ICAI Notes- Unit 3: Assets Based Accounting Standards | Advanced Accounting for CA Intermediate PDF Download

 Page 1


 
 
ASSETS BASED ACCOUNTING STANDARDS 
 
 
 
    
v 
 5.77 
 
 
 
 
 
LEARNING OUTCOMES 
 
UNIT 3: ACCOUNTING STANDARD 13 
ACCOUNTING FOR INVESTMENTS 
 
 
 
After studying this unit, you will be able to comprehend – 
? What are the various Forms of Investments  
? Classification of Investments  
? How to compute the Cost of Investments  
• Current Investments  
• Long-term Investments  
• Investment Properties  
? Disposal of Investments  
? Reclassification of Investments  
? Disclosure Requirements as per the standard. 
3.1 INTRODUCTION  
The standard deals with accounting for investments in the financial statements of 
enterprises and related disclosure requirements.  
Shares, debentures and other securities held as stock-in-trade (i.e., for sale in the 
ordinary course of business) are not ‘investments’ as defined in this Standard. 
However, the manner in which they are accounted for and disclosed in the 
financial statements is quite similar to that applicable in respect of current 
investments. Accordingly, the provisions of this Standard, to the extent that they 
relate to current investments, are also applicable to shares, debentures and other 
securities held as stock-in-trade, with suitable modifications as specified in this 
Standard. 
© The Institute of Chartered Accountants of India
Page 2


 
 
ASSETS BASED ACCOUNTING STANDARDS 
 
 
 
    
v 
 5.77 
 
 
 
 
 
LEARNING OUTCOMES 
 
UNIT 3: ACCOUNTING STANDARD 13 
ACCOUNTING FOR INVESTMENTS 
 
 
 
After studying this unit, you will be able to comprehend – 
? What are the various Forms of Investments  
? Classification of Investments  
? How to compute the Cost of Investments  
• Current Investments  
• Long-term Investments  
• Investment Properties  
? Disposal of Investments  
? Reclassification of Investments  
? Disclosure Requirements as per the standard. 
3.1 INTRODUCTION  
The standard deals with accounting for investments in the financial statements of 
enterprises and related disclosure requirements.  
Shares, debentures and other securities held as stock-in-trade (i.e., for sale in the 
ordinary course of business) are not ‘investments’ as defined in this Standard. 
However, the manner in which they are accounted for and disclosed in the 
financial statements is quite similar to that applicable in respect of current 
investments. Accordingly, the provisions of this Standard, to the extent that they 
relate to current investments, are also applicable to shares, debentures and other 
securities held as stock-in-trade, with suitable modifications as specified in this 
Standard. 
© The Institute of Chartered Accountants of India
 
ADVANCED ACCOUNTING  
 5.78 
This Standard does not deal with:  
a. The basis for recognition of interest, dividends and rentals earned on 
investments which are covered by AS 9 
b. Operating or finance leases 
c. Investments on retirement benefit plans and life insurance enterprises 
d. Mutual funds, 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, 2013. 
3.2 DEFINITION OF THE TERMS USED IN THE 
STANDARD 
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 (inventory) are not 
‘investments’ 
Fair value is the amount for which an asset could be exchanged between a 
knowledgeable, willing buyer and a knowledgeable, willing seller in an arm’s 
length transaction. Under appropriate circumstances, market value or net 
realisable value provides an evidence of fair value. 
Market value is the amount obtainable from the sale of an investment in an open 
market, net of expenses necessarily to be incurred on or before disposal. 
3.3 FORMS OF INVESTMENTS 
Enterprises hold investments for diverse reasons. For some enterprises, 
investment activity is a significant element of operations, and assessment of the 
performance of the enterprise may largely, or solely, depend on the reported 
results of this activity.  
Some investments have no physical existence and are represented merely by 
certificates or similar documents (e.g., shares) while others exist in a physical form 
(e.g., buildings). For some investments, an active market exists from which a 
market value (fair value) can be established. For other investments, an active 
market does not exist and other means are used to determine fair value. 
© The Institute of Chartered Accountants of India
Page 3


 
 
ASSETS BASED ACCOUNTING STANDARDS 
 
 
 
    
v 
 5.77 
 
 
 
 
 
LEARNING OUTCOMES 
 
UNIT 3: ACCOUNTING STANDARD 13 
ACCOUNTING FOR INVESTMENTS 
 
 
 
