An investment is held for wealth generation (such as dividends and interest on shares and loan notes) and capital growth. Current investments are readily realizable and are intended to be held for no more than one year. All other investments are long term investments.

Investments in subsidiaries, associates and joint ventures require special accounting procedures for the preparation of additional financial statements – group accounts, otherwise known as consolidated accounts. From your earlier studies you should be familiar with the definitions relating to group accounts. For example, a subsidiary, broadly, is more than 50% controlled, and an associated company is one over which an entity has a ‘signficant influence’ as evidenced by at least a 20% holding.

Long term investments may be carried at cost, revalued amounts, or the lower of cost and market value determined on a portfolio basis decided by the director.

The carrying amount of a long term investment should be reduced to recognize impairments in value.

Where long term investments are carried at market value a consistent policy should be adopted whereby increases or decreases in the carrying amount should either go through the income statement, or, to a revaluation account in equity. To the extent that there is no revaluation surplus relating to a particular asset, any deficit should be charged to income.

When assets carried at market value are disposed of the company should adopt a policy of crediting outstanding revaluation surpluses to either income, or retained earnings.

Current investments may be carried at market value or the lower cost or market value.

Disclosure requirements

In general terms, the following items should be disclosed in relation to all investments:

(a) The accounting policies for:

  1. The determination of carrying amount of investments

  2. The treatment of changes in market value of current investments carried at market value

  3. The treatment of a revaluation surplus on the sale of a revalued investment

(b) The significant amounts included in income for

  1. Interest, royalties, dividends and rentals on long term and current investments

  2. Profits and losses on disposals of current investments

  3. Changes in value of such investments

(c) The market value of marketable investments if they are not carried at market value

(d) The fair value of investment properties if they are accounted for as long term investments and not

carried at fair value

(e) Significant restrictions on the feasibility of investments or