Corporate Financial Reporting · NBFCs - Provisioning Norms, Accounting and Reporting

NBFC Accounting for Investments and Valuation Norms

Updated 11 October 2026 · Fact-checked

RBI prudential norms make an NBFC classify each investment as current (readily realisable, held up to one year) or long-term (all others). Current investments are valued at the lower of cost and market value, category-wise. Long-term investments stay at cost, with a provision only for a diminution that is other than temporary. Unquoted shares follow special rules.

Understand Accounting for Investments and Valuation Norms

An NBFC holds investments for two reasons: to earn short-term returns on surplus funds, or to hold them for the long run (group companies, strategic stakes, bonds held to maturity). RBI wants the balance sheet to show these honestly, so it asks the NBFC to classify each investment at the time of purchase and to value each class differently.

Current investment is one that is readily realisable and intended to be held for not more than one year from the date of acquisition. Long-term investment is every investment that is not current. The Board of the NBFC should lay down an investment policy, and the classification should follow it.

The valuation logic follows the classification. A current investment is a trading-type asset, so you check it against market value. The rule is prudent: net depreciation is provided for, net appreciation is ignored. A long-term investment is held for the long run, so day-to-day price swings do not matter. You provide only when the fall in value is other than temporary, and you do it scrip by scrip.

For quoted investments, market value comes from stock exchange quotes. Unquoted investments have no market price, so RBI prescribes proxies. Unquoted equity shares are valued at the lower of cost and break-up value, taken from the latest audited balance sheet. If that balance sheet is not available, or is too old, the investment is provided for in full. Unquoted preference shares are valued at the lower of cost and face value, and units of mutual funds at the repurchase price or NAV.

These are the norms for NBFCs that follow Indian GAAP-based prudential norms. NBFCs that follow Ind AS account for financial assets under Ind AS 109 and Ind AS 113 (fair value). They still have to meet RBI's regulatory floor for impairment. Read your question carefully to see which framework it asks for, and check the exact wording against the latest RBI Master Direction.

Key rules to remember

Current investment: Readily realisable and intended to be held for ≤ 1 year from acquisition; Everything else is a long-term investment. Classify at the time of acquisition.
Valuation of current investments: Carrying amount = lower of cost and market value, category-wise; Categories: equity shares, preference shares, debentures and bonds, government securities, units of mutual funds, others. Provide for net depreciation in a category and ignore net appreciation.
Provision for current investments: Provision for a category = Σ cost − Σ market value (only if positive); Offset gains and losses within a category, never across categories.
Valuation of long-term investments: Cost, less provision for diminution other than temporary (scrip-wise); Follows the accounting standard on investments. A temporary fall needs no provision.
Unquoted equity shares: Value = lower of cost and break-up value; Break-up value = net worth available to equity ÷ number of equity shares, from the latest audited balance sheet. If it is not available, provide in full.
Unquoted preference shares: Value = lower of cost and face value; Applies to unquoted preference shares as per the RBI norms.
Mutual fund units: Value = repurchase price or NAV declared by the fund; Compare it with cost to find any depreciation.
Transfer between categories: Transfer at lower of cost, book value and market value on the date of transfer; Any depreciation on transfer is fully provided for.

How to solve Accounting for Investments and Valuation Norms questions

Use this order for any question on classification, valuation or provisioning of NBFC investments.

1Read the facts and note the holding period and intention for each investment. Classify each one as current or long-term.
2Decide whether each investment is quoted or unquoted. Note the type: equity, preference, debenture, government security or mutual fund units.
3For current investments, group the scrips by category. For each scrip, list cost and market value.
4Total cost and total market value for each category. If market value is lower, the difference is the provision. If it is higher, the provision is nil and the gain is ignored.
5For long-term investments, test each scrip separately. Provide only if the fall is other than temporary, and state your reason.
6For unquoted investments, apply the specific rule: lower of cost and break-up value for equity, lower of cost and face value for preference shares, and NAV for mutual fund units. Check that the balance sheet used is the latest audited one.
7Show the carrying amount, the provision and the balance sheet or disclosure presentation. Give a one-line conclusion.

Quickest way: Category-wise lower-of-cost-or-market table

When to use it: Use it for any numerical question with several current investments and a table of cost and market value.

Draw columns: category, scrip, cost, market value.
Subtotal cost and market value for each category.
For each category, write the provision as cost minus market value if cost is higher, otherwise write nil.
Add the category provisions. Subtract the total from the total cost to get the carrying amount.
For unquoted shares, do a separate line: cost against break-up value, and take the lower.

