Investment Accounts: Notes | Accounting for CA Intermediate (Old Scheme) PDF Download

 Page 1


 
LEARNING OUTCOMES 
*   
 
 
 
  
INVESTMENT ACCOUNTS 
 
 
 
After studying this chapter, you will be able to– 
? Understand the meaning of the term ‘investments’ 
? Compute the cost of investments 
? Learn the classification of investments 
? Compute the carrying amount of investments 
? Calculate the profit/ loss on disposal of investments 
? Determine the transfer value on reclassification of 
investments 
 
 
 
 
 
 
9 
CHAPTER 
Page 2


 
LEARNING OUTCOMES 
*   
 
 
 
  
INVESTMENT ACCOUNTS 
 
 
 
After studying this chapter, you will be able to– 
? Understand the meaning of the term ‘investments’ 
? Compute the cost of investments 
? Learn the classification of investments 
? Compute the carrying amount of investments 
? Calculate the profit/ loss on disposal of investments 
? Determine the transfer value on reclassification of 
investments 
 
 
 
 
 
 
9 
CHAPTER 
 
 
9.2 
 
ACCOUNTING 
  
 
 
Investments are assets  held by an enterprise 
for earning income
Dividends, Interests and Rentals
for capital appreciation   or for other 
benefits
Subsequent 
recognition
Initial recognition
Classification
Investments
Current 
investments
Cost
Lower of cost and 
fair value 
Long-term 
investments
Cost
Cost less provision 
for 'other than 
temporary' 
diminution
 
Page 3


 
LEARNING OUTCOMES 
*   
 
 
 
  
INVESTMENT ACCOUNTS 
 
 
 
After studying this chapter, you will be able to– 
? Understand the meaning of the term ‘investments’ 
? Compute the cost of investments 
? Learn the classification of investments 
? Compute the carrying amount of investments 
? Calculate the profit/ loss on disposal of investments 
? Determine the transfer value on reclassification of 
investments 
 
 
 
 
 
 
9 
CHAPTER 
 
 
9.2 
 
ACCOUNTING 
  
 
 
Investments are assets  held by an enterprise 
for earning income
Dividends, Interests and Rentals
for capital appreciation   or for other 
benefits
Subsequent 
recognition
Initial recognition
Classification
Investments
Current 
investments
Cost
Lower of cost and 
fair value 
Long-term 
investments
Cost
Cost less provision 
for 'other than 
temporary' 
diminution
 
 
 
9.3 
 
INVESTMENT ACCOUNTS 
 
 1. INTRODUCTION 
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. Investment Accounting is done as per AS 13, Accounting for 
Investments which deals with accounting for investments in the financial 
statements and related disclosure requirements except: 
(i) Bases for recognition of interest, dividends and rentals earned on 
investments;  
(ii) operating or financial leases; 
(iii) investment of retirement benefit plans and life insurance enterprises; 
(iv) mutual funds, etc. 
Note: Assets held as Stock-in-trade are not ‘Investments’. 
 2. CLASSIFICATION OF INVESTMENTS 
The investments are classified into two categories as per AS 13, viz., Current 
Investments and Long-term Investments. 
2.1 Current 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. 
 Example: A Ltd. acquired 1,000 shares of B Ltd. on 1st April, 20X1 with an 
intention to hold them for a period of 15 months. Suggest the classification of 
such investment (in accordance with AS 13) as on 31st March, 20X2. 
 Investment in 1,000 shares is not a current investment because it is intended to 
be held for more than one year from the investment date even though the 
remaining period as on the reporting date may be less than one year. 
• The carrying amount for current investments is the lower of cost and fair 
value. 
• 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. 
Page 4


 
LEARNING OUTCOMES 
*   
 
 
 
  
INVESTMENT ACCOUNTS 
 
 
 
After studying this chapter, you will be able to– 
? Understand the meaning of the term ‘investments’ 
? Compute the cost of investments 
? Learn the classification of investments 
? Compute the carrying amount of investments 
? Calculate the profit/ loss on disposal of investments 
? Determine the transfer value on reclassification of 
investments 
 
 
 
 
 
 
9 
CHAPTER 
 
 
9.2 
 
ACCOUNTING 
  
 
 
Investments are assets  held by an enterprise 
for earning income
Dividends, Interests and Rentals
for capital appreciation   or for other 
benefits
Subsequent 
recognition
Initial recognition
Classification
Investments
Current 
investments
Cost
Lower of cost and 
fair value 
Long-term 
investments
Cost
Cost less provision 
for 'other than 
temporary' 
diminution
 
 
 
9.3 
 
INVESTMENT ACCOUNTS 
 
 1. INTRODUCTION 
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. Investment Accounting is done as per AS 13, Accounting for 
Investments which deals with accounting for investments in the financial 
statements and related disclosure requirements except: 
(i) Bases for recognition of interest, dividends and rentals earned on 
investments;  
(ii) operating or financial leases; 
(iii) investment of retirement benefit plans and life insurance enterprises; 
(iv) mutual funds, etc. 
Note: Assets held as Stock-in-trade are not ‘Investments’. 
 2. CLASSIFICATION OF INVESTMENTS 
The investments are classified into two categories as per AS 13, viz., Current 
Investments and Long-term Investments. 
2.1 Current 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. 
 Example: A Ltd. acquired 1,000 shares of B Ltd. on 1st April, 20X1 with an 
intention to hold them for a period of 15 months. Suggest the classification of 
such investment (in accordance with AS 13) as on 31st March, 20X2. 
 Investment in 1,000 shares is not a current investment because it is intended to 
be held for more than one year from the investment date even though the 
remaining period as on the reporting date may be less than one year. 
• The carrying amount for current investments is the lower of cost and fair 
value. 
• 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. 
 
