ASLB Guidance Note Investments

Guidance Note on
‘Accounting for Investments’ for Local
Bodies

Issued by

The Committee on Public and Government Financial
Management
The Institute of Chartered Accountants of India
New Delhi

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Introduction and Background:

Local Bodies are an important constituent of our Indian Government System which
are responsible for providing basic services to the citizens and development of
infrastructure in the area under their jurisdiction. Keeping in view the role of the local
bodies in development of a country, it is imperative that the financial management in
local bodies be given utmost priority.

Investment decisions are important part of financial management in any entity. Idle
funds should be deployed in such a way that returns are increased while balancing
the liquidity of the entity. Local Bodies in our country also invest as per the
respective applicable statute/ rules/ regulations. From the accounting and financial
reporting perspective, it is crucial that the investments done by any entity should be
accounted for correctly and properly reflected in the financial statements of an entity.
Proper records maintained at the end of the entity also ensure accountability and
transparency in its financial operations.

Since efforts are being made by most of the local bodies in the country to move to
accrual basis of accounting, ICAI has been making an attempt to provide a robust,
updated accrual accounting guidance for them, i.e., Accounting Standards for Local
Bodies (ASLBs) which is at par with the International benchmark, i.e. International
Public Sector Accounting Standards (IPSASs) which provide accounting guidance
for the Government at the International level. ASLBs, that provide accrual- based
accounting guidance for various events and transaction of local bodies, are being
issued on all subjects relevant to local bodies in India. To avoid complexity, in place
of the ASLB corresponding to IPSASs on “Financial Instruments”, this Guidance
Note is being issued which aims to provide accounting guidance to local bodies in
respect of Investments made by them.

The Guidance Note is expected to harmonise the diverse practices that are being
followed in accounting of investments by local bodies.

Usually, large local bodies have investment guidelines in place. In such case, local
body need to follow accounting instructions as per the said statute /policy. In case of
inconsistency, if any, with the applicable statute, the provisions of statute will prevail.

This Guidance Note does not deal with investment decisions taken by the entity as to
when, how and what type of investment is to be made by the entity. This Guidance
Note covers all aspects of investment accounting, i.e., recognition, measurement,
presentation & disclosure. This would lead to true and fair presentation of financial
statements aligned with the need of all stakeholders.

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Guidance Note on ‘Accounting for Investments’ for Local
Bodies

Contents

Page No.
Objective .............................................................................................................................................. 4
Scope ..................................................................................................................................................... 4
Definitions .............................................................................................................................................. 5
Classification of Investments .............................................................................................................. 6
Measurement ........................................................................................................................................ 6
Initial Measurement.......................................................................................................................... 6
Subsequent Measurement .............................................................................................................. 8
Fair Value Measurement ................................................................................................................... 10
Disposal of Investments .................................................................................................................... 11
Reclassification of Investments ........................................................................................................ 11
Guidance in case investments are made from specific funds ..................................................... 12
Presentation & Disclosure in Financial Statements ...................................................................... 12
Appendix .............................................................................................................................................. 14
Implementation Guidance – Maintenance of Investment Register ......................................... 14
Illustrative Format of Investment Register .................................................................................. 15

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 Guidance Note on
‘Accounting for Investments’ for Local Bodies

The following is the text of the Guidance Note on ‘Accounting for Investments’ for
Local Bodies, issued by the Council of the Institute of Chartered Accountants of
India, will be recommendatory in nature in the initial years for use by the Local
Bodies. This guidance note will be mandatory for Local Bodies in a State from the
date specified in this regard by the State Government concerned.

Objective
1. The objective of this Guidance Note is to provide guidance on accounting for
investments1 including presentation & disclosures in Financial Statements.

Scope
2. This Guidance Note deals with accounting for investments in the financial
statements of Local Bodies including ascertaining cost of acquisition of
investments, classification of investments, ascertaining carrying value of
investments and identifying diminution in value of investments and overall
presentation & disclosure of investments.

3. This Guidance Note applies to all the entities described as Local Bodies in the
Preface to the Accounting Standards for Local Bodies.

