT: Investment other than current investment is called long-term investment.
INVESTMENT PROPERTY: It is an investment in land or building that is not intended to be occupied substantially for use by or in their operation of the investing enterprise. For example, if a company purchase land or building not for its business use but for earning the rent by letting the land or building; the land or building is not fixed asset but it is an investment or even if building is not let out but is held with the intention to earn capital appreciation, then it is an investment.
CLASSIFICATION OF INVESTMENT: Enterprises present financial statements that classify fixed assets, investments and current assets into separate categories. Investment is classified as Long-term Investment and Current Investment as defined above.
COST OF INVESTMENT: Cost of investment comprises of purchase price and acquisition charges Such as brokerage, fees and duties etc.
● Investment is acquired by insue of shares or other securities: Purchase price of investment is the fair value of the securities issued.
● Investment is acquired in exchange for another asset: Acquisition cost investment is fair value of the asset given up. OR Fair value of the investment received if it is more clearly evident.
● Pre-acquisition interest: When interest has accrued in pre-acquisition period and was included in cost of investment at the time of acquisition, then subsequent receipt of such pre-acquisition interest is deducted from the cost of investment.
● Dividend: When dividend is declared from pre-acquisition profits, and later on received by the purchaser of investment, then such amount of dividend is deducted from the cost of investment.
● Right shares:
● If right shares offered are subscribed, then cost of right shares in added to the carrying amount of the investment.
● If right shares offered are not subscribed but right is sold in the market, then sale proceeds are taken to profit and loss account provided original share on which right is received is not acquired at cum-right.
● Investment purchased at cum-right: If Investment is acquired at cum-right price and after that it becomes ex-right, the market value of such investments will fall below the acquisition cost of investment. The cost of investment is reduced by the amount received on sale of rights.
CARRYING AMOUNT OF INVESTMENT: (Valuation of investment for the purpose of Balance Sheet)
--> CURRENT INVESTMENTS: Carrying amount of each current investment is the lower of cost and realizable value. Any reduction in realizable value is debited in profit and loss account; however if realizable value of investment is increased subsequently, the increase in value of current investment to the level of the cost is credited to profit and loss account.
--> LONG TERM INVESTMENT:
● It is usually carried/valued at cost
● If there is a decline in value of investment, but such decline is not temporary, then carrying amount of investment is reduced by the amount of such decline.
● The resultant reduction in carrying amount is charged to the profit and loss account. This reduction amount is reversed when there is a rise in the value of investment but such rise in value should not be temporary.
● Indicators of the value of an investment are obtained by reference to (a) its market value, (b) the investee's assets and results, (c) the expected cash flows from the investment, (d) the type and extent of the investor's stake in the investee, (e) restrictions on distributions by the investee or on disposal by the investor may affect the value attributed to the investment.
--> INVESTMENT PROPERTIES : The cost of shares held in co-operative society is added to cost of investment properties. If the shares in co-operative societies are necessary to acquire the invesment properties, an enterprise holding investment properties should
accout for them as long term investment.
DISPOSAL OF INVESTMENT:
● When an investment is disposed of, the difference between the carrying amount and net sale proceeds (Gross sale less expenses) is recognized in the profit and loss account.
● When only a part of total investment is disposed of, the carrying amount of that part of investment is determined on the basis of the average carrying amount of the total investment.
RECLASSIFICATION OF INVESTMENTS :
● From long-term investment to current investment.
● Transfers are made at the lower of cost and carrying amount on the date of transfer.
● From current investment to long-term investment
● Transfers are made at the lower of cost and fair value on date of transfer.
DISCLOSURES:
● Accounting policies followed for valuation of investment
● Classification of investment into current and long term in addition to classification as per Schedule III of Companies Act 2013 in case of company.
● Aggregate amount of quoted and unquoted securities separately.
● Any significant restriction on investment like minimum holding period for sale/disposal, utilization of sale proceeds or non remittance of sale proceeds of investment held outside India.
Notes:
Some Adjustments for Equity Shares Investment Account:
Dividend received:
Any dividend received out of pre-acquisition profit is credited to Investment Account. It is recorded in the "Cost Column" only. However, dividend received out of post-acquisition profit is credited to "Income Column" Dividend received from pre-acquisition profit will reduce the average cost of shares and dividend received from post- acquisition profit will increase the income.
Bonus shares:
The bonus issue refers to capitalization of reserves and profit. It results in conversion of reserves and surplus into share capital. The purpose is to ensure that, in the long-run, equity share capital of the company comes closer to equity shareholders funds employed in the business. To bring in sanctity to the Issue of Bonus Shares, The Companies Act, 2013 has introduced Section 63 to deal exclunively with Bonus shares.
Bonus shares are issued by capitalizing free reserves. An existing shareholder (buniness/lnvetors) receives Bonus shares on the basis of existing holding, at no cost. Therefore, only the nominal value column of the investment Account needs amendment. The total nominal value of shares received as bonus will appear in nominal value column and nothing is recorded in the cost column. In effect, the average cost of the existing shares is reduced.
RIGHT SHARES:
Where at any time, a company having a share capital proposes to increase its subscribed capital by the issue of further shares, such shares shall be offered-----
(a) persons who, at the date of the offer, are holders of equity shares of the company in proportion, subject to the following conditions, namely:-----
(i) the offer shall be made by notice specifying the number of shares offered and limiting a time not being less than fifteen days and not exceeding thirty days from the date of the offer within which the offer, if not accepted, shall be deemed to have been declined;
(ii) unless the articles of the company otherwise provide, the offer aforesaid shall be deemed to include a right exercisable by the person concerned to renounce the shares offered to him.
