One of our readers has raised a query and would like to know about the all possible options/ treatments available for the Investments in Equity. He has raised the below queries-
1. At present all Investment are being classified between long term and current and are being recognized at cost (subject to some permanent diminution and in case current investment lower of fair value or cost) , hence what are the options available to value Equity Investments under Ind-As?
2. What are the differences in treatments of such Equity Investments in case separate financial statement and consolidated FS?
3. Is there any exception to fair value of Equity?
After the applicability of Ind-As in India the situation specific to the treatment of Equity Investments will be different and it will eventually change the whole dynamics of its effect in PL and at the same time, Auditors need to ensure all such options (which will talk about later part of this article) while auditing under Ind-As regime and Management of the Entity should evaluate all such options commensurate to the objective of the business.
Let’s have a look at one by one the responses on the queries raised above –
1. Response on First bullet point – Comparing to the present accounting treatment to value Equity Investments in a financial statement which is at cost, now all Equity Investments are to be FAIR Valued with some exceptions. Refer the below reference from standards-
Ind-As 109 – Financial Instruments
Para -2.1– This Standard shall be applied by all entities to all types of financial instruments except:
(a) those interests in subsidiaries, associates and joint ventures that are accounted for in accordance with Ind AS110 Consolidated Financial Statements, Ind AS 27 Separate Financial Statements orInd AS 28 Investments in Associates and Joint Ventures. However, in some cases, Ind AS110, Ind AS 27 or Ind AS 28 require or permit an entity to account for an interest in a subsidiary, associate or joint venture in accordance with some or all of the requirements of this Standard ………….”
Para 5.2.1 – After initial recognition, an entity shall measure a financial asset in accordance with paragraphs 4.1.1–4.1.5 at:
(a) amortised cost;
(b) fair value through other comprehensive income; or
(c) fair value through profit or loss
Ind-As 27 – Separate Financial Statements
Para -10 –“When an entity prepares separate financial statements, it shall account for investments in subsidiaries, joint ventures and associates either:
(a) at cost, or
(b) in accordance with Ind AS 109.
The entity shall apply the same accounting for each category of investments……….”
Ind-As 28 – Investment in associates & Joint Venture
Para -16 -“An entity with joint control of, or significant influence over, an investee shall account for its investment in an associate or a joint venture using the equity method……….”
For the easy reference please refer below the overall requirement to value these equity investments-
|Nature of Equity Investment||Separate FS||Consolidated|
|Subsidiary||At Cost or Ind-As 109||Full consol|
|Associates||At Cost or Ind-As 109||Equity accounting||Note -1|
|Joint Venture||At Cost or Ind-As 109||Equity accounting||Note -1|
|Equity Investment||Fair Value||Fair Value||Note -2|
|(other than above)|
|Associates/ JV can be shown at cost or as per Ind-As 109 which defines|
|categories i.e. FVTOCI, FVTPL etc.|
|Equity investment (Both Quoted & Unquoted) will always be Fair valued either through PL or OCI with an exception as per para BC 5.2.3|
2. Response on second bullet point- As one can see the options available to value Equity Investments by an Entity. In Separate Financial Statement, it is very clear that all Equity Investments (both quoted and Unquoted) which are other than JV/Associate/ Subsidiary will be valued at its FAIR VALUE. Fair value has been defined under Ind-As 113 – “Fair Value Measurements” and generally it will be quoted prices of that equity investment which are quoted or fair value as calculated using valuation techniques in case Unquoted equity investments. Under the separate financial statement (applicable to CFS also) an entity can designate its Equity investment (other than JV/Associate/ Subsidiary) fair value through Other Comprehensive Income (instead of PL) which is irrevocable once elected at inception based on the management intention to keep that investment not for trading to earn short term profits.
But under Consolidated Financial Statement the situation will remain same for equity investments other than JV/Associate/ Subsidiary and to be measured at FAIR VALUE only. However JV/ Associates will be valued at Equity accounted balances and subsidiary will be consolidated.
One interesting thing to note here is that, as per IFRS version of standards which allows equity accounting balances for separate financial statements but Indian version of IFRS i.e. Ind-As has CARVED OUT this and does not allow equity accounting for separate financial and only applicable in case of CFS.
3. Response on third bullet point – Many reader has asked about if there are any exceptions to the fair value of equity investment (other than associate/ JV/ Subsidiary) , which can be referred as below-
Ind-As 109 – Financial Instruments
Para -B5.2.3– All investments in equity instruments and contracts on those instruments must be measured at fair value. However, in limited circumstances, cost may be an appropriate estimate of fair value. That may be the case if insufficient more recent information is available to measure fair value, or if there is a wide range of possible fair value measurements and cost represents the best estimate of fair value within that range
Para B.5.2.4– Indicators that cost might not be representative of fair value include:
(a) a significant change in the performance of the investee compared with
budgets, plans or milestones.(b) changes in expectation that the investee’s technical product milestones will be achieved.(c) a significant change in the market for the investee’s equity or its products or potential products. (d) a significant change in the global economy or the economic environment in which the investee operates. (e) a significant change in the performance of comparable entities, or in the valuations implied by the overall market. (f) internal matters of the investee such as fraud, commercial disputes, litigation, changes in management or strategy. (g) evidence from external transactions in the investee’s equity, either by the investee (such as a fresh issue of equity), or by transfers of equity instruments between third parties.
Hence the above indicators should be properly documented where fair value of Equity Investments are not being calculated and cost has been used by using this para.
Risk areas and pointers for Auditors-
1. There might be a risk to continue an Investment at cost being classified as associate which has not been evaluated properly under the new accounting standards (i.e Ind-As) where it might downfall to Normal Equity Investment and FAIR VALUE will be required.. This could be kind of objective to avoid fair valuation of such investment to keep them under associate/ JV or Subsidiary where cost value can be used in financial statements…
2. By using the exception to use cost as its FAIR VALUE will be used widely to avoid fair valuation exercise, and hence substantive documentation would be required in order to use this exception,
3. Unquoted Equity investment valuation will require more evaluation as the entities might not follow proper valuation techniques as per Ind-As 113,
4. Many Unquoted Investment might not have any value at all when fair valuation techniques will be used whereas it was shown with some significant amounts under Old accounting,
5. Designation of an Equity Investment at fair value through OCI should be documented properly and link it with the objective of the entity and should not be used merely to avoid an effect on PL,
One has to look into all related facts and patterns before concluding this type of assessment based on this concept. Readers are requested not to take this article as any kind of advice (it is not exhaustive in nature) and should evaluate all relevant factors of each individual cases separately.
(Author of this article is an experienced chartered accountant who has specialization on various GAAP conversions assignments covering different industries around different part of the world including acting as an Independent IFRS Advisor & Corporate Trainer. He can be reached via email at firstname.lastname@example.org or Whatsapp +91-9634706933)