4. This Guidance Note does not deal with:

a) Recognition of interest, dividends and rentals earned on investments which
are covered by ASLB 9, ‘Revenue from Exchange Transactions’;

b) Lease agreements which are covered by ASLB 13, ‘Leases’

c) Investment Property which are covered by ASLB 16, ‘Investment Property’;

d) Investment in controlled entities covered by ASLB 34, ‘Separate Financial
Statements’ and ASLB 35, ‘Consolidated Financial Statements’2;

1
In India, investments can be made by Local Bodies only in securities or other investments that are
permitted by the applicable municipal act/ other relevant statute of the concerned State. This
Guidance Note is intended to apply only to items which are material.
2
This Guidance Note makes a reference to ASLBs 35 (“Consolidated Financial Statements”), 37
(“Joint Arrangements”) & 40 (“Entity Combinations”) and Guidance on ‘Financial Instruments’ that are
yet to be formulated/ issued and the guidance for the same may be obtained from other
corresponding pronouncements as per the hierarchy prescribed in paragraph 15 of ASLB 3,
‘Accounting Policies, Changes in Accounting Estimates and Errors’ that prescribe to consider the

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 e) Accounting for Investment in Associates & Joint Ventures which are
covered by ASLB 36 ‘Investment in Associates & Joint Ventures’;

f) Joint Arrangements covered by ASLB 37, ‘Joint Arrangements’5;

g) Entity combinations covered by ASLB 40, ‘Entity Combination’5; and

h) Changes in the fair value of financial assets (refer Guidance on “financial
instruments”5).

5. For all investments within the scope of this Guidance Note, the impairment
requirements prescribed in ASLB 21, ‘Impairment of Non-Cash Generating
Assets’ and ASLB 26, ‘Impairment of Cash Generating Assets’ will not apply
rather the requirement as prescribed in the Guidance Note for diminution in
value of investment will apply in that case3.

Definitions

6. The following terms are used in this Standard with the meanings specified:

i. Investments are assets held not for operational purposes or for rendering
services, i.e., assets other than fixed assets or current assets (e.g., securities,
shares, debentures, immovable properties). Assets held as stock-in-trade are
not ‘investments’.

ii. Short term investments are investments which are readily realisable and are
intended to be held for not more than twelve months from the date of
investment.

iii. Long term investments are investments other than short term investments.

iv. Fair value is the amount for which an asset could be exchanged, or a liability
settled, between knowledgeable, willing parties in an arm’s length
transaction4.

followings in descending order: (a) the most recent pronouncements of the Institute of Chartered
Accountants of India, e.g., Accounting Standards and Guidance Notes on Accounting. Such
pronouncements also include ‘Framework for the Preparation and Presentation of Financial
Statements’, (b) International Public Sector Accounting Standards issued by International Public
Sector Accounting Standards Board, and (c) accepted accounting practices in Local Bodies or in
private sector.
3
This paragraph will have the consequential impact on ASLBs 21 & 26 that will be taken care of at the
revision stage of ASLBs.
4
An arm’s length transaction is one between parties that do not have a particular or special
relationship that makes prices of transactions uncharacteristic of market conditions. The transaction is
presumed to be between unrelated parties, each acting independently.

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 v. Market value is the amount obtainable from the sale of an investment in an
open market, net of expenses necessarily to be incurred on or before
disposal.

vi. Government Securities are bonds, notes, and other debt instruments sold by
a government to finance its borrowings.

Classification of Investments
7. The investments should be classified based on the maturity profile or nature into
short term and long term investments.

8. Short term investments are investments which are readily realisable and are
intended to be held for not more than twelve months from the date of
investment. Investments other than short term investments can be classified as
long term investments, even though they may be readily marketable.

9. The intention of the entity at the time of making investment is to be considered to
decide whether the investment is to be classified as short term or long term
investments.

10. The short term & long term investments can further be classified in following
categories:

 Central Government Securities
 State Government Securities
 Treasury Bills
 Fixed Deposits with Banks
 Equity Shares in Company
 Preference shares in Company
 Debentures & Bonds
 Units of Mutual Funds
 Commercial Papers
 Other Investments

This list is illustrative and not exhaustive.

11. As per ASLB 1, ‘Presentation of Financial Statements’, long term investments
are to be classified as ‘Non-Current Assets’ and short term investment as
‘Current Assets’.

Measurement
Initial Measurement

At the time of Acquisition

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12. All investments are initially recognised at Cost.

13. The cost of investments comprises of its purchase price and any other directly
attributable cost incurred for acquisition. Directly attributable cost includes:

 Brokerage,
 Transfer & other Fees, and
 Stamp duty & other Taxes & Duties.

For example: Entity acquires equity shares of a company through a broker for
Rs. 10,00,000/-, brokerage paid Rs. 10,000/-, then cost of acquisition of
investment works out to Rs. 10,10,000/-.

