Accounting for Investments under AS 13 and Ind AS – An Expert Analysis
Executive summary
This article provides an expert-level, practitioner-focused exposition on accounting for investments as addressed under Accounting Standard (AS) 13 ‘Accounting for Investments’ and the corresponding Ind AS framework (principally Ind AS 109 ‘Financial Instruments’). The discussion interweaves fundamental accounting concepts — prudence, matching, materiality, substance over form, going concern and fair presentation — with explicit measurement rules, recognition and derecognition principles, impairment considerations and disclosure requirements. The article incorporates corporate case studies, real-life examples and detailed numerical illustrations to explain operational complexities faced by preparers, auditors and regulators. Target readers are qualified chartered accountants, finance professionals and senior banking officers.
1. Introduction
Investments form a core component of many entities’ balance sheets. They exist across industries — from conglomerates holding strategic stakes to banks maintaining portfolios of government securities. Accounting for investments involves classifying investments correctly, measuring them at appropriate bases, recognizing income that flows from them and disclosing information that aids users of financial statements. In India, the traditional guidance for non-Ind AS companies is AS 13; for entities reporting under Ind AS, the treatment follows Ind AS 109 (and related standards such as Ind AS 32 and Ind AS 107). Although the two frameworks share economic objectives, execution and detail differ materially.
2. Scope and applicability: AS 13 vis-à-vis Ind AS 109
AS 13 applies to investments other than those dealt with specifically by other Accounting Standards (for example, investments accounted for under AS 17 — Segment Reporting — or AS 5 — Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies). The classification under AS 13 is primarily between current investments and long-term investments. Current investments are valued at lower of cost and quoted/fair value, while long-term investments are carried at cost less diminution other than temporary.
Ind AS 109 adopts a classification approach grounded in the business model for managing financial assets and the contractual cash flow characteristics of the assets. Financial assets are measured either at amortised cost, fair value through other comprehensive income (FVOCI) or fair value through profit or loss (FVTPL). Thus, Ind AS 109 is more principles-based and forward-looking compared with AS 13’s more rules-based approach.
3. Fundamental accounting concepts embedded in investment accounting
a) Prudence: Conservatism appears in AS 13’s guidance to write down current investments to fair value and write down long-term investments only where the diminution is other than temporary. Ind AS similarly requires recognition of impairment losses when evidence indicates a loss, but uses expected credit loss (ECL) models for some asset types — a forward-looking principle.
b) Matching: Investment income recognition and classification impact how returns are matched to periods; for example, dividends are recognized in income when the entity’s right to receive payment is established.
c) Substance over form: Control, significant influence or trading intent drive classification in the Ind AS model. For instance, an instrument legally structured as debt may be classified as equity under Ind AS 109 if its substance indicates otherwise.
d) Going concern and other overarching principles: Measurement at cost vs. fair value is influenced by the going concern assumption and the entity’s business model.
4. Classification of investments under AS 13 and Ind AS
AS 13:
– Current investments: investments intended to be realized within 12 months or held for trading — measured at lower of cost and fair value.
– Long-term investments: other investments — generally carried at cost and written down only if permanent in nature.
Ind AS:
– Amortised cost: when business model objective is to hold assets to collect contractual cash flows and those cash flows are solely payments of principal and interest (SPPI).
– FVOCI: assets held both to collect contractual cash flows and to sell; equity instruments may be irrevocably designated at FVOCI.
– FVTPL: assets held for trading or those not meeting the above tests.
5. Measurement principles under AS 13
Cost under AS 13 includes purchase price and directly attributable acquisition costs (brokerage, transfer taxes, etc.). For current investments, fair value is market price of quoted investments (closing market price at balance sheet date) or estimated fair value for unquoted instruments. For long-term investments, cost less provision for diminution other than temporary is the carrying amount.
6. Recognition, valuation and disposal — operational issues
Recognition of purchase and sale requires appropriate cut-off and presentation (profit on sale of long-term investments credited to capital reserve in many cases). AS 13 requires that profit or loss on sale of current investments be recognized in profit and loss. For long-term investments, profit on sale is generally transferred to capital reserve until realized or appropriated.
