1.4  Query:   

          Valuation of current investments.

1. A company is engaged in the business of purchase and sale of shares and securities through various share brokers at a brokerage ranging between 0.5% and 1.00% on the gross value of the shares traded by the company. The share brokers offer their prices for purchase/sale of shares, after addition/deduction of their brokerage from the gross value of shares traded, as per trade practice, and hence the company does not account for the brokerage charged by the brokers and does not exhibit the same in the profit and loss account. The company treats the shares and securities as current assets in step with the nature of its activities and accordingly value them at cost price or market price, whichever is less.

2.As on 31.3.1990, the company held a large number of 14% non-convertible debentures of Rs.30 each, in a leading fertilizer company. Since the market price of the debentures was less than the cost price of the same (market price was Rs. 28/- as at 31.3.1990), the company had the following two options before it for valuation of the debentures as at 31.3.1990.

(i) Valuation at competitive rate offered by the share broker as on 31.3.1990 which was Rs. 28.32 (net of brokerage) per debenture.

(ii) Valuation at market price (the rate quoted at the Bombay Stock Exchange as at 31.3.1990) which was Rs. 28/- per debenture.

3.The company had desired to value the debentures at the rate offered by the share broker because it was at this rate that the entire lot of debentures was sold in April, 1990. (The accounts of the company were finalised in July, 1990). However, the statutory auditors of the company objected to this mode of valuation and suggested that the debentures be valued at the market price (i.e., rate quoted by the Bombay Stock Exchange) because that being lower than the price offered by the share broker and cost price of the debentures. The company accepted the suggestion of the auditors and valued the debentures at the market price Rs. 28/- per debenture.

4.The C & AG, in the course of audit of accounts of the company had pointed out that from the market price of the debentures adopted by the company, the brokerage payable on sale of the debentures should be deducted to arrive at the net realisable value of the debentures, in accordance with paragraph 5-12 of the “Statement on Auditing Practices”, issued by the Institute of Chartered Accountants of India, which states inter alia: -

“The net realisable value is the estimated selling price in the ordinary course of business less cost of completion and cost necessarily to be incurred in order to make the sale”.

5. In the above context, the querist has sought the opinion of Expert Advisory Committee on the following issues:

(i) Whether the C & AG was correct in pointing out that brokerage should be deducted from the market price at which the debentures had been valued?

(ii) Whether the original stand of the company that the debentures be valued at the price offered by the broker as at 31.3.1990 and at which the entire lot of debentures was sold in April, 1990, was correct?

(iii) Whether the brokerage deducted by the broker should be worked out and shown separately in the profit and loss account as required by clause 3 (d) of Part-II of Schedule VI to the Companies Act, 1956.

                                                   Opinion                                                             April 11, 1991

1.The Committee notes from the facts of the query that the basis of valuation adopted by the company is ‘Cost or Market value’, whichever is lower.

2.The Committee notes the definition of ‘market value’ as given in IAS 25 on ‘Accounting for Investments’, issued by the International Accounting Standards Committee, which is reproduced below:

                        “Market value is the amount obtainable form the sale of an investment in an active market”.

3.The Committee notes that in the present case the share brokers merely offer to purchase the shares at a specified price. The Committee is, therefore, of the view that the quotation on a recognised stock exchange is the indicator of the price which can be realised on the sale of securities. In the present case, debentures should be valued at Rs. 28/- being the price quoted at the Bombay stock exchange as on 31.3.1990.

4.The Committee is of the view that the brokerage referred to in clause 3(d) of Part II of Schedule VI to the Committee Act, 1956 refers to the brokerage paid to a party other than the party to whom goods are sold. The Committee is of the view that in the present case the brokerage is paid to the brokers who buy the securities from the company. This brokerage, therefore, should be adjusted in the selling price of the securities.

5.The Committee is accordingly of the following opinion in respect of the issues raised in para 5 of the query:

(i) The company should have valued the debentures at Rs. 28.00, i.e., the price quoted on the stock exchange as on 31.3.1990. The brokerage should not be deducted from the market price at which the debentures are valued.

(ii) No.

(iii) The brokerage deducted by the brokers should not be shown separately in the profit and loss account.

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