13 Accounting Standard 13 - Accounting for Investmets - AS 13

[Accounting Standards]

Disclosure of Accounting Standard 13 - Accounting for Investmets - AS 13


25. The following disclosures in financial statements in relation to investments are appropriate:—


(a) the accounting policies for the determination of carrying amount of investments;

(b) the amounts included in profit and loss statement for:

(i) interest, dividends (showing separately dividends from subsidiary companies), and rentals on investments showing separately such income from long term and current investments. Gross income should be stated, the amount of income tax deducted at source being included under Advance Taxes Paid;

(ii) profits and losses on disposal of current investments and changes in carrying amount of such investments;

(iii) profits and losses on disposal of long term investments and changes in the carrying amount of such investments;

(c) significant restrictions on the right of ownership, realisability of investments or the remittance of income and proceeds of disposal;

(d) the aggregate amount of quoted and unquoted investments, giving the aggregate market value of quoted investments;

(e) other disclosures as specifically required by the relevant statute governing the enterprise.

[Accounting Standards]

Accounting Standard

Classification of Investments

26. An enterprise should disclose current investments and long term investments distinctly in its financial statements.

27. 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.

[Accounting Standards]

Cost of Investments of Accounting Standard 13 - Accounting for Investmets - AS 13


28. The cost of an investment should include acquisition charges such as brokerage, fees and duties.

29. If an investment is acquired, or partly acquired, by the issue of shares or other securities, the acquisition cost should be the fair value of the securities issued (which in appropriate cases may be indicated by the issue price as determined by statutory authorities). 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 for another asset, the acquisition cost of the investment should be determined by reference to the fair value of the asset given up. Alternatively, the acquisition cost of the investment may be determined with reference to the fair value of the investment acquired if it is more clearly evident.

[Accounting Standards]

Investment Properties of Accounting Standard 13 - Accounting for Investmets - AS 13


30. An enterprise holding investment properties should account for them as long term investments.

[Accounting Standards]

Carrying Amount of Investments of Accounting Standard 13 - Accounting for Investmets - AS 13


31. Investments classified as current investments should be carried in the financial statements at the lower of cost and fair value determined either on an individual investment basis or by category of investment, but not on an overall (or global) basis.


32. Investments classified as long term investments should be carried in the financial statements at cost. However, provision for diminution shall be made to recognise a decline, other than temporary, in the value of the investments, such reduction being determined and made for each investment individually.

[Accounting Standards]

Changes in Carrying Amounts of Investments of Accounting Standard 13 - Accounting for Investmets - AS 13


33. Any reduction in the carrying amount and any reversals of such reductions should be charged or credited to the profit and loss statement.

[Accounting Standards]

Disposal of Investments of Accounting Standard 13 - Accounting for Investmets - AS 13


34. On disposal of an investment, the difference between the carrying amount and net disposal proceeds should be charged or credited to the profit and loss statement.

[Accounting Standards]

Disclosure of Accounting Standard 13 - Accounting for Investmets - AS 13


35. The following information should be disclosed in the financial statements:


(a) the accounting policies for determination of carrying amount of investments;

(b) classification of investments as specified in paragraphs 26 and 27 above;

(c) the amounts included in profit and loss statement for:

(i) interest, dividends (showing separately dividends from subsidiary companies), and rentals on investments showing separately such income from long term and current investments. Gross income should be stated, the amount of income tax deducted at source being included under Advance Taxes Paid;

(ii) profits and losses on disposal of current investments and changes in the carrying amount of such
investments; and

(iii) profits and losses on disposal of long term investments and changes in the carrying amount of such investments;

(d) significant restrictions on the right of ownership, realisability of investments or the remittance of income and proceeds of disposal;

(e) the aggregate amount of quoted and unquoted investments, giving the aggregate market value of quoted investments;

(f) other disclosures as specifically required by the relevant statute governing the enterprise.

[Accounting Standards]

Effective Date of Accounting Standard 13 - Accounting for Investmets - AS 13


36. This Accounting Standard comes into effect for financial statements covering periods commencing on or after April 1, 1995.