Under Ind AS, gains and losses on remeasurement depend on classification: FVTPL gains impact profit or loss; FVOCI gains (debt) affect OCI and may recycle to profit/loss on derecognition depending on classification; equity FVOCI gains remain in OCI without recycling.
7. Numerical illustration — classification and measurement (AS 13)
Illustration 1 — Current vs. Long-term under AS 13
Facts:
Company A purchases 10,000 shares of Listed Co X on 1-Jan-20XX for ₹200 per share (transaction cost ₹5,000). On 31-Mar-20XX (balance sheet date), market price is ₹180. Company intends to hold for trading.
Computation:
Cost = (10,000 × ₹200) + ₹5,000 = ₹2,000,000 + ₹5,000 = ₹2,005,000.
Market value = 10,000 × ₹180 = ₹1,800,000.
As current investment: measured at lower of cost and market → ₹1,800,000. Provision/mark-down = ₹205,000 recognized in P&L.
If classified as long-term, no markdown unless diminution other than temporary is evident.
Illustration 2 — Long-term investment permanent diminution assessment
Facts:
Company B holds 100,000 shares of Associate Y acquired for ₹10 per share (₹1,000,000). Quoted price on balance sheet is ₹4 per share (₹400,000). Management assesses whether diminution is temporary.
Considerations:
– Nature of investee’s problems (industry downturn vs. fundamental insolvency).
– Expected recovery and strategic intent.
If judged temporary: disclose but do not write down to market. If judged other than temporary: write down to estimated recoverable amount and charge P&L (or adjust based on company policy under AS 13).
8. Ind AS illustration — business model and measurement
Illustration 3 — Ind AS 109 classification
Facts:
Bank C purchases government bonds for ₹100,000,000 with contractual cash flows comprising principal and interest. The bank’s business model is to hold to collect payments and to meet liquidity; no intent to sell.
Under Ind AS 109:
– SPPI test: satisfied.
– Business model: hold to collect → Measure at amortised cost.
Accounting:
– Initial recognition at fair value plus transaction costs.
– Subsequent measurement at amortised cost using effective interest rate (EIR).
If Bank C had intended to both collect and sell, classification would be FVOCI (debt). If held for trading, FVTPL applies.
9. Impairment — AS 13 vs Ind AS approach
AS 13: For current investments, markdown to market inherently protects against impairment. For long-term investments, AS 13 requires recognition of diminution other than temporary. The standard, however, offers limited guidance on indicators and measurement.
Ind AS 109: For financial assets measured at amortised cost or FVOCI (debt), the expected credit loss (ECL) model applies for impairment — a forward-looking expected loss model. For equity instruments measured at FVOCI, impairment is measured as change in fair value (OCI) and is not reclassified to profit/loss on disposal (if designated FVOCI).
Numerical example — ECL for debt instrument
Facts:
Entity D holds a 3-year corporate bond with nominal ₹1,000,000; expected credit loss calculation yields 12-month ECL in year 1 of ₹8,000.
Accounting:
– Recognize loss allowance of ₹8,000 at initial recognition (if required by model) or as movement in loss allowance depending on initial recognition rules.
– Subsequent movement in ECL is recognized in profit/loss.
10. Corporate case study — Manufacturing conglomerate (Case Study 1)
Background:
A large Indian manufacturing conglomerate (referred to as ‘ConglomCo’) holds investments across equity shares, mutual funds and long-term strategic equity investments in joint ventures. Historically, the conglomerate classified most investments as long-term and carried them at cost, disclosing market values in the notes. After the adoption of Ind AS by its listed subsidiaries, the conglomerate faced significant volatility in reported earnings due to remeasurement under fair value for certain portfolios.
Issues encountered:
– Reclassification of strategic investments in associates: some strategic stakes previously treated as long-term were now within Ind AS scope of equity method (Ind AS 28) leading to recognition of share of profit/loss.