 
9.4 
 
ACCOUNTING 
• 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. 
• Any reduction to fair value and any reversals of such reductions are included 
in the statement of profit and loss. 
2.2 Long-term Investments 
• A long-term investment is an investment other than a current investment. 
• Long term investments are usually carried at cost.  
• If 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 reduction in carrying amount is charged to the statement of profit and 
loss.  
• The reduction in carrying amount is reversed when there is a rise in the value 
of the investment, or if the reasons for the reduction no longer exist. 
 
Carrying Amount
Current 
investments 
Lower of cost 
and fair value.
Any reduction to fair
value is debited to
profit and loss account,
however, if fair value of
investment is increased
subsequently, the
increase in value of
current investment up
to the cost of
investment is credited
to the profit and loss
account (and excess
portion, if any, is
ignored).
Valuation 
on overall (or global)
basis is not considered
appropriate; prudent
method is to carry
investment individually.
Long term 
investments 
Carried 
at cost.
Where there is a decline, other than
temporary,in the carrying amounts of
long term valued investments, the
resultant reduction in the carrying
amount is charged to the profit and
loss statement. The reduction in
carrying amount is reversed when
there is a rise in the value of the
investment, or if the reasons for the
reduction no longer exist.
Valuation 
Determined on an 
individual 
investment basis.
Page 5


 
LEARNING OUTCOMES 
*   
 
 
 
  
INVESTMENT ACCOUNTS 
 
 
 
After studying this chapter, you will be able to– 
? Understand the meaning of the term ‘investments’ 
? Compute the cost of investments 
? Learn the classification of investments 
? Compute the carrying amount of investments 
? Calculate the profit/ loss on disposal of investments 
? Determine the transfer value on reclassification of 
investments 
 
 
 
 
 
 
9 
CHAPTER 
 
 
9.2 
 
ACCOUNTING 
  
 
 
Investments are assets  held by an enterprise 
for earning income
Dividends, Interests and Rentals
for capital appreciation   or for other 
benefits
Subsequent 
recognition
Initial recognition
Classification
Investments
Current 
investments
Cost
Lower of cost and 
fair value 
Long-term 
investments
Cost
Cost less provision 
for 'other than 
temporary' 
diminution
 
 
 
9.3 
 
INVESTMENT ACCOUNTS 
 
 1. INTRODUCTION 
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. Investment Accounting is done as per AS 13, Accounting for 
Investments which deals with accounting for investments in the financial 
statements and related disclosure requirements except: 
(i) Bases for recognition of interest, dividends and rentals earned on 
investments;  
(ii) operating or financial leases; 
(iii) investment of retirement benefit plans and life insurance enterprises; 
(iv) mutual funds, etc. 
Note: Assets held as Stock-in-trade are not ‘Investments’. 
 2. CLASSIFICATION OF INVESTMENTS 
The investments are classified into two categories as per AS 13, viz., Current 
Investments and Long-term Investments. 
2.1 Current 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. 
 Example: A Ltd. acquired 1,000 shares of B Ltd. on 1st April, 20X1 with an 
intention to hold them for a period of 15 months. Suggest the classification of 
such investment (in accordance with AS 13) as on 31st March, 20X2. 
 Investment in 1,000 shares is not a current investment because it is intended to 
be held for more than one year from the investment date even though the 
remaining period as on the reporting date may be less than one year. 
• The carrying amount for current investments is the lower of cost and fair 
value. 
• 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. 
 
 
9.4 
 
ACCOUNTING 
• 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. 
• Any reduction to fair value and any reversals of such reductions are included 
in the statement of profit and loss. 
2.2 Long-term Investments 
• A long-term investment is an investment other than a current investment. 
• Long term investments are usually carried at cost.  
• If 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 reduction in carrying amount is charged to the statement of profit and 
loss.  
• The reduction in carrying amount is reversed when there is a rise in the value 
of the investment, or if the reasons for the reduction no longer exist. 
 
Carrying Amount
Current 
investments 
Lower of cost 
and fair value.
Any reduction to fair
value is debited to
profit and loss account,
however, if fair value of
investment is increased
subsequently, the
increase in value of
current investment up
to the cost of
investment is credited
to the profit and loss
account (and excess
portion, if any, is
ignored).
Valuation 
on overall (or global)
basis is not considered
appropriate; prudent
method is to carry
investment individually.
Long term 
investments 
Carried 
at cost.
Where there is a decline, other than
temporary,in the carrying amounts of
long term valued investments, the
resultant reduction in the carrying
amount is charged to the profit and
loss statement. The reduction in
carrying amount is reversed when
there is a rise in the value of the
investment, or if the reasons for the
reduction no longer exist.
Valuation 
Determined on an 
individual 
investment basis.
 
 
9.5 
 
INVESTMENT ACCOUNTS 
 
 3. COST OF INVESTMENTS 
1. The cost of an investment includes acquisition charges such as brokerage, 
fees and duties.  
2. 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. 
 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. 
Type of acquisition Cost of investments 
Cash/ bank Cash price including charges such as 
brokerages, fees and duties 
Issue of shares/ other securities Fair value of securities issued 
In exchange for another asset Fair value of asset given up or fair value 
of investment acquired, whichever is 
more clearly evident 
3.  A separate Investment Account should be made for each scrip purchased. The 
scrips purchased may be broadly divided into two categories, viz. 
 
 The entries in Investment Account for these two broad categories of scrips 
will be made as under: 
(i) Fixed income Bearing Securities: These refer to securities having fixed 
return of income. Investment in Government securities or debentures 
comes under this category.  
Categories of Investment on the basis of Income
Fixed income bearing scrips
e.g. Government securities; 
debentures or bonds
Variable income bearing scrips.
e.g. Equity shares