1.3 Query:           

Valuation of investments in securities.

1. A public sector company holds a large portfolio of investments in securities which are largely in the nature of public sector tax free bonds. The company’s accounting policy on valuation of such investments is as follows:

“Unquoted investments are valued at cost. Quoted are valued at cost or market value whichever is lower.”

2. The querist has informed that as on 31^st March, 1994, all the public sector bonds were reflected into the category of “Unquoted” under the following two sub-groups: -

            (a)        Listed but no quotation reported.

            (b)        Others.

During the current financial year, with the opening of “National Stock Exchange” and “Over the Counter Exchange of India”, some of the securities have started getting listed as well as quoted. According to the querist, this has raised a question as to what should be appropriate method of valuation of investment in securities which are now quoted at these exchanges. The querist informed that, considering the prevailing interest rates and cost of financing, such securities are presently traded at lower than the face value.

3. According to the querist, all the securities (units of UTI, mutual funds securities, public sector bonds etc.) were purchased as there were surplus funds and investment decisions were taken on the basis of economic considerations including tax benefits available on securities. In the past, some of the securities were sold to meet the loan repayment liabilities. The querist has also informed that, at present, there is no need to sell these securities at lower than the face value as the company has the capacity to withhold these securities till maturity. According to the querist, considering that the securities will ultimately be realised at face value, a question has been raised as to whether the same could be valued at face value notwithstanding the fact that market value could be lower than face value. If this is so, necessary changes would be required in the accounting policies of the company. The querist has further informed that the company also holds certain tax free bonds, the purchase cost of which is higher than their face value.

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

(i) If the company is in a position to hold the securities and also able to realise full face value on maturity, is it necessary to provide for the notional loss being the difference between the acquisition cost and the quoted price of the security as on 31^st March of each year or will it be sufficient to provide in the books, the difference between the acquisition cost and the face value (Wherever the acquisition cost is higher than the face value)?

(ii) In case the securities are quoted in more than one stock exchange, which quotation should be considered for the purpose of valuation?  It is also possible that a particular security may quote at various rates such as buy, sell, best bid, best offer etc. In such a situation, what should be the rate considered for valuation purpose?

                                                                             Opinion                                      April 4, 1995

1. The Committee notes the definitions of the terms ‘Fair Value’, ‘Current Investment’ and ‘Long Term Investment’ as given in para 3 and also notes paras 31, 32 and 33 of Accounting Standard (AS) 13 on ‘Accounting for Investment’, issued by the Institute of Chartered Accountants of India, as reproduced below:

“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.

A long term investment is an investment other than a current investment.

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.”

“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.

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

2. The Committee is of the view that the premium [i.e., the difference between the acquisition cost and its redemption value] on purchase of securities which are debt securities like public sector bonds etc., where they are in the nature of long term investments, should be amortised over the period of its remaining life, i.e., upto maturity.

3. On the basis of the above, the Committee is of the following opinion in respect of the issues raised by the querist at para 4 of the query:

(i) The company should determine, keeping in view the definitions given in para 1 above, whether the investments are long-term investments or current investments. In case the investments are classified to be of the nature of long-term investments, they should be carried in the financial statements at cost. However, if there is any fall in the value of such investments, other than temporary, the value of the investment should be reduced accordingly. The premium paid on the purchase of debt securities should be accounted for as specified in para 2 above. In case the investments are classified as current investments, they should be carried in the financial statements at lower of cost and fair value.

(ii) For the purpose of ascertainment of the market value of the quoted investments (in case of current investments), the quotation list of a stock exchange where the company normally deals in, may be taken. The selection of the stock exchange at which the company normally deals should be based on certain specified norms (e.g., the volume and value of transactions) to be established by the company and followed on consistent basis. The closing selling rate of the relevant day, may be considered for valuation purposes.

__________________________