[Accounting Standards]

A. Facts of the Case


1. A company made certain investments in the form of shares of another company, (‘investee company’) jointly promoted by the company with another company as long term strategic investment in two stages. In the first stage, the company received shares through direct allotment by the investee company at par. In the second stage, the company acquired further shares in the investee company at a discount from the other promoter of the investee company.
2. As per the querist, the company carried, in its books of account, this long-term investment at its actual cost as per paragraph 17 of Accounting Standard (AS) 13, ‘Accounting for Investments’, issued by the Institute of Chartered Accountants of India. The investee company incurred losses in excess of its paid-up capital. However, considering the long term nature of investments and a strategy to revive the net worth, the erosion was considered by the company as temporary, and consequently, the carrying cost of the investment was not reduced in its books of account.
3. In a subsequent period, the company sold, as per the querist, the specific part of the above investment which was acquired in the second stage at a price less than its par value, but more than its acquisition cost, and thus, recorded a profit as a result of valuing the carrying cost of the shares disposed off at the actual acquisition cost. As per the querist, this is in accordance with paragraph 17 of AS 13. According to the querist, the company contends that as the investment was acquired in two stages, there were two specific parts of the investment out of which one specific part was sold and the other specific part remained with the company which, as per paragraph 17 of AS 13, the company was entitled to value at its actual acquisition cost. In case the company had followed paragraph 22 of AS 13, there would have been a loss to be debited to the profit and loss account instead of recording a profit.
4. As per the querist, the auditors of the company have taken the view that paragraph 22 and not paragraph 17 of AS 13 is applicable and have, thus, qualified their audit report to this extent. The auditors have also qualified their report as to the state of affairs of the company, stating that the investments are carried at a higher value by the company in its books of account as a result of non-compliance with AS 13 in respect of paragraph 22. The auditors continued to express a qualified opinion in subsequent years as regards the state of affairs reflected by the balance sheet in respect of the investments being carried at a higher value on account of non- compliance with AS 13 in the past.
5. According to the querist, the company contends that in view of the fact that:

(a) under paragraph 17 of AS 13, the ‘long term investments’ are to be carried at cost, which the enterprise is complying with, and

(b) paragraph 22 of AS 13 is applicable for computing carrying cost of the part of the investment disposed of (and not to the balance investment);

the company was right in carrying the balance investment at its actual acquisition cost. Hence, according to the company, the auditors are not justified in qualifying the state of affairs in the subsequent periods. The auditors’ qualification in respect of the carrying amount of the balance ‘long term investment’ has to be dispensed with because there is no ‘non-adherence’to the provisions of AS 13 subsequent to the year in which a part of the investment was disposed of.
6. As per the querist, the company contends that determining the carrying amount of the investment sold on the basis of average cost of the investment acquired in two stages, for the purpose of reporting, especially when the enterprise has made actual profit, would have completely distorted the financial statements of the relevant period. Also, if the carrying amount of the balance investment is averaged out, especially when the diminution in the value is considered as temporary, the financial statements would get distorted for all times to come. The company also contends that even for the purposes of computing ‘capital gains’ under the provisions of the Income-tax Act, 1961, it is the cost (and not the average cost) and proceeds, which are relevant. This is true even in case of partial disposal of an investment, as long as the investment purchased and sold is specific and is appropriately identifiable.
7. The querist has stated that the company also contends that since the auditors have qualified the accounts once and there being no further non- compliance, the accounts of the enterprise should not be qualified repeatedly since it would serve no useful purpose for the stakeholders of the company. However, the auditors are of the view that non-compliance with paragraph 22 in the year of disposal has resulted in the carrying amount of the balance investment being higher and its consequent impact on the net worth of the company and, hence, there is importance of a continuing qualified opinion as regards the state of affairs of the company.
8. The querist has drawn the attention of the Committee to paragraphs 7, 8, 17, 18, 19, 21 and 22 of AS 13 in respect of the above. The querist has also stated that if an enterprise deviates from the provisions of the Standard in any manner, to the extent of the deviation, the financial statements prepared by the enterprise shall be subject to qualification by the auditor.
B . Query
9. The querist has sought the opinion of the Expert Advisory Committee on the following issues:

(a) What should be the correct accounting treatment of the above transaction?
(b) Whether the company is justified in its contention that the specific portion of the balance investment should be carried at its actual acquisition cost according to paragraph 17 of AS 13.
(c) Whether the auditors are justified in their stand that despite the fact that the investment was held in two specific lots acquired at different costs, upon sale of one specific lot, the balance investment should be carried at average cost and not the actual cost, in view of paragraph 22 of AS 13.
(d) Whether the auditors are justified in qualifying their report on the financial statements of the subsequent periods on the ground that investments are not carried at the average cost as per paragraph 22 of AS 13.


