1.21  Query:  

Classification of amounts invested in “Commercial Paper” in the balance sheet. 

1. During the year 1990-91, a company invested an amount of Rs. 93.25 lacs in the commercial paper issued by M/s. Hindustan Lever Ltd., which was sponsored by the State Bank of India. This amount was invested for a period of 6 months and was outstanding as on 31.3.1991. As this amount was invested for a short period, while finalising the balance-sheet as at 31.3.1991, it was classified as “Investment in Commercial Paper” under the head “Current Assets”.

2. The CAG, in his comments on the accounts of the company, observed that this amount should have been classified as “Investment” and not as “Current Asset”. The relevant comment of the CAG is reproduced hereunder:

                        “Investments Rs. 1732.63 lakhs:

This does not include Rs. 93.25 lakhs being the investment of surplus funds made by the company in commercial papers of Hindustan Lever Limited sponsored by State Bank of India. The same has been shown under the head current assets resulting in understatement of investments to that extent.”

3. The querist has also stated that the company has also made long term investments in shares and debentures of various other companies and units of Unit Trust of India, which have been shown separately under the heading “Investments” in the balance sheet.

4. The querist has sought the opinion of the Committee as to whether the classification made by the company, in respect of the investment in commercial papers, is correct?

                                                             Opinion                               October 7, 1992

1. The Committee notes para 3 of the Exposure Draft of the proposed Accounting Standard on Accounting for Investments*, issued by the Institute of Chartered Accountants of India, which defines the terms ‘Investments’ and ‘Current Investment’ as follows:

“Investments: Investments are assets held by an enterprise for earning income by way of dividends, interest, royalties and rentals for capital appreciation, or for other benefits to the investing enterprise such as those obtained through trading relationships.

Current Investment:   A current investment that is by its nature readily realisable and is intended to be held for not more than one year.”

The Committee notes that International Accounting Standard (IAS) 25 on ‘Accounting for Investments’, in its para 3 also defines ‘Current investments’ as above.

2. The Committee also notes paras 25 and 26 of the Exposure Draft which read as follows:

“25.      An enterprise should present current investments as current assets and long term investments as investments.

26.       The following investments, whether current or long term, should be shown separately:

                        (a)        Investment in Government and Trust securities.

                        (b)        Trade investments;

                        (c)        Investment in subsidiary companies;

                        (d)        Investment properties;

                        (e)        Investments in the capital of partnership firms.”

The Committee also notes that IAS 25 also requires disclosure of current investments as current assets (para 43).

3. The Committee further notes section 211(1) of the Companies Act, 1956, which provides, inter alia, as follows:

“Every balance sheet of a company shall give a true and fair view of the state of affairs of the company as at the end of the financial year and shall, subject to the provisions of this section, be in the form set out in part I of Schedule VI, or as near thereto as circumstances admit or in such other form as may be approved by the Central Government either generally or in any particular case.”(emphasis supplied)

4. The Committee also notes that as per Part I of Schedule VI to the Companies Act, 1956, under ‘General instructions for preparation of balance sheet’, Note ‘I’ recognises that investments can be disclosed under ‘Current Assets’ as ‘Stock-in-trade’, even though there exists a separate head ‘Investments’. In other words, the law permits disclosure of investments under ‘Current Assets’ in appropriate cases.

5. Accordingly, the Committee is of the view that classification of current investments as a current asset in the balance sheet, as long as investments required to be shown separately by Part I of Schedule VI are shown distinctly, would not be in violation to the legal requirement of true and fair.

6. On the basis of the above, the Committee is of the opinion, in respect of the issue raised by the querist in para 4 of the query, that the classification of investments in commercial paper under the head current assets is proper.

*Published in the December, 1989, issue of ‘The Chartered Accountant’ (page 507). This has been issued, after modifications, as Accounting Standard (AS) 13, which is published in September 1993 issue of ‘The Chartered Accountant’.

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