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Query No. 12
Subject:
Disclosure
of investments.1
A. Facts of the
Case
1. A company engaged
in the business
of providing e-commerce solutions/transactions has
acquired another company which was in similar business in order to obtain
synergies. The acquisition brought significant advantages to the company in
terms of customers, data base, reputation, etc.
However, as per
the querist, the
advantages arising out
of the acquisition cannot be
measured in monetary terms.
2. The company
has acquired all the shares of the other company for Rs.200 crore
in a step-up
acquisition which was
paid over two
fiscal years. The value was determined by independent valuation. While
the net asset value of the company acquired was around Rs.50 crore only, Rs.200
crore was shown as investment in the books of the company.
3. According
to the
querist, there is no
permanent diminution in the
value of the investments since the
operations of the company acquired are complimentary in nature.
As this investment
cannot be valued
in monetary terms or
cash flows, management
of the company
is of the opinion
that the synergies
obtained from the
acquisition of the
other company would be utilised over a period of 5 years.
B. Query
4. The querist
has sought the opinion of the Expert Advisory Committee on the issue as to
whether the company can write off its investment in the company acquired over a
period of five years or should the investments be written off at the end of
five years when the synergies obtained would have been fully utilised.
C. Points
considered by the Committee
5. The
Committee notes from the facts of the case that the company has acquired shares
of another company for Rs.200 crore which it intends
to hold for a long period.
Accordingly, the Committee is of the view that the investment
should be classified
as a long-term
investment and the amount
paid for acquisition
of shares, i.e.,
Rs. 200 crore,
should be treated as the cost of
the investment.
6. The
Committee notes that the accounting for investments is governed by Accounting
Standard (AS) 13, ‘Accounting for Investments’, issued by the Institute of
Chartered Accountants of India. Paragraph 32 of the Standard, which deals with
accounting for long-term investments, 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.”
D. Opinion
7. On the basis
of the above, the Committee is of the opinion that the long term investment in
shares should be carried in the financial statements
at
the cost of
Rs. 200 crore.
However, if there
is decline, other
than temporary, in the value of shares, a provision therefor is required
to be made in the year in which such decline occurs.
1Opinion finalised by the Committee on 14.4.2001.
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