C. Points considered by the Committee
10. The Committee restricts itself to the particular queries raised by the querist in paragraph 9 above, and has not examined any other issue that may be contained in the facts of the case, such as, whether non-recognition of the diminution in the value of investments held as long-term strategic investments is appropriate or not.
11. The Committee notes from the facts of the case that the ‘investment’in question was acquired by the company in two lots and both the lots were held as a long-term strategic investment in the books of account of the company.
12. The Committee notes paragraphs 17 and 22 of AS 13 which are reproduced below:

"17. Long-term investments are usually 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. Indicators of the value of an investment are obtained by reference to its market value, the investee’s assets and results and the expected cash flows from the investment. The type and extent of the investor’s stake in the investee are also taken into account. Restrictions on distributions by the investee or on disposal by the investor may affect the value attributed to the investment."
"22. 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.2 "

13. From the above, the Committee is of the view that the two lots of investment were held collectively as a long-term investment in the books of account of the company. In other words, the company did not make any distinction between the two lots of investment as to the purpose of their holding. Accordingly, the Committee is of the view that the two lots of the investment cannot be treated as separate investments, and, therefore, paragraph 22 of AS 13, reproduced above, is applicable. In accordance with paragraph 22 of AS 13, upon sale of the part of the investment, the carrying amount to be allocated to the lot sold should be determined on the basis of the average carrying amount of the total holding of the investment, i.e., by averaging the cost of investments acquired in the two lots. Consequently, the carrying amount of the balance portion of the investment will also be determined on the basis of the average cost. Thus, as per the facts of the case supplied by the querist, the company should have accounted for a loss on the sale of the part of the investment and should have carried the balance portion of the investment at a reduced amount, i.e., the average carrying amount.
14. The Committee also notes that paragraph 3.16 of the ‘Statement on Qualifications in Auditor’s Report’, issued by the Institute of Chartered Accountants of India, states that "Each year’s accounts being independent, the essential facts relating to a qualification made in an earlier year must be repeated where appropriate".
15. From the above, the Committee is of the view that an auditor has to report on the truth and fairness of the financial statements of a particular financial year, and, therefore, if the amount in respect of an item of asset in the balance sheet of the company is not appropriately reflected, the auditor is professionally bound to report on the same. The said inappropriate amount might be reflected as a result of an incorrect treatment followed by the company in an earlier year. However, since the same has an effect on the current year’s financial statements, the auditor should qualify his report in accordance with the ‘Statement on Qualifications in Auditor’s Report’.
16. The Committee notes that considerations different from accounting may apply for taxation purposes. Therefore, ‘cost’ for the purpose of determination of capital gains tax liability is not necessarily relevant for the purpose of accounting.
D. Opinion
17. On the basis of the above, the Committee is of the following opinion on the issues raised in paragraph 9 above:

(a) The correct accounting treatment of the transaction would be to determine the carrying amount of the portion of investment sold, on the basis of average cost of the two lots of the investment. Accordingly, as per the facts supplied, a loss should be booked on the sale of the part of the investment and the carrying amount of the remaining investment should be reduced to the average cost.
(b) No, the company is not justified in its contention that the specific portion of the balance investment should be carried at its actual acquisition cost. For this purpose, paragraph 22 of AS 13 is applicable, and not paragraph 17 thereof.
(c) Yes, the auditors are justified in their stand that despite the fact that the investment was held in two specified lots acquired at different costs, upon sale of one specified lot, the balance investment should be carried at average cost and not the actual cost, in view of paragraph 22 of AS 13.
(d) Yes, the auditors are justified in qualifying their report on the financial statements of the subsequent years on the ground that investments are not carried at the average cost as per paragraph 22 of AS 13.


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1 Opinion finalised by the Committee on 28.10.2003.
2 In respect of shares, debentures and other securities held as stock-in-trade, the cost of stocks disposed of is determined by applying an appropriate cost formula (e.g. first-in first-out, average cost, etc.). These cost formulae are the same as those specified in Accounting Standard (AS) 2, in respect of Valuation of Inventories.