Expert Advisory Committee
ICAI-Expert Advisory Committee
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1.15  Query:   

Valuation of investments of banks on the reporting date, i.e., 31st March.

 

1. The querist has stated that the Reserve Bank of India, vide Circular No. BPBC 44/21.04.048/95 dated April 15,1995, directed all public sector banks regarding the method to be adopted for valuation of current investments. As per clause 3 of the annexure to the said Circular for valuation of current investments, banks were directed that Government securities and PSU Bonds under current category were not being actively traded and as such market quotations for valuing the same were not available. Therefore, the valuation of Government securities in the current category should be done as per market quotation on 31st March, 1995, wherever available. Where market quotations were not available, valuation of Government securities should be made by applying YTM method of valuation. As per CRISIL-IDBI publication “Bond Yield Tables” on page 9, Market Price has been defined as, “the amount the buyer pays when he purchases the bond from the market. It includes accrued interest, i.e., interest from the date of the last interest payment to the date of purchase of the bonds”.

 

2. The querist has also stated that the National Stock Exchange, vide their Circular No. NSE/WDM/5018 dated 28th April, 1995, informed all the participants: “To enable you to value the securities as on 31st March, 1995, we are glad to furnish the market rate of all the securities traded on the NSE as of 31st March, 1995”. NSE, in its above Circular, provided an annexure which has the following columns:

 

Sec. type

 

1

Security

 

2

Issue Name

 

3

Last Trd. Dt.

 

4

Trade Value

(Rs. lacs)

5

Price

(Rs.)

6

 

3. The querist has informed that the interest accrued from the date of trading till the reporting date, i.e., 31st March, 1995, was recognised as income as “Interest accrued but not due” and the rate of NSE as of 31st March, 1995, also included the interest from the date of purchase till the reporting date of that year. Hence, the interest for the broken period was being accounted for twice by the banks.

 

4. The querist has further informed that he had sought clarification from the Department of Banking Operations & Development, RBI, on the above issue who replied: “Please refer your letter dated 29th June, 1995, on the above subject. We advise that our instructions on the valuation of investments have been finalised in consultation with IBA/ICAI and some of the banks have already finalised their accounts taking into our aforesaid instructions. If you have any suggestions, you should take up the matter with ICAI and the same could be considered while finalising the valuation of investments for the next financial year.”

 

5. The querist has sought the opinion of the Expert Advisory Committee on the following issues:

 

(i) When market price of the Government Security is calculated on YTM method and the market price so arrived is say “X” then interest for the period of last due date till the valuation date which has already been taken into the income should be reduced from “X” to arrive at the correct market price on the date of valuation or not.

 

(ii) Is it proper and correct to consider the NSE traded rate of Government Securities as of 31st March, 1995, for valuation when the Securities were traded any time during the year say July/Aug./Sept./Oct./Nov./ Dec./Jan. etc., without reducing the interest element from the traded rate for the period of last trading date till 31st March?

 

(iii) Is it proper to value such securities by applying YTM method where, as per NSE quotations, rates are available as of 31st March, or the lower of the YTM method or NSE quotations less interest element thereon, whichever is lower, is to be adopted keeping in view the principle of prudence and conservative accounting policy?

 

                                                                    Opinion                                     September 24, 1996

 

1. The Committee is of the view that the current investments should be valued at the lower of cost and market value. The Committee notes that the Reserve Bank of India has issued Circular No. BPBC 44/21.04.048/95 dated April 15, 1995, which gives directions for valuation of investments, including determination of market price. In respect of the latter, “valuation of government securities in the current category should be done as per market quotations on 31st March, 1995, wherever available. Where market quotations are not available, valuation of government securities should be made on Yield-to-Maturity (YTM) basis.”

 

2. The Committee is of the view that it would be appropriate to determine market value of the government securities in the current category on the basis of the market quotations on the valuation date, i.e., 31st March, in case the market quotation of the security concerned is available as on that date or around that date. Conceptually, such market value would be representative value of the security in case such securities are actively traded. In case the market quotation of the security concerned is not available as on 31st March or around that date, then YTM method has to be used as per the instructions of the RBI.

 

3. The market value of the security worked out as per the YTM method represents the value of the security arrived at on the basis of the rate notified by the RBI of the expected yield from the valuation date till the date of maturity of the security. No adjustment regarding the rate of interest accrued from the due date till the valuation date is, therefore, necessary to determine the market value of the security.

 

4.  On the basis of the above, the opinion of the Committee on the issues raised by the querist in para 5 of the query is as below:

 

(i) No adjustment in the market value of the security arrived at on the basis of YTM method should be made in respect of the interest for the period from the last due date till the valuation date.

 

(ii)  For the purpose of determination of market value of government securities, market quotation prevailing as on or around 31st March should be taken; where market quotation on or around this date is not available, YTM method should be used. The determination of market value of such securities on the basis of quotations prevailing on dates other than March 31 or around that date would not be proper.

 

(iii) As per the RBI Circular, the market value of government securities of the current category is to be determined on the basis of the market quotation as on 31st March or around that date, wherever available. However, wherever the market quotation on that date is not available, YTM method should be used.

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