Valuation of Short-Term Investments
Short term investments is important because it can help in short term financing. This type of investment can be valued at the lower cost or market value. The company amount, which is the amount at which the assets are recorded in the books of account at a particular date, should be determined on an item by item basis. The amount by which cost exceeds market value is called unrealized loss and this loss should be charged to the income statement for the period. The realized gains and losses on disposal of short-term investments should be taken to the income statement for the period of disposal.
Valuation of Long-Term Investments
Enterprises are expected to carry long term investments at either current market value or historical cost. Where the investor decides to carry long term investments at market value, such value is expected to be kept up to date. Under market value it is not appropriate to account for any increase in the current value as a realized profit for the period, rather the amount of any increase is accounted for as surplus on revaluation and taken to a revaluation reserve.
The current market value of long term investments is of less immediate relevance as the investor does not intend or is unable to secure that value by their disposal. As much, long term investments are usually carried at historical cost, less provision for impairments in their value. When there has been a permanent decline in value of an investment, the carrying amount of the investment should be written down to recognize the loss. Such a reduction should be charged to the income statement.
This reduction is temporary as the amount charged is liable to be reversed in a situation where the cost increases. Other than the fact the increase is temporary, others aspect to consider is the value of the investment involve, another to look at the is the reason for the reduction and also why it no longer exist. An increase in carrying amount arising from the revaluation of long, term investments should be credited to owner’s equity as revaluation surplus.
To the a point where the decreased amount has a possibility of offsetting any previous cost increase, which will be effective on the investment that is meant to be credited in respect to the revaluation surplus, it should be charged against that revaluation surplus rather than income. Furthermore, when there is an increase on revaluation which is directly related to a previous decrease in carrying amount for the same investment that was charged to income, should be credited to the extent that it offsets the previous recorded decrease.
Investment properties are usually valued at their market values and revalued periodically on a systematic basis.
Gains and Losses on Sale of Investments
Putting up an investment for sale and they get sold, every profit made and also every losses you get as a result of the sale is usually recorded on the income statement of account. Such gain or loss is computed as the difference between the proceeds of sale net of expenses and it’s carrying amount. If the investment sold had previously been revalued and the increase in the carrying amount has been credited to and still remains in a revaluation surplus account within the owner’s equity, amount of the increase is transferred to income. When only part of an investor’s holding of a particular investment is disposed of, the carrying amount of the part
sold will be calculated on the basis of the average carrying amount the total holdings.
Transfer of Investment
Where long term investments are reclassified as short-term investments, transfers should be made at the lower of cost and market value. In a situation where the investment which was valued before is revalued, whatever, that is remaining for revaluation would be considered a surplus and should be reversed. Investments reclassified from short term to long term should each be transferred at historical cost less provision for impairment in their value or at market value if they were previously stated at that value.
Features of Financial Assets Investment
Financial asset investment may be defined as the acquisition of fixed or variable income securities or promissory notes of various economic units which represent claims on the productive assets of the issuers. It could be in ordinary share, preference shares, bonds or debentures, treasury bills, commercial papers, bankers’ acceptances, lease, treasury certificates, federal government development stocks, certificates of deposits, time deposits, and other paper claims to wealth. These instruments are sold to investors by: borrowers to raise necessary funds to carry on their operations. The investors purchase such instruments with the hope of disposing them off at a premium at a later date or holding them to maturity.
The features of financial assets investment include
- Negotiability or transferability
- Convertibility
- Face value
- form of I Owe You
- Coupon payment
- Redeemability (except ordinary shares)
- Redemption value
‘8. Liquidity
- Collateralizable
10.Tenor
Classes of financial assets investment be categorized according to these
Nature Or the Certainty of Income Expected: Here there are two types of classes, they include, (i) Fixed income securities and then (ii) Variable income securities. The fixed income securities make references to those income that which generates to its holder a fixed regular Income usually a percentage of the face value. Variable income securities generate irregular income. An example of it is the floating rate securities.
Life span of assets: Under this class, we have short term financial assets and long-term financial assets. Short term financial assets are called the money market instruments. They include treasury bills, commercial papers, commercial or trade bills, certificates of deposits, time deposits, banker’s unit fund, call deposits, savings deposits, and term loans. The long-term financial assets can as well be referred to the capital market instruments.
They consist of instruments such as ordinary shares, preference shares, bonds, mutual trust funds, unit trust funds, development stocks, options, lease, swaps, forward contracts, and futures contracts.
Asset backed: These are mortgages in various forms.
Features of Real Assets Investment
Real asset investment may be defined as the acquisition of tangible assets such as land, buildings, plant and machinery, equipment, oil well, motor vehicle, factory building, stocks of inventories, manufacturing outfit, ship, furniture, fixtures, fittings, aeroplane, which an organization may require to carry on their businesses in addition to income generation and capital appreciation.
The features of real assets investment are
- physical
- moveable or immoveable
- depreciates or appreciates
- saleable