– Equity instruments designated at FVOCI created OCI volatility. Management sought to evaluate whether designation at FVOCI was appropriate or whether FVTPL better reflected the business model.
Lessons and controls:
– Governance over classification decisions is critical. Documenting the business model, periodic review of intent and board approvals for FVOCI irrevocable designation are required.
– Hedge and presentation considerations: conglomerates prefer FVOCI for strategic equity to avoid P&L volatility but must appreciate OCI’s non-recycling characteristics (for equity FVOCI).
11. Corporate case study — Banking sector investments (Case Study 2)
Background:
A national bank (referred to as ‘Bank Z’) maintains a portfolio of government securities (held to maturity), SLR investments, and trading securities. Under AS 13, banks treated investments as current or long-term based on managerial intent and statutory classification. Under Ind AS, banks faced reclassification and differing impairment models.
Key complexities:
– SLR classification: statutory requirements to maintain a portion in government securities influence business model determination. For instance, securities held to meet SLR may be managed differently from those held for trading.
– Day-one gains and losses: Ind AS positions day-one gains to be recognized only when observable market transactions exist, otherwise deferred.
Numerical example — Trading vs. held-to-maturity
Facts:
Bank Z buys treasury bills (T-bills) for ₹50,000,000 for liquidity management. The bank intends to sell as needed and actively trades these instruments.
Under Ind AS:
– These are likely FVTPL due to trading intent → changes in fair value recognized in P&L.
– Interest (if any) using EIR is also recognized.
12. Real-life examples — dividend recognition, bonus shares, rights issues
Dividends:
Under both AS 13 and Ind AS, dividends from equity investments are recognized when right to receive is established — typically on the date of record or declaration depending on jurisdictional law.
Bonus shares and rights issues:
– Bonus shares received by an investor reduce per-share cost, necessitating cost apportionment.
Numerical illustration:
Company E purchased 1,000 shares at ₹100 per share (cost ₹100,000). Bonus issue of 1 for 5 (i.e., 200 bonus shares) is received.
New total shares = 1,200.
Adjusted cost per share = ₹100,000 / 1,200 = ₹83.33 per share.
Rights:
Rights offered at below market price will require accounting treatments including recognition of rights received and valuation of entitlements if exercised or sold.
13. Reclassification rules — operational challenges
Under AS 13, reclassification mainly occurs between current and long-term investments based on management intent and circumstances (e.g., subsequent sale). There is an absence of a strict remeasurement requirement on reclassification dates.
Under Ind AS 109, reclassification depends on changes in business model and is permitted only when entity’s business model changes (rarely expected). On reclassification, measurement bases shift, and carrying amounts are adjusted prospectively with specific rules for remeasurement (forexample, from amortised cost to fair value).
Illustration:
If an entity moves an instrument from amortised cost to FVTPL, carrying amount is remeasured to fair value at reclassification date and subsequent measurement follows FVTPL.
14. Derecognition and disposal — principles
Derecognition under Ind AS 109 follows the principle of transferring substantially all risks and rewards of ownership. For securities sold with continuing involvement (e.g., repo or sale with repurchase), derecognition analysis is required to determine whether to derecognise and whether to recognise a liability.
AS 13’s derecognition is narrower — disposal results in recognition of profit/loss; however, complex transactions may require additional judgement.
15. Presentation and disclosure requirements
AS 13 requires detailed note disclosures, such as:
– Classification between current and long-term;
– Cost and market/fair values;
– Diminution considered temporary or other than temporary.
Ind AS places greater emphasis on:
– Fair value hierarchy (Ind AS 113 — Fair Value Measurement);
– Business model and classification judgement;
– ECL assumptions for impairment;
– Detailed reconciliations of carrying amounts for categories (amortised cost, FVOCI, FVTPL).
16. Numerical case: investment accounting across frameworks
Facts:
Entity F purchases a non-convertible debenture (NCD) on 1-Apr-20XX for ₹1,000,000 with 2-year tenure and 8% annual coupon, paid annually. Transaction cost ₹5,000. Entity’s business model is to hold to collect.
