AS 13

ACCOUNTING FOR INVESTMENTS

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’

CLASSIFICATION OF INVESTMENTS

The investments are classified into two categories as per AS 13, viz., Current
Investments and Long-term Investments.

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, 20X2 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, 20X3.

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 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.

 Any reduction to fair value and any reversals of such reductions are included in the
statement of profit and loss.

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.

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 brokers
fess and duities
Issued of shares/other securities Fair value of securities issued
In exchanges for another asset Fair value of assets give up or fair value of
investment acquired which over is more clearly
evident

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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.
Transaction for fixed income bearing securities may occur on following basis:
(a) Ex-interest basis
(b) Cum- interest basis

In case the transaction is on ‘Ex-interest’ basis, the amount of interest accrued to the
date of transaction has to be paid in addition to the price of security.

The following entries are made in the books of Purchaser:

Investment Account Dr. (With the price settled on ex- interest basis)*
Interest accrued Account Dr. (Accrued interest till the date of
To Bank A/c transaction)**(With total amount paid)

* This amount will appear in Capital Column of ‘Investment A/c’.

**This amount will appear in Income Column of ‘Investment A/c’.

In case the transaction is on cum-interest basis, a part of purchase price is related to

the interest accrued from the date of the last interest paid to the date of transaction.
Hence, in this case, the cost of investment has to be calculated by subtracting the
amount of accrued interest from the Purchase Price.

The following entries are made in the books of Purchaser:

Investment Account Dr. (With the price settled on cum- interest
Interest accrued Account Dr. less Interest Accrued)* (Accrued interest till
To Bank A/c the date of transaction)**(With total amount
paid)
* This amount will appear in Capital Column of ‘Investment A/c’.
**This amount will appear in Income Column of ‘Investment A/c’.
When the interest amount is actually received, it is entered in the Income Column
credit side. The net effect of these entries will be that the amount credited to the

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income will be only the interest arising between the date of purchase and the one on
which it next falls due.

Note:
(a) Interest amount is always calculated with respect to nominal value (par value/
nominal value).
(b) In case the quotation does not specify whether it is ex-interest or cuminterest, the
same will be treated as ex-interest quotation as per the general practice

(ii) Variable Income Bearing Securities: These refer to securities having variable
return of income. Investment in equity shares comes under this category. The
following points should be noted with respect to investment in equity shares:
(a) dividends from investments in shares are not recognised in the statement of
profit and loss until a right to receive payment is established;
(b) the amount of dividend accruing between the date of last dividend payment
and the date of purchase cannot be immediately ascertained.

In the following way the information is incorporated in the books of investor at the
time of purchase:
Investment Account Dr. (With the entire purchase price)*
To Bank A/c (With total amount paid)

* This amount will appear in Capital Column of ‘Investment A/c’.

The adjustment with respect to dividend is made when the dividend is actuallyreceived
as under:
Bank A/c Dr. (with total dividend received) (with the amount of
To Investment A/c dividend for the period for which the investor did not
To Investment A/c hold the share)* (with the amount of dividend for the
post – acquisition period)**

* This amount will appear in Capital Column of ‘Investment A/c’.

**This amount will appear in Income Column of ‘Investment A/c’.
 The important point with respect to investment in equity shares is that the amount
of dividends for the period, for which the shares were not held by the investor,
should not be treated as revenue receipt but they should be treated as capital
receipt, i.e., when dividends on equity shares are declared from pre-acquisition
profits, the amount of such dividend received by the investor is entered on the
credit side in the capital column, so as to reduce the acquisition cost.

 If it is difficult to make an allocation between pre and post-acquisition periods

except on an arbitrary basis, the cost of investment is normally reduced by
dividends receivable, only if they clearly represent recovery of part of the cost.

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3. 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 statement of profit and loss.
Right shares Accounting
When right shares offered are Cost of right shares should be added
subscribed to carrying amount of the original holding
If rights are not subscribed for Sale proceeds should be taken to
but are sold statement of profit and loss (refer note
below for an exception)

Note: 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.

For e.g., Mr. X acquires 200 shares of a company on cum-right basis for Rs 50,000. He
subsequently receives an offer of right to acquire fresh shares in the company in the
proportion of 1:1 at ` 110 each. X subscribes for the right issue.

Thus, the total cost of X’s holding of 400 shares would amount to Rs 72,000 (50,000
+22,000). Suppose, he does not subscribe but sells the rights for Rs 15,000. The ex-
right market value of 200 shares bought by X immediately after the rights falls to Rs
40,000. In this case out of sale proceeds of Rs 15,000, Rs 10,000 may be applied to
reduce the carrying amount to the market value Rs 40,000 and Rs 5,000 would be
credited to the profit and loss account.

4. Where an investment is acquired by way of issue of bonus shares, no amount is

entered in the capital column of investment account since the investor has not paid
anything.

DISPOSAL OF INVESTMENTS

 On disposal of an investment, the difference between the carrying amount and the
disposal proceeds, net of expenses is recognised in the profit and loss statement.
 When a part of the holding of an individual investment is disposed, the carrying
amount is required to be allocated to that part on the basis of the average carrying
amount of the total holding of the investment.
 In respect of shares, debentures and other securities held as stock-in-trade, the
cost of stocks disposed of may be determined by applying an appropriate cost
formula (e.g., first-in, first-out (FIFO), average cost, etc.). These cost formulae are
the same as those specified in AS 2, Valuation of Inventories.
(i) Fixed Income Bearing Securities: In case the transaction is on ‘Cum-interest
basis’, the amount of accrued interest from the date of last payment to the

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 date of sale is credited in the income column and only the sale proceeds, net
of accrued interest (from the date of last payment to the date of sale), is
credited in the capital column of investment account.

In case the transaction is on ‘Ex-interest’ basis, entire sale proceeds is

credited in the capital column and the amount of accrued interest from the
date of last payment to the date of sale, separately received from the buyer
will be taken to the credit side of the income column of investment account.
(ii) Variable Income Bearing Securities: In case of these securities, the entire
amount of sale proceeds should be credited in the capital column of
investment account, unless the amount of accrued dividend can be
specifically established. The entries in the books at the time of sale of
investments will be just the reverse of the entries passed for their
acquisition.

Particulars Value in ‘capital’ column of investment

Purchase Sale
Transaction on Purchase price of investment, Entire sale proceeds from
ex-interest basis i.e., no impact of interest investments, i.e., no impact
accrued upto the date of of accrued interest (from
transaction the date of last payment to
the date of sale)
Transaction on Purchase price of investment Sale proceeds, net of
cum-interest less accrued interest upto the accrued interest (from the
basis date of transaction date of last payment to the
date of sale)

RECLASSIFICATION OF INVESTMENT

When Investments are classified from Current Investments to Long-term Investments,

transfer is made at Cost and Fair Value; whichever is less (at the date of transfer).

When Investments are classified from Long-term Investments to Current Investments,

transfer is made at Cost and Carrying Amount; whichever is less (at the date of
transfer).

Accounting for interest, dividend, etc.

Nature of income Pre-acquisition period Post-acquisition period

Interest Interest accruing before Interest accruing after
acquisition acquisition
Dividend Declared from pre Declared from post
acquisition profits acquisition profits
Accounting Deducted from cost of Recognised as an income
investment

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