14. If an investment is acquired, or partly acquired, by the issue of securities, the
acquisition cost is the fair value of the securities issued (which, in appropriate
cases, may be indicated by the issue price as determined by statutory
authorities). The fair value may not necessarily be equal to the nominal or par
value of the securities issued.

15. If an investment is acquired in exchange, or part exchange, for another asset, the
acquisition cost of the investment is determined by reference to the fair value of
the asset given up. It may be appropriate to consider the fair value of the
investment acquired if it is more clearly evident.

16. Interest and dividends receivables in connection with an investment are generally
regarded as income, being the return on the investment. However, in some
circumstances, such inflows represent a recovery of cost and do not form part of
income. For example, accrued interest (before the acquisition of an interest-
bearing investment) is already included in the price paid for the investment, the
subsequent receipt of interest is allocated between pre-acquisition and post-
acquisition periods; the pre-acquisition portion is deducted from cost. When
dividends on equity are declared from pre-acquisition profits, a similar treatment
may apply. If it is difficult to make such an allocation except on an arbitrary
basis, the cost of investment is normally reduced by dividends receivable only if
they clearly represent a recovery of a part of the cost.

17. When right shares offered are subscribed for, the cost of the right shares is
added to the carrying amount of the original holding. If rights are not subscribed
for but are sold in the market, the sale proceeds are taken to the Income and
Expenditure statement. However, where the investments are acquired on cum-
right basis and the market value of investments immediately after their becoming
ex-right is lower than the cost for which they were acquired, it may be
appropriate to apply the sale proceeds of rights to reduce the carrying amount of
such investments to the market value.

18. The illustrative cases of cost of acquisition to be considered in different situations
are as under (this is not an exhaustive list):

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 Acquisition of Investment Cost of Acquisition
Government Securities Purchase cost + directly attributable costs
Interest bearing Purchase Cost less interest/ dividend received
investments (cum-interest / from pre-acquisition portion
cum-dividend basis)
Equity / Preference Shares Purchase cost + directly attributable costs
Bonds / Debentures Purchase cost + directly attributable costs
In exchange of securities Fair Value of securities issued / issue price
issued determined by statutory authorities
In exchange of another Fair value of the asset given up or Fair value of
asset the investment acquired, whichever is more
clearly evident.

Subsequent Measurement

19. At each reporting date, the Local Bodies should review the entire investment
portfolio, whether short term or long term. Valuation should be done for each
category of investment individually and not as a whole.

Short term investments

20. The short term investments are measured at lower of cost or fair value.

21. Valuation of short term investments on overall (or as a whole) basis is not
considered appropriate. Entity may have a concern with the value of a category
of related short term investments and not with each individual investment, and
accordingly the investments may be carried at the lower of cost or fair value
computed category-wise (i.e., equity shares, preference shares, convertible
debentures, etc.). However, the more prudent and appropriate method is to carry
investments individually at the lower of cost or fair value.

22. For short term investments, any decline in fair value and any reversals of such
reductions are included in the income and expenditure statement.

Long term investments

23. Long term investments are usually carried at cost. However, when there is a
decline, other than temporary, in the value of a long term investment, the
carrying amount is reduced to recognise such decline. Indicators of the value of
an investment are obtained by reference to its market value, the investee’s
assets and results and the expected cash flows from the investment.

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24. Long term investments are usually of individual importance to the investing
entity. The carrying amount of long term investments is therefore determined on
an individual investment basis.

25. Decline in value of long term investment which is other than temporary for a
particular investment that the entity holds can be evaluated based on various
factors. Illustrative list of factors that may indicate ‘other-than-temporary decline’
include:

 Fair value is significantly below cost.
 Decline in fair value is attributable to specific adverse conditions affecting a
particular investment or industry or a geographic area.
 Management does not have both the intent and the ability to hold the
investment for a period of time sufficient to allow for any anticipated recovery
in fair value.
 Decline in fair value has existed for an extended period of time.
 A security has been downgraded by a rating agency.
 Financial condition of the issuer has deteriorated.
 Dividends have been reduced or eliminated, or scheduled interest payments
on securities have not been made or restructured.
If any of the factors exists, the diminution of value of investment should be
made.

26. Where there is a decline, other than temporary, in the carrying amounts of long
term investments, the resultant reduction in the carrying amount is charged to
the income and expenditure statement. The reduction in carrying amount is
reversed when there is a rise in the value of the investment, or if the reasons for
the reduction no longer exist.

