Investment classification

1. Investment Accounting

2. Meaning
• Investments are assets held for earning income by way of dividends,
interest and rentals, for capital appreciation or for other benefits to
the investing enterprise. Three factors which are considered are :-
- Liquidity : To get it converted to cash whenever required
- Security : Safety of the fund
- Profitability : More profits, i.e., rewards, then risk is higher

3. Classification
•Current Investments
•Long Term Investments
On the basis of
period of holding
•Variable Earnings Securities
•Fixed Earning Securities
On the basis of
nature of
investment

4. Meaning : Current & Long Term Investments
Current Investments : is an investment that is by its nature readily
realizable and is intended to be held for more than one year from the
date of which the investment is made.
Carrying Amount : Lower of cost and fair value
Fair Value: market value or the amount for which an asset could be
exchanged between a willing buyer and willing seller at an arm’s length
transaction.
Long Term Investment : Investments other than current investments
even though they may be readily marketable.

5. Meaning : Long Term Investments (Contd.)
Carrying Amount : carried at cost
If there is a permanent decline in the value of a long term investment,
the carrying amount is reduced. The reduction will be charged to P&L
account. This will be reversed when there is rise in the value of
investment or if the reasons for the reduction no longer exist.

6. Current and Long Term Investments
Current
Investment
Lower of cost or
fair value
Reduction to fair
value and reversal
to be charged to
P&L account
Long Term
Investment
Cost
If permanent
decline, then
reduction to be
charged to P&L

7. Cost of Investment
- Cost of an investment includes acquisition charges such as brokerage,
fees and duties
- If an investment is acquired by issue of other securities then
acquisition cost is fair value of securities of the asset issued
- If an investment is acquired in exchange of another asset, the
acquisition cost is determined with reference to the fair value of the
asset given up.

8. Classification on the basis of income
Fixed Income
bearing scrips
Govt securities,
Debentures
and Bonds
Variable Income
bearing scrips
Equity Shares,
Preference
Shares

9. Bonus & Rights Shares
- Existing Equity shareholders may receive bonus shares for which
shareholders do not make any payment. The investors will record the
receipt of bonus shares on the debit side of investment account.
Where an investment is acquired by bonus shares, no amount is
entered in capital column of investment account since investor need
not pay anything.
- Right shares represent the offer given by the company to the existing
shareholders to subscribe shares at a specific price. They may accept
and pay for shares or they may ignore the same or if possible may
dispose off the offer for a consideration.

10. Bonus & Rights Shares
- Existing Equity shareholders may receive bonus shares for which
shareholders do not make any payment. The investors will record the
receipt of bonus shares on the debit side of investment account.
Where an investment is acquired by bonus shares, no amount is
entered in capital column of investment account since investor need
not pay anything.
- Right shares represent the offer given by the company to the existing
shareholders to subscribe shares at a specific price. They may accept
and pay for shares or they may ignore the same or if possible may
dispose off the offer for a consideration.

11. Disposal of Investments
- On Disposal, the difference between carrying amount and disposal
proceeds, net of expenses is recognized in the P&L statement.
- When a part of holding an investment is disposed, the carrying
amount is required to be allocated to that part on the basis of the
average carrying amount of the total holding of the investment.
- In respect of shares, debentures and other securities held as stock in
trade, the cost may be determined by applying an appropriate cost
formula viz FIFO, average cost, etc.