INVESTMENTS – What is Investment?
Organizations, both corporate and non-corporate bodies, in the course of their business operations apply all or some of their resources in acquiring assets to be held for capital appreciation, income generation, or other purposes such as securing competitive advantages. Business organizations, individuals, and households often employ funds not immediately needed in the conduct of regular operations profitably without actually engaging or being involved in the management of such funds that they have provided, most times this money can be used for the following (i) trade, (ii) production, (iii) provision of services etc. Such investments could be in the form of financial assets such as equity securities, debt securities, or real assets such as land and building. In some organizations, their primary business is making investments here and there. Therefore succinctly put investment can be defined as assets acquisition by an enterprise for the purposes of capital appreciation and income generation.
Investment Classification
Investments are usually classified as short term investments and long term investments. Short term investments are investments held temporarily in place of cash, which can be converted into cash when current financing needs make such conversion desirable, and intended to be held for not more than one year. Short term investments may be in ordinary shares, preference shares, bonds, treasury bills, commercial papers, bankers acceptances, finished goods and services etc, once they are.
Readily reliable and the intention of the investor is to hold such an investment for not more than one year. Long term investment exists where the investor decides to employ funds over a long period of time to earn income. Long-term investment may include debt and equity securities and investment properties. Investment properties represent an enterprise’s interest in land and buildings held primarily for their investment potentials (i.e. income generation and capital appreciation) and not occupied substantially for use of the enterprise itself in its operations or a member of its group of companies. In Nigeria, a property is deemed to qualify as an investment property if not more than 15% of the lettable space is Occupied by the owner or another enterprise. in the group. A property is deemed to be substantially occupied if the owner or another enterprise in the same group occupies more than 15% of the lettable space.
Investment can also be classified as expansion of existing business, undertaking of new business, replacement and modernization of a business, mutually exclusive investments, independent investments, and contingent investments. Expansion of existing business may take the form of adding capacity to the existing product lines in order to increase the earnings ability of the organization. Undertaking of new business may come in the form of acquisition of existing business or nursing a business from the scratch.
Replacement and modernization investment is required when there is need to change outdated and obsolete equipment for more economical operations. Mutually exclusive investments have the same objective and if one is chosen, others will have to be excluded. Independent investments serve different purposes and depending on their profitability and availability of funds, an organization can undertake all the independent investments. When as a client you are presented with options which includes investment that requires you undertake one or more different investments, this is when it is referred to as contingent investments.
Furthermore, a project is an undertaking to perform a specific goal. According to so many academic work, Project management can be defined or described as (i) the planning, (ii) the directing and the (iii) the controlling of a project with the main aim of the project meeting its goals, it doesn’t stop there, these goals must be achieved within the period of time set out and also the cost of executing the project will not be beyond the budget. The project life cycle includes the project definition, planning, implementation, completion, and evaluation.
Valuation of Investments
Investments can be valued using the cost or the market value of the assets However, if we may tow the line of conservatism of accountant’s view. Considerably, one should regard investments as the value ascribed at the lower of cost of the product, also it should refer to the market value of the assets in view. Market value can be described as the price you pay for buy a product, this is attached to the value obtained when an investment in sales is made in an active market, here both the buyer and the seller are knowledgeable about the transaction, this drives their wiliness to transact the and make ends meet.
Valuation of investments at cost requires that such investments be recorded at cost at the date of acquisition and carried at cost unless their market value becomes less than cost by a substantial amount and the decline in market value is due to a permanent condition. Subsequent to such declined recoveries in market value is viewed as cost for future accounting purposes. Cost will include such charges as brokerages, fees, duties, etc relating directly to the acquisition of the investments.
In reference to the market value method used for valuation of assets, investment portfolio can be revalued at the close of every financial year, using the market value of the asset, irrespective of the cost. Proponents of the market value method for short term investments argue that since the investments are easily realizable stores of wealth or cash substitutes, the enterprise is not concerned with the cost of such items but the cash it could realize from their disposal.
It is further argued that reporting investments at cost will enable the investor to recognize income at his discretion by selling selected investments and repurchasing them immediately, and reporting the resulting profit in the income statement. This will have the effect of increasing the reported income even though the transactions have not changed the investor’s economic position. Looking at the lower cost or the presumed market value, using the portfolio method of investments can attract lower cost in valuation or net realizable market value.