27. Any appreciation in market value of both short term and long term investments
over the cost of investments should be ignored. If the appreciation is in respect
of investments for which the diminution in value of investment was recorded in
earlier years, the value of the said investments should be appreciated by an
amount not greater than the diminution in value recorded in earlier years.

For example: Local Body purchased 10,000 equity shares of listed company A
Ltd. at Rs. 5,000/- per share. Local Body intends to hold this investment for long
term purposes. Market value at cut-off date, i.e., March 31, 2019 was Rs.
4,000/. Then difference between cost of acquisition & market value of Rs. 1,000
will be treated as decline which is temporary in nature and hence no diminution
in value is required to be made.

Now, during F.Y. 2019-2020, the investee company has gone in liquidation and
liquidation proceedings are underway as at cut-off date of 31st March, 2020.
Since, amount that will be recovered on liquidation is yet to be ascertained and
there could be possibility that no amount will be recovered and, accordingly,
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 there is decline in value which is other than temporary in nature and hence the
diminution in value is required to be made.

28. The carrying amount of investments at reporting date should be:

Type of Investment Carrying Value
Short term investment Lower of Cost or Fair Value.
Long term investments At Cost.
Diminution in value is reduced from
carrying amount and charged to Income
& Expenditure Statement, if there is a
decline other than temporary.

Fair Value Measurement

29. A fair value measurement is for a particular investment and therefore, while
measuring fair value, an entity should take into account the characteristics of
the investment if market participants would take those characteristics into
account when pricing the investment at the measurement date. Such
characteristics include, for example, the followings:

a. the economic benefit from the investment; and
b. restrictions, if any, on the disposal of the investment.

30. Fair value is a market-based measurement, not an entity-specific
measurement. For some investments, observable market transactions or
market information might be available. For other investments, observable
market transactions and market information might not be available. However,
the objective of a fair value measurement in both cases is the same—to
estimate the price at which an orderly transaction5 to sell the investment would
take place between market participants6 at the measurement date under

5
Orderly transaction is “a transaction that assumes exposure to the market for a period before the
measurement date to allow for marketing activities that are usual and customary for transactions
involving such investments; it is not a forced transaction (e.g., a forced liquidation or distress sale).”
6
Market Participants are “buyers and sellers in the principal (or most advantageous) market for the
investments who have all of the following characteristics:
a. They are independent of each other, i.e., they are not related parties as defined in ASLB 20,
‘Related Party Disclosures’, although the price in a related party transaction may be used as
an input to a fair value measurement if the entity has evidence that the transaction was
entered into at market terms.
b. They are knowledgeable, having a reasonable understanding about the investment and the
transaction using all available information, including information that might be obtained
through due diligence efforts that are usual and customary.
c. They are able to enter into a transaction for the investment.

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 current market conditions (i.e., an exit price at the measurement date from the
perspective of a market participant that holds the investment).

31 A quoted market price in an active market provides the most reliable evidence
of fair value of an investment. The adjustments to the quoted price may also be
required to be made to arrive at fair value depending on various factors such as
the volume of investments.

32. If no evidence is available to determine the market value of an investment in
an active market, the fair value of the investment may be established by
reference to:
a. other investments with similar characteristics, in similar circumstances
and markets. For example, the fair value of an unlisted company’s
equity shares may be estimated by reference to the market value of
unlisted company with similar features for which market evidence is
available, or
b. discounted cash flow projections based on reliable estimates of future
cash flows. For example, the fair value of debentures of an unlisted
company may be estimated by reference to discounted future cash
inflows from interests and redemption of debentures.

33. If there is no market-based evidence of fair value because of the specialised
nature of the investment, an entity may need to estimate fair value using, the
unobservable inputs such as entity’s own data and analysis, information from
market participants that is reasonably available.

Disposal of Investments
34. Investments may be held to maturity or may be disposed off before the
maturity date. On disposal of an investment, the difference between the
carrying amount and the disposal proceeds, net of expenses (such as
commission, brokerage etc.), is recognised in the income and expenditure
statement.

35. When disposing off a part of the holding of an individual investment, the
carrying amount to be allocated to that part is to be determined on the basis of
the average carrying amount of the total holding of the investment.

Reclassification of Investments
36. Investments can be reclassified from long term to short term and short term to
long term investments depending upon their maturity and intention of the
management to hold the investment.

d. They are willing to enter into a transaction for the investment, i.e., they are motivated but not
forced or otherwise compelled to do so.”

