1.33 Query
Valuation and disclosure of investments.
1. A public sector financial corporation is registered under the Companies Act, 1956. On some occasions, it is having idle funds. These are invested in such a manner that they give maximum return and the money is available to the corporation as and when desired. Whenever such funds are idle for a long period, the same are invested in long term avenues which give higher rates of return. Accordingly, the corporation has, during the year, invested some of its funds in public sector bonds, units and corporate deposits. The terms and conditions of each of the investments mentioned above are as below:
(i) Public Sector Bonds
These bonds are issued by other public sector companies like NTPC, REC and these have been purchased from the market. The interest on these bonds is payable on half-yearly basis. The corporation has also paid some amount of premium at the time of purchase. The bond certificate is in the name of corporation. These bonds shall be redeemed for payment in 1993.
(ii) Units
These units have been purchased through banks at the market rate. Dividend on these units shall be payable to the corporation after it is declared by UTI, which is done normally in June. The financial year of the company closes on 31.3.1988. The purchase price of these units is Rs. 13.50 each, whereas the face value is Rs. 10/- each and thus there is a premium of Rs. 3.50 on each unit. However, the market value at present is Rs. 14.00 (approx). These units are not in the name of the corporation.
(iii) Corporate Deposits
The corporation has given corporate deposits to various other public sector companies like SAIL. These deposits carry different rates of interest for different periods and can be encashed at 24 hours notice. The receiving company is giving a letter confirming the receipt. There is no other document with the corporation in support of the deposit.
2. Keeping the above facts in view, the querist has sought the opinion of the Expert Advisory Committee on the following:
(a) How and under which schedule the above investments viz, public sector bonds, units and corporate deposits are to be shown?
(b) Whether there will be a change in the presentation as stated in (a) above in respect of the corporate deposits as these are on different rates of interest for different periods?
(c) If the above investments are to be shown under ‘Investments’, Schedule VI to the Companies Act 1956 requires to show whether these are at cost and are quoted/unquoted. Since public sector bonds and units are quoted, it may be advised which quotation list should be referred for the quoted price, i.e., whether quotation list of Delhi Stock Exchange should be used or quotation list of Bombay Stock Exchange should be used and so on.
(d) Whether the premium paid on public sector bonds can be treated as deferred revenue expenditure and written off over the period of its remaining life, in case the corporation decides to keep them till the maturity and, if so, what basis should be adopted. Further what shall be the position in case the corporation encashes these bonds before maturity.
(e) Whether the premium paid on units has to be shown as a part of the investment cost or as deferred revenue expenditure till these are held by the corporation. Since there is no date of maturity in case of units, what basis should be adopted if the premium is to be considered as deferred revenue expenditure and whether it will be advisable to do so.
(f) Whether any provision for expected dividend can be made in the accounts and if so, the basis thereof.
(g) Is any disclosure required for the difference between purchase price of units and the market value which at present is Rs. (+) 0.50 per unit.
(h) It may also be opined whether interest accrued but not due on the above investments is to be shown under other current assets or under any other schedule of the balance sheet.
(i) Whether any note to accounts or in accounting policies is required to be given for any of the above stated transactions.
Opinion November 15, 1988
1. The opinion of the Committee on various issues raised by the querist in para 2 of the query, is as below:
(a) Part I of Schedule VI to the Companies Act 1956, requires investments to be shown under the separate head “Investments” as below:
“Showing nature of investments and mode of valuation for example, cost or market value and distinguishing between –
* (1) Investments in Government or Trust Securities.
* (2) Investments in shares, debentures or bonds showing separately shares fully paid-up and partly paid-up and also distinguishing the different classes of shares and showing also in similar details investments in shares, debentures or bonds of subsidiary companies.
(3) Immovable properties.
(4) Investments in the capital of partnership firms.
* Aggregate amount of company’s quoted investments and also the market value thereof shall be shown.
Aggregate amount of company’s unquoted investments shall also be shown.”
On the basis of the above, the Committee is of the opinion that Units should be shown in category (1) as Trust Securities, and public sector bonds should be shown in category (2). Corporate deposits should also be shown in category (2) separately since the objective thereof is to invest idle funds of the corporation.
(b) There should be no change in presentation as stated in (a) above in respect of public deposits.
(c) The Committee is of the opinion that for the purpose of ascertainment of market value of quoted investments, the quotation list of a stock exchange where the corporation normally deals in, may be taken.
(d) The Committee notes that para 15 of International Accounting Standard 25 (IAS 25) on ‘Accounting for Investments’, states as below:
The difference between the acquisition cost and redemption value of an investment in debt securities (the discount or premium on acquisition) is usually amortised by the investor over the period from acquisition to its maturity so that a constant yield is earned on the investment. The amortised discount or premium is credited or charged to income as though it were interest and added to or substracted from the carrying amount of the security. The resulting carrying amount is regarded as cost.”
On the basis of the above, the Committee is of the opinion that premium paid on purchase of public sector bonds can be treated as deferred revenue expenditure in case the redemption value thereof is lower than its acquisition cost inclusive of premium, and amortised over the period of its remaining life, i.e., up to maturity. In case, the corporation encashes these bonds before maturity, the unamortised amount of the premium should be charged to the profit and loss account of the relevant year. In case an element of interest is included in the premium, it should be deducted from the cost of the investment.
(e) Since units are not debt securities, the premium payable on purchase thereof should not be deferred but included as the cost of investment.
(f) Provision for expected dividend on units will amount to recognition of anticipated gains which is contrary to prudence concept of accounting and therefore should not be made.
(g) Part I of Schedule VI to the Companies Act, 1956, does not require disclosure of the difference between price of an investment and its market value. It is, therefore, not necessary to disclose the said difference in respect of the units. However, market values of quoted investments is to be disclosed.
(h) The Committee notes that Part I of Schedule VI to the Companies Act, 1956, requires disclosure of ‘Interest accrued on Investments’, under the head “Current Assets”. It does not distinguish between ‘interest accrued and due’ and ‘interest accrued but not due’. In view of this, the Committee is of the opinion that ‘Interest accrued but not due on Investments’ should be disclosed as ‘Interest accrued on Investments’ under the head ‘Current Assets’.
(i) As long as disclosures are made in accordance with the requirements of Schedule VI to the Companies Act, 1956, no further disclosures are statutorily necessary. However, in case a company is preparing a separate statement on accounting policies, the policies regarding valuation of investments, amortization of premium on debt securities and disclosure of corporate deposits as investments, should be disclosed.
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