Common mistakes in Accounting for Investments and Valuation Norms

Valuing each scrip separately and provisioning every loss in a current investment portfolio.
Students carry over the scrip-wise rule from long-term investments.
Fix: For current investments, work category by category and offset gains and losses within a category. Do not offset across categories.
Offsetting a gain in equity shares against a loss in debentures.
It feels like a total portfolio view.
Fix: Categories are separate. Net appreciation in one category cannot reduce a provision needed in another.
Providing for every fall in market price of a long-term investment.
Students apply the current investment rule to all investments.
Fix: Long-term investments are provided for only when the diminution is other than temporary. Say this in the answer.
Writing up an investment to market value when the market value exceeds cost.
Fair value accounting under Ind AS shapes their instincts.
Fix: Under these prudential norms, appreciation is ignored and the investment stays at cost.
Using a break-up value from an old or unaudited balance sheet for unquoted equity.
The audit and date conditions are overlooked.
Fix: Use the latest audited balance sheet. If it is not available, state that the full cost has to be provided for.
Mixing up the Ind AS 109 approach with the RBI prudential approach.
Both appear in the Corporate Financial Reporting paper.
Fix: Read the question for the framework. Write Ind AS 109 fair value classification or the RBI lower-of-cost-or-market rule, not both together.

Worked examples

Example 1

An NBFC holds the following current investments on the balance sheet date. Equity shares: A Ltd cost ₹5,00,000, market value ₹4,60,000; B Ltd cost ₹3,00,000, market value ₹3,40,000. Debentures: C Ltd cost ₹4,00,000, market value ₹3,70,000; D Ltd cost ₹2,00,000, market value ₹2,10,000. Compute the provision required and the carrying amount of the portfolio.

Show the solution

Classify by category: equity shares and debentures are separate categories.
Equity shares: total cost = 5,00,000 + 3,00,000 = ₹8,00,000. Total market value = 4,60,000 + 3,40,000 = ₹8,00,000.
Net depreciation on equity shares = 8,00,000 − 8,00,000 = nil. Provision = nil.
Debentures: total cost = 4,00,000 + 2,00,000 = ₹6,00,000. Total market value = 3,70,000 + 2,10,000 = ₹5,80,000.
Net depreciation on debentures = 6,00,000 − 5,80,000 = ₹20,000. Provision = ₹20,000.
Total provision = 0 + 20,000 = ₹20,000.
Carrying amount = total cost (8,00,000 + 6,00,000 = 14,00,000) − 20,000 = ₹13,80,000.

Answer: Provision required is ₹20,000 (debentures only). The portfolio is carried at ₹13,80,000.

Example 2

An NBFC holds 50,000 unquoted equity shares of Mehta Textiles Ltd, face value ₹10, bought at ₹18 per share. The latest audited balance sheet (within one year) of Mehta Textiles shows a net worth available to equity shareholders of ₹1,20,00,000, with 10,00,000 equity shares outstanding. Find the value at which the investment is carried and the provision needed.

Show the solution

Cost of the investment = 50,000 × ₹18 = ₹9,00,000.
Break-up value per share = ₹1,20,00,000 ÷ 10,00,000 = ₹12.
Break-up value of the holding = 50,000 × ₹12 = ₹6,00,000.
Unquoted equity shares are valued at the lower of cost and break-up value. Lower of 9,00,000 and 6,00,000 = ₹6,00,000.
Provision = 9,00,000 − 6,00,000 = ₹3,00,000.

Answer: The investment is carried at ₹6,00,000 and a provision of ₹3,00,000 is needed. If no latest audited balance sheet were available, the full ₹9,00,000 would have to be provided for.

Exam tips

Start every answer by classifying each investment as current or long-term and give the reason in one line. Marks are often tied to it.
In numerical questions, always group by category and show category totals. Examiners check this step.
Write the rule next to the number: for example, 'net appreciation ignored' or 'diminution other than temporary'. This protects your marks if the arithmetic goes wrong.
For MCQs, check whether the question is about a current or a long-term investment and whether the shares are quoted or unquoted. Most distractors change only these facts.
State which framework you are using, RBI prudential norms or Ind AS 109, before you start the working.

Practice questions from NBFCs - Provisioning Norms, Accounting and Reporting

Accounting for Investments and Valuation Norms in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

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Accounting for Investments and Valuation Norms: frequently asked questions

How does an NBFC classify investments as current or long-term?

An investment that is readily realisable and intended to be held for not more than one year from the date of acquisition is current. All other investments are long-term. The classification is made at the time of acquisition and follows the NBFC's board-approved investment policy.

How are quoted current investments valued under the RBI norms?

They are valued at the lower of cost and market value, category by category. Net depreciation in a category is provided for, while net appreciation is ignored. Market value is taken from stock exchange quotes.

How do you value unquoted equity shares in an NBFC?

Take the lower of cost and break-up value. Break-up value comes from the latest audited balance sheet of the investee company. If that balance sheet is not available, the NBFC provides for the full cost.

When is a provision needed for long-term investments?

Only when the fall in value is other than temporary, and it is assessed scrip by scrip. A temporary fall in market price does not need a provision. The provision is charged to the profit and loss account.