Expert Advisory Committee
ICAI-Expert Advisory Committee
Options:

Query No. 16

 

Subject:     

Accounting for incentive received in respect of purchase of investments.[1]

A. Facts of the Case

 

1. A not-for-profit company is engaged in promoting trade through organising/participating in fairs/exhibitions in India and abroad.  According to the querist, investment of surplus funds is done in accordance with the guidelines of the Department of Public Enterprises, Ministry of Industry, either in term deposits with approved banks or in the schemes of Unit Trust of India (UTI) etc.

 

2. During the year 1997-98, the company purchased 49,28,730 units of US-64 of UTI at the rate of Rs. 14 per unit amounting to Rs.690.02 lakh.  Subsequently, the Unit Trust of India paid Rs.10.35 lakh as incentive to the company for direct purchase of units from it.  The cost of the units was arrived at after deducting the above incentive from the gross investment value.  According to the querist, the accounting policy of the company on this issue stipulates that long term investments are to be stated at cost or market value whichever is lower.  Since the cost of the investment at the close of the year on 31.3.98 was lower than its market value, the investment cost of Rs.679.67 lakh (Rs.690.02 lakh less Rs.10.35 lakh) was reflected in annual accounts.

 

3.  According to the querist, while auditing the accounts of the company for the year 1997-98, the government auditors opined that the incentive of Rs.10.35 lakh received from the Unit Trust of India should have been shown as ‘income’ in the income and expenditure account of the company instead of being deducted from the cost of the investment.

 

4. As per the querist, the company’s contention is that as per Accounting Standard (AS) 13, ‘Accounting for Investments’, issued by the Institute of Chartered Accountants of India, the cost of an investment should include acquisition charges such as brokerage, fee and duties.  According to the querist, this implies that the amount received by the investor on account of incentive or such other related receipts should be deducted from the investment amount to arrive at the cost of an investment.  Therefore, deduction of the amount of Rs.10.35 lakh received as incentive for purchase of units directly from UTI from the cost of the investment is appropriate.

 

B. Query

 

5. The opinion of the Expert Advisory Committee has been sought by the querist as to whether the incentive received from the UTI should be reflected in the annual accounts as a deduction from the cost of the investment or whether it should be shown as an ‘income’ in the income and expenditure account.

 

C. Points Considered by the Committee

 

6. The Committee notes paragraph 32 of AS 13 which states as below:

 

“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.”

 

Though the querist has not sought the opinion of the Committee on the appropriateness of its accounting policy relating to long-term investments, the Committee observes that the same is not in accordance with AS 13.

 

7. The Committee notes that paragraph 9 of AS 13, ‘Accounting for Investments’, states the following:

 

“9. The cost of an investment includes acquisition charges such as brokerage, fees and duties.”

 

The Committee notes that the above paragraph does not specifically deal with the treatment of incentives received or receivable by an investor in connection with an investment made by him.

 

8. The Committee is of the view that the incentive received by the company is clearly attributable to the purchase of units and, therefore, it is of the nature of a rebate for direct purchase.  The general principle of accounting for such a rebate is to deduct it in arriving at the cost of the asset concerned.  For example, rebates relating to inventories and fixed assets are deducted in arriving at their cost (paragraph 6.3 of AS 2, ‘Valuation of Inventories’ as originally issued in June, 1981, and paragraph 9.1 of AS 10, ‘Accounting for Fixed Assets’).  On this basis, the Committee is of the view that the incentive should be adjusted in arriving at the cost of the investment rather than being treated as an income.

 

D. Opinion

 

9. On the basis of the above, the Committee is of the opinion that the incentive received from UTI should be deducted in arriving at the cost of the investment.

 

_________

[1] Opinion finalised by the Committee on 28.5.1999.