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 37. Where long term investments are reclassified as short term investments, the
short term investments should be recorded at the lower of cost or carrying
amount at the date of reclassification.

38. Where investments are reclassified from short term investments to long term
investments, the long term investments should be recorded at the lower of
cost or fair value at the date of reclassification.

39. The carrying amount of the reclassified investments will be as follows:
Reclassification Carrying Amount

Reclassification of long term Lower of cost or carrying amount at the
investment as short term date of reclassification
investment
Reclassification of short term Lower of cost or fair value at the date
investment as long term of reclassification
investment

Guidance in case investments are made from specific funds

40. If the investments are made from specific/earmarked funds, then the following
treatment is done:
(a) Income from investment should be credited to that specific fund,
(b) Profit on disposal of investments should be credited to that specific fund
(or debited in case of loss on disposal), and
(c) Diminution in the value of investment should be debited to that specific
fund.

Presentation & Disclosure in Financial Statements
41. Following information should be disclosed in the financial statements in
relation to the investments:

a) Accounting policy for determination of carrying amount of investments;

b) Classification of investments as short term investments and long term
investments distinctly; further classified into:
i. Government securities
ii. Fixed Deposits with Banks
iii. Shares, debentures or bonds
iv. Units of Mutual funds
v. Others—specifying nature.

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c) Amounts included in income and expenditure statement for:
i. Interest & dividends on investments showing separately such
income from long term and short term investments. Gross income
should be stated, the amount of income tax deducted at source
being included under Advance Taxes paid;
ii. profits and losses on disposal of short term investments and
changes in the carrying amount of such investments; and
iii. profits and losses on disposal of long term investments and
changes in the carrying amount of such investments;

d) significant restrictions on the right of ownership, realisability of investments
or the remittance of income and proceeds of disposal;

e) the aggregate amount of quoted and unquoted investments, giving the
aggregate market value of quoted investments;

f) Investments, after diminution in value of investment should be carried in
Financial Statements at the reduced value. Aggregate diminution in value of
investments to be disclosed separately.

g) Amount resulting from appreciation in investment, if any to be disclosed
separately. (paragraph 27)

h) Previous reclassifications made, if any, in investment to be disclosed along
with necessary quantification.

i) Other disclosures as specifically required by the relevant statute governing
the entity.

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 Appendix
Implementation Guidance – Maintenance of Investment Register

This guidance accompanies, but is not a part of, Guidance Note on Accounting for
investments.

A Local Body may have investment in variety of securities and to have better control
over investments, proper record is required to be maintained. Following is an
illustrative list of details to be maintained for each investment:

a. Description of the Investments along with Name of the issuer
b. Distinctive number of certificates/ receipt numbers (if certificates/receipts are
available in physical form) along with quantity of investment, i.e., number of
shares or bonds or debentures or units held
c. Face value of Investment made
d. Rate of Interest
e. Date of Acquisition of Investment
f. Cost of Acquisition
a. Purchase Price
b. Directly attributable cost (such as brokerage, fees, and taxes & duties)
g. Date of Maturity / Redemption/sale of investment
h. Date of receipt of investment proceeds
i. Amount realised on sales/disposal/redemption of Investments
j. Carrying Amount after reducing diminution in value of Investment
k. Other information in remarks:
a. Market Value of Investment
b. Interests/ dividend/rentals received on Investment
c. Diminution in value of Investments
d. Details of charge / pledged / lien created on such securities
e. Whether investments have been held in demat account
f. Gain or loss on disposal of investment

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 Illustrative Format of Investment Register

Sr. Descr Distinctiv Face Rate Date Trans No of Pur Directly Total Date Date Amou Carryi Remarks (such as
No. iption e number Valu of of action share cha Attributa cost of of nt ng details regarding
of the of e Intere acqui note s/ se ble cost of Matur recei realise amou Market Value of
Invest certificate (Rs.) st (%) sition no. units Pric (e.g. Acqui ity / pt of d nt Investment,
ments s/ receipt of e Brokera sition Rede inves either after Interests/
along numbers inves (Rs. ge, (Rs.) mptio tment on reduci dividend/rentals
with tment ) Fees, n sale or ng received on
proce
Name Duties /sale maturi dimin Investment,
eds
of and ty of ution Details of charge /
issuer Taxes) invest in pledged / lien
(Rs.) ments Value created on
of investments,
Invest Whether
ment investments have
been held in
demat account,
Diminution in
value of
investment, Gain
or loss on
disposal of
investments,)

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