In the previous article of this series, we discussed about current liabilities and working capital. In this article, we shall conclude our discussion about the components that make up a balance sheet by taking up the topic of 'investments' and the different types of investments found in companies' balance sheets.
As defined in Accounting Standard 13 (AS-13) - "Investments are assets held by an enterprise for earning income by way of dividends, interest, and rentals, for capital appreciation, or for other benefits to the investing enterprise. Assets held as stock-in-trade are not 'investments'."
Some of the investments found in companies' balance sheets include stocks, bonds, mutual funds and investments made towards their subsidiaries or associate companies.
Broadly investments can be categorised into four categories. They are as follows:
*Current and long-term investments
*Quoted and unquoted investments
Current and long-term investments:
On a broader basis, investments are classified as long-term and short terms investments. Current investments are investments that are not intended to be held on for more than a year from the date of purchase. An example of the same would be an investment in a liquid fund. On the other hand, AS-13 states that an investment other than a current investment is termed as a long term investment.
In the financial statements, current investments are valued at the lower of cost and fair value. However, in the case of long term assets, it should be valued at cost. However, it is mandatory for companies to make a provision for diminution in value if there is a decline in the value of the investment. AS-13 has defined fair value as - "Fair value is the amount for which an asset could be exchanged between a knowledgeable, willing buyer and a knowledgeable, willing seller in an arm's length transaction.
Under appropriate circumstances, market value or net realisable value provides an evidence of fair value." Apart from the actual cost of the asset, the cost of an investment also includes acquisition charges such as brokerage, fees and duties.
Further, as values of investments fluctuate from time to time, companies need account for the same in their books (profit and loss account). It is mandatory for companies to report the aggregate amount of quoted and unquoted investments. They should also give the aggregate market value of quoted investments as on the date of reporting.
You may also notice investments termed 'investment property' annual reports of in some companies. This is nothing but an investment in land or buildings which are not intended to be used or occupied by the investee. Such an investment is considered as a long term investment.
Quoted and unquoted investments:
Quoted investments are investments whose value is easily assessable. Investment in the stock of companies which are listed on stock exchanges would be the best example of quoted investments. This is because market prices give these instruments a readily assessable value. Investment in mutual funds would also classify as a quoted investment.
On the other hand, un-quoted investments are investments which do not have a readily available price. Many a time you will find that companies have invested in stocks that are not listed on any stock exchange. For such kind of investments, other means are used to determine fair value.
It may be noted that some companies also report investments as trade and non-trade investments. Also, an investor may get confused as to why certain investments are shown in a company's standalone statement, but are missing from its consolidated balance sheet. The answer lies in the fact that a company's consolidated numbers include those of its subsidiaries and associate companies, the latter companies do not appear separately as investments in the balance sheet.
In the next article, we shall take a look at some of the key ratios associated with the profit and loss account and the balance sheet.
This article is authored by >Equitymaster.com , India’s leading independent equity research initiative Disclaimer: The opinions expressed by Equitymaster are theirs alone and do not reflect the opinions of The Hindu Business Line or any employee thereof. The Hindu Business Line is not responsible for the accuracy of any of the information within the article.