CA Intermediate · Advanced Accounting

AS 13 Accounting for Investments: formula sheet

Full chapter guide

Key formulas

Definition of investment: Investment = asset held for income (dividends, interest, rentals), capital appreciation or other benefits; The purpose of holding decides the classification. Stock-in-trade is not an investment.
Current investment: Readily realisable AND intended to be held for not more than 1 year from acquisition; Both conditions must be met. Intention at the time of acquisition matters.
Long-term investment: Long-term investment = investment other than a current investment; It is a residual definition. Anything not current is long-term.
Investment property: Investment in land or buildings not intended to be occupied substantially for use by, or in the operations of, the investing enterprise; It is treated as an investment under AS 13.
Fair value: Amount exchanged between knowledgeable, willing parties in an arm's length deal; Learn the wording separately from market value.
Market value: Amount obtainable from sale in an open market, net of disposal expenses; Expenses necessarily incurred on disposal are deducted.
Items outside AS 13: Interest, dividend and rental recognition (AS 9); leases (AS 19); retirement benefit plan investments; life insurance enterprises; mutual funds, venture capital funds, banks and public financial institutions under Central or State Act; Learn this list as the exclusions. The listed entities are outside AS 13.
Current investments: Carrying amount = Lower of (Cost, Fair value); Compare scrip by scrip unless told otherwise. Any reduction goes to the Statement of Profit and Loss.
Long-term investments: Carrying amount = Cost − Provision for diminution other than temporary; Do not reduce for a temporary fall. Never write up above cost.
Write-down loss: Loss = Carrying amount before − Revised carrying amount; Charged to profit and loss. Disclose it separately.
Write-back limit: Reversed amount ≤ amount earlier written down; The reversal is made only when the reason for the reduction no longer exists.
Investment property: Carrying amount = Cost − Diminution other than temporary; Treated as a long-term investment under AS 13.
Bonus shares received: Bonus shares = Shares held × Bonus ratio; For 1:5 bonus, divide shares held by 5. Cost of bonus shares = nil.
Rights shares entitlement: Rights entitlement = Shares held (after any earlier bonus) × Rights ratio; Use the holding on the record date. Include bonus shares if they were allotted earlier.
Cost of rights shares: Cost = Number of rights shares subscribed × Issue price (plus brokerage or other direct charges); Added to total cost of the investment.
Sale of rights: Profit on renunciation = Sale proceeds of rights (less any expenses); Credited to Statement of Profit and Loss. Cost of original shares is unchanged.
Average cost per share: Average cost = Total cost ÷ Total number of shares held; Recompute after every bonus or rights subscription. Use it to cost shares sold.
Accrued interest: Accrued interest = Nominal value × Interest rate × Months since last interest date ÷ 12; Use days ÷ 365 if the question gives exact dates.
Cost of debenture, cum-interest: Cost = Total price paid − Accrued interest; Add brokerage to cost. Accrued interest is debited to Interest account.
Cost of debenture, ex-interest: Cost = Price paid (excluding interest); Accrued interest paid separately is debited to Interest account.
Profit or loss on sale: Profit or (loss) = Sale price excluding accrued interest − Carrying cost of units sold; If the sale is cum-interest, first remove the accrued interest from the sale price.
Gain or loss on disposal: Profit or (Loss) = Net sale proceeds − Carrying amount of investments sold; Net sale proceeds = sale price less brokerage and other costs of sale. Credit or debit the Statement of Profit and Loss.
Carrying amount of part sold: Carrying amount sold = (Total carrying amount ÷ Total units held) × Units sold; Use average cost for the holding unless the question tells you to use another basis. Cum-rights and bonus adjustments come first.
Transfer from long-term to current: Transfer value = Lower of (Cost, Carrying amount) on the date of transfer; Any resulting write-down is charged to the Statement of Profit and Loss.
Transfer from current to long-term: Transfer value = Lower of (Cost, Fair value) on the date of transfer; Different basis from long-term to current. Any write-down on transfer is charged to the Statement of Profit and Loss.
Disclosure rule on ownership: Investments in another's name: account for them if you own them and disclose the details; Substance (who owns and gets benefits) decides, not the name on the certificate.

Quick revision

An investment is an asset held to earn income, for capital appreciation or other benefits.
A current investment is readily realisable and intended to be held for not more than one year from the date of acquisition.
A long-term investment is any investment that is not a current investment.
Cost includes the purchase price plus brokerage, fees and duties.
Current investments are carried at the lower of cost and fair value. The comparison is made on an individual investment basis or by category (such as equity shares, preference shares, debentures), but not on a total-portfolio basis.
Long-term investments are carried at cost, and reduced only for a decline that is other than temporary.
Bonus shares are received at no cost, so total cost stays the same while the number of units rises.
When rights shares are exercised, the amount paid is added to the cost of the investment. When the rights are sold or renounced, the profit or loss is recognised in the statement of profit and loss.
On a cum-interest purchase, interest accrued up to purchase is not part of cost; only the balance is.
Profit or loss on sale is sale proceeds net of expenses less carrying amount.
Transfers between categories are made at the date of transfer. Current to long-term: at the lower of cost and fair value. Long-term to current: at the lower of cost and carrying amount.
Disclose accounting policies, and the amounts of income and the investments by category.

Common mistakes

Treating shares held by a share dealer as AS 13 investments. Fix: Check the purpose. Shares held for sale in the ordinary course are stock-in-trade.
Classifying by the type of instrument, such as calling all equity shares long-term. Fix: Classify by intention and ready realisability. Equity shares can be current.
Writing down a long-term investment for any market fall Fix: Check the word temporary. Reduce only for a fall other than temporary.
Offsetting a gain in one current investment against a loss in another Fix: Compare each scrip separately unless the question says to use category or total.
Adding a value to cost for bonus shares. Fix: Bonus shares are free. Add the number of shares with nil amount and recompute average cost.
Deducting the sale proceeds of rights from the cost of the original shares. Fix: Credit the proceeds to the Statement of Profit and Loss as profit on renunciation, unless the question directs otherwise.
Taking sale price instead of net sale proceeds when finding profit. Fix: Underline expenses in the question and always subtract them before comparing with carrying amount.
Including accrued interest in the gain on sale. Fix: Split the receipt: interest for the period goes to Interest Income, only the balance is sale proceeds.

Exam tips

Memorise the exclusions as a short list. Scope questions often ask 'what is not covered'.
Quote the definition in your answer, then apply it to the facts. Markers look for both.
For classification cases, state both conditions of a current investment: readily realisable and held for one year or less from acquisition.
Learn the exact wording of fair value and market value. MCQs test the difference, including disposal expenses.
Check who the holder is. A share dealer, a mutual fund or an insurer changes the answer.
Read the first line of a question for words like held for sale soon or long term. Classification drives the whole answer.
If the question gives no method for current investments, compare scrip by scrip and say so.
Always show the loss separately. Step marks are given for the working of each investment.