(iii) after the expiry of the time specified in the notice aforesaid, or on receipt of earlier intimation from the person to whom such notice is given that he declines to accept the shares offered, the Board of Directors may dispose of them in such manner which is not disadvantageous to the shareholders and the company;
(b) to employees under a scheme of employees stock option, subject to special resolution passed by company and subject to such conditions as may be prescribed; or
(c) to any persons, if it is authorised by a special resolution, whether or not those persons include the persons referred to in clause (a) or clause (b), either for cash or for a consideration other than cash, if the price of such shares is determined by the valuation report of a registered valuer subject to such conditions as may be prescribed.
Right shares are issued at a lower price than the existing market rates. Moreover, a business can buy rights from outsiders against a consideration. The following are the possible situations:
● Accepting Rights Shares When Issued: An existing shareholder (business/Investor) receives right shares on the basis of existing holding, at a cost less than market price. When right shares are taken up, nominal value is recorded in the nominal value column and the amount paid is recorded in the cost column. In effect, the average cost of the existing shares will be reduced.
● Sale of Rights to Outsiders: The Shareholders may take up the rights issue by subscribing for the shares offered; alternatively, the rights may be sold in the open market. When the rights to the shares are sold, the total amount received is credited to the Profit and Loss Account.
● Purchase of Rights from outsiders: The shareholder may purchase rights from the open market. The total amount paid is debited to the Investment Account-"Cost Column".
INVESTMENTS ACCOUNTS: AS-13
Eg 1. On 1.1.2016, 400 6% Debentures of Rs.100 each of ABB Ltd. were held as investments by Mr. Vinod at a cost of Rs. 36,400. Interest is payable on 30th September and 31st March every year.
On 1.4.2016 Rs. 8,000 of such debentures were purchased by Vinod @ Rs. 98 each cum-interest.
On 1.9.2016 Rs. 12,000 of debentures were sold at Rs.96 ex-interest.
On 1.12.2016 Rs. 16,000 debentures were sold @ Rs. 99 cum-interest.
On 31.12.2016 Rs. 20,000 debentures were purchased @ Rs. 95 ex-interest.
Assume brokerage at 0.1% of nominal value of Rs.100 each in each case. The stocks were quoted at Rs. 97.50 as on 31st December 2016. Prepare Investment Account for 6% Debentures of ABB Ltd. in the books of Mr. Vinod for the year ended 31st December, 2016. Ignore Income Tax.
2. Mayuri Ltd. held on 1.4.2016 12% Govt. Stock of Rs. 1,80,000 purchased at the cost of Rs. 1,69,500. (Rs. 100 face value)
On 1.9.2016, it purchased further of Rs. 1,20,000 stock at Rs. 96.50 cum-interest, brokerage being Rs. 600.
On 31.10.2016 Rs. 1,50,000 of the stock was sold at Rs. 94.50 ex-interest, brokerage being Rs. 750.
On 1.3.2017, Rs. 60,000 of the stock was sold at Rs. 96 cum-interest. Brakerage paid Rs. 300. Interest was paid quarterly basis on 30th June, 30th September, 31st December and 31st March every year. The stocks were quoted at Rs. 85 as on 31st March,2017.
Prepare lnvestment Account for the year ended 31st March 2017 in the books of M Ltd. Ignore Income Tax
3. On 1st June 2016, Mr. Naitik acquired 12,000 equity shares of Rs. 10 each in ABB Ltd. for Rs. 2,40,000 on cum-right basis :
ABB Ltd. declared:
(a) one for three borus issue on 1st July, 2016; and
(b) one for four right issue on 1st September, 2016 at 20% premium.
Mr. Naitik:
(a) took up half the right Issue;
(b) sold the remaining rights for Rs. 8 per share;
(c) sold half of its total shareholdings on 31stDecember, 2016 for Rs. 1,48,000.
You are required to prepare the Investment Account for the period ended on 31st December, 2016. Ignore Income Tax.
4. On 1/4 /2016, Kartik had 50,000 equity shares of HP Ltd at a book value of Rs. 15 per share [face value Rs. 10] on 20/6/2016. He purchased another 10,000 shares of the company at Rs. 16 per share. The directors of HP Ltd announced a bonus and right issue. No dividend was payable on these issue .The terms of the issue are as follows:
Bonus basis 1:6 [date 16/8/2016]; Right basis 3:7 [date 31/8/2016] Price Rs 15 per share.
Due date for payment: 30/9/2016.
Shareholders can transfer their rights in full or part. Accordingly, Kartik sold 331/3% of his entitlement to Naksh for a consideration of Rs. 2 per share.
Dividends: Dividend for the year ended 31/3/2016 at the rate of 20% was declared by HP Ltd and received by Kartik on 31/10/2016. Dividends for shares acquired by him on 20/6/2016 are to be adjusted against cost of purchase.
On 15/11/2016, Kartik sold 50,000 equity shares at a premium of Rs. 5 per share. You are required to prepare in the books of Kartik [1] investment Account; and [2] Extracts of profit and Loss Account. Books of accounts are closed on 31/12/2016. Ignore Income Tax.
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