After studying this unit, you will be able to comprehend – 
? What are the various Forms of Investments  
? Classification of Investments  
? How to compute the Cost of Investments  
• Current Investments  
• Long-term Investments  
• Investment Properties  
? Disposal of Investments  
? Reclassification of Investments  
? Disclosure Requirements as per the standard. 
3.1 INTRODUCTION  
The standard deals with accounting for investments in the financial statements of 
enterprises and related disclosure requirements.  
Shares, debentures and other securities held as stock-in-trade (i.e., for sale in the 
ordinary course of business) are not ‘investments’ as defined in this Standard. 
However, the manner in which they are accounted for and disclosed in the 
financial statements is quite similar to that applicable in respect of current 
investments. Accordingly, the provisions of this Standard, to the extent that they 
relate to current investments, are also applicable to shares, debentures and other 
securities held as stock-in-trade, with suitable modifications as specified in this 
Standard. 
© The Institute of Chartered Accountants of India
 
ADVANCED ACCOUNTING  
 5.78 
This Standard does not deal with:  
a. The basis for recognition of interest, dividends and rentals earned on 
investments which are covered by AS 9 
b. Operating or finance leases 
c. Investments on retirement benefit plans and life insurance enterprises 
d. Mutual funds, 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, 2013. 
3.2 DEFINITION OF THE TERMS USED IN THE 
STANDARD 
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 (inventory) are not 
‘investments’ 
Fair value is the amount for which an asset could be exchanged between a 
knowledgeable, willing buyer and a knowledgeable, willing seller in an arm’s 
length transaction. Under appropriate circumstances, market value or net 
realisable value provides an evidence of fair value. 
Market value is the amount obtainable from the sale of an investment in an open 
market, net of expenses necessarily to be incurred on or before disposal. 
3.3 FORMS OF INVESTMENTS 
Enterprises hold investments for diverse reasons. For some enterprises, 
investment activity is a significant element of operations, and assessment of the 
performance of the enterprise may largely, or solely, depend on the reported 
results of this activity.  
Some investments have no physical existence and are represented merely by 
certificates or similar documents (e.g., shares) while others exist in a physical form 
(e.g., buildings). For some investments, an active market exists from which a 
market value (fair value) can be established. For other investments, an active 
market does not exist and other means are used to determine fair value. 
© The Institute of Chartered Accountants of India
 
 
ASSETS BASED ACCOUNTING STANDARDS 
 
 
 
    
v 
 5.79 
 
3.4 CLASSIFICATION OF INVESTMENTS 
 
A 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. The intention to hold for not more than one year is to be 
judged at the time of purchase of investment.  
A long term investment is an investment other than a current investment. 
Further classification of current and long-term investments should be as specified 
in the statute governing the enterprise. In the absence of a statutory requirement, 
such further classification should disclose, where applicable, investments in: 
(a) Government or Trust securities 
(b) Shares, debentures or bonds 
(c) Investment properties 
(d) Others—specifying nature 
3.5 COST OF INVESTMENTS 
The cost of an investment includes acquisition charges such as brokerage, fees 
and duties etc.  
Example 
X Ltd invests in long-term deposit worth ` 200 lakhs on 1st April 2022. It incurs 
brokerage cost of ` 1 lakh to be able to make the investment. The value of the 
investment on 1st April 2022 is ` 201 lakhs. 
If an investment is acquired, or partly acquired, by the issue of shares or other 
securities, the acquisition cost is the fair value of the securities issued. The fair 
value may not necessarily be equal to the nominal or par value of the securities 
issued.  
Classification of Investments
Current Investments
Long Term Investments
© The Institute of Chartered Accountants of India
Page 4


 
 
ASSETS BASED ACCOUNTING STANDARDS 
 
 
 
    
v 
 5.77 
 
 
 
 
 
LEARNING OUTCOMES 
 
UNIT 3: ACCOUNTING STANDARD 13 
ACCOUNTING FOR INVESTMENTS 
 
 
 
After studying this unit, you will be able to comprehend – 
? What are the various Forms of Investments  
? Classification of Investments  
? How to compute the Cost of Investments  
• Current Investments  
• Long-term Investments  
• Investment Properties  
? Disposal of Investments  
? Reclassification of Investments  
? Disclosure Requirements as per the standard. 
3.1 INTRODUCTION  
The standard deals with accounting for investments in the financial statements of 
enterprises and related disclosure requirements.  
Shares, debentures and other securities held as stock-in-trade (i.e., for sale in the 
ordinary course of business) are not ‘investments’ as defined in this Standard. 
However, the manner in which they are accounted for and disclosed in the 
financial statements is quite similar to that applicable in respect of current 
investments. Accordingly, the provisions of this Standard, to the extent that they 
relate to current investments, are also applicable to shares, debentures and other 
securities held as stock-in-trade, with suitable modifications as specified in this 
Standard. 
© The Institute of Chartered Accountants of India
 