Under AS 13:
– If classified as long-term investment: carry at cost (₹1,005,000) unless permanent diminution.
– Interest recognized on cash basis or accrual basis — IAS/Ind AS prefers EIR; AS practice often uses coupon unless EIR is applied.
Under Ind AS 109:
– Classification: amortised cost (SPPI satisfied and business model hold to collect).
– Initial recognition: ₹1,000,000 + transaction cost ₹5,000 = ₹1,005,000.
– Effective interest rate calculation: solve for EIR that discounts expected cash flows (₹80,000 at year 1, ₹1,080,000 at year 2) to ₹1,005,000. Apply EIR to subsequent carrying amount and recognize interest income accordingly. Impairment under ECL model may require allowance.
17. Practical challenges and audit considerations
a) Judgement in classification: Documenting evidence supporting business model determination and designation of FVOCI for equity instruments is critical. Auditors assess management’s intent and governance approvals.
b) Fair value measurement: Use of Level 3 inputs for unquoted investments requires robust valuation models, independent valuation reports and sensitivity analysis.
c) Impairment: For long-term investments under AS 13, assessing whether diminution is other than temporary is highly subjective and often contentious in audit.
d) Related party investments: Disclosure and valuation can pose conflicts of interest; look-through and impairment considerations intensify.
e) Regulatory overlays: Banks must reconcile statutory liquidity requirements and prudential norms with accounting classifications; this may cause temporary mismatches between regulatory and accounting treatment.
18. Governance, internal controls and policy drafting
Enterprises must adopt clear investment policies covering:
– Classification rules and thresholds;
– Authorisation matrix for purchases and sales;
– Valuation methodology for unquoted instruments;
– Hedge accounting policies (if applicable);
– Documentation for business model decisions and FVOCI designations.
Robust controls include periodic review of intent, independent valuation sign-offs, impairment assessment committees and board-level oversight.
19. Illustrative worked example — consolidation of effects
To demonstrate P&L and OCI volatility under different models, consider a portfolio of ₹10 crore equity investments with 25% fair value decline during the year.
Scenario A (AS 13, long-term holdings carried at cost):
– No P&L impact if decline judged temporary; disclosure only.
Scenario B (Ind AS, equity FVOCI designation):
– Decline measured at fair value → OCI charge of ₹2.5 crore; P&L unaffected. On disposal, no recycling to P&L; cumulative OCI remains in equity.
Scenario C (Ind AS, FVTPL):
– Decline impacts P&L immediately → P&L loss ₹2.5 crore; earnings volatility.
20. Concluding remarks and recommendations
Accounting for investments requires not only technical compliance with AS 13 or Ind AS 109 but also disciplined governance, documented judgments and robust disclosures. Preparers should:
– Establish clear policies aligned with business models and economic reality.
– Ensure valuation methodologies for Level 3 instruments are defensible and independently validated.
– Maintain audit trails for classification decisions and reclassifications.
– Communicate effectively with auditors on impairment judgements and ECL assumptions.
– For banks and regulated entities, reconcile accounting treatment with prudential norms and disclose the reconciliation where material.
Appendix — practical checklist for audit and preparation
1. Confirm legal title and economic exposure for all investments.
2. Document business model and board approvals for FVOCI designations.
3. Obtain market quotations or independent valuations for fair value measurements.
4. Prepare ECL models and assumptions for debt instruments measured at amortised cost or FVOCI.
5. Ensure appropriate cut-off for purchases, sales and income recognition.
6. Review related-party investments for appropriate disclosure and valuation.
7. Reconcile tax and accounting treatments and document temporary timing differences.
References and further reading (select)
– Accounting Standard (AS) 13, ICAI.
– Ind AS 109 Financial Instruments; Ind AS 113 Fair Value Measurement; Ind AS 28 Investments in Associates and Joint Ventures.
– ICAI guidance notes and illustrative financial statements.
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Acknowledgements
The author acknowledges the practical insights from banking sector practice and corporate finance professionals who have highlighted real-world complexities of applying investment accounting standards.
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