ADVANCED ACCOUNTING  
 5.78 
This Standard does not deal with:  
a. The basis for recognition of interest, dividends and rentals earned on 
investments which are covered by AS 9 
b. Operating or finance leases 
c. Investments on retirement benefit plans and life insurance enterprises 
d. Mutual funds, 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, 2013. 
3.2 DEFINITION OF THE TERMS USED IN THE 
STANDARD 
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 (inventory) are not 
‘investments’ 
Fair value is the amount for which an asset could be exchanged between a 
knowledgeable, willing buyer and a knowledgeable, willing seller in an arm’s 
length transaction. Under appropriate circumstances, market value or net 
realisable value provides an evidence of fair value. 
Market value is the amount obtainable from the sale of an investment in an open 
market, net of expenses necessarily to be incurred on or before disposal. 
3.3 FORMS OF INVESTMENTS 
Enterprises hold investments for diverse reasons. For some enterprises, 
investment activity is a significant element of operations, and assessment of the 
performance of the enterprise may largely, or solely, depend on the reported 
results of this activity.  
Some investments have no physical existence and are represented merely by 
certificates or similar documents (e.g., shares) while others exist in a physical form 
(e.g., buildings). For some investments, an active market exists from which a 
market value (fair value) can be established. For other investments, an active 
market does not exist and other means are used to determine fair value. 
© The Institute of Chartered Accountants of India
 
 
ASSETS BASED ACCOUNTING STANDARDS 
 
 
 
    
v 
 5.79 
 
3.4 CLASSIFICATION OF INVESTMENTS 
 
A 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. The intention to hold for not more than one year is to be 
judged at the time of purchase of investment.  
A long term investment is an investment other than a current investment. 
Further classification of current and long-term investments should be as specified 
in the statute governing the enterprise. In the absence of a statutory requirement, 
such further classification should disclose, where applicable, investments in: 
(a) Government or Trust securities 
(b) Shares, debentures or bonds 
(c) Investment properties 
(d) Others—specifying nature 
3.5 COST OF INVESTMENTS 
The cost of an investment includes acquisition charges such as brokerage, fees 
and duties etc.  
Example 
X Ltd invests in long-term deposit worth ` 200 lakhs on 1st April 2022. It incurs 
brokerage cost of ` 1 lakh to be able to make the investment. The value of the 
investment on 1st April 2022 is ` 201 lakhs. 
If an investment is acquired, or partly acquired, by the issue of shares or other 
securities, the acquisition cost is the fair value of the securities issued. The fair 
value may not necessarily be equal to the nominal or par value of the securities 
issued.  
Classification of Investments
Current Investments
Long Term Investments
© The Institute of Chartered Accountants of India
 
 
ADVANCED ACCOUNTING 
v
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 5.80 
If an investment is acquired in exchange, or part exchange, for another asset, the 
acquisition cost of the investment is determined by reference to the fair value of 
the asset given up or the fair value of the investment acquired, whichever is more 
clearly evident. 
Interest, dividends and rentals receivables in connection with an investment are 
generally regarded as income, being the return on the investment. However, in 
some circumstances, such inflows represent a recovery of cost and do not form 
part of income.  
For example, when unpaid interest has accrued before the acquisition of an 
interest-bearing investment and is therefore included in the price paid for the 
investment, the subsequent receipt of interest is allocated between pre-
acquisition and post-acquisition periods; the pre-acquisition portion is deducted 
from cost. When dividends on equity are declared from pre-acquisition profits, a 
similar treatment may apply. If it is difficult to make such an allocation except on 
an arbitrary basis, the cost of investment is normally reduced by dividends 
receivable only if they clearly represent a recovery of a part of the cost. 
When right shares offered are subscribed for, the cost of the right shares is added 
to the carrying amount of the original holding. If rights are not subscribed for but 
are sold in the market, the sale proceeds are taken to the profit and loss 
statement.  
However, 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. 
© The Institute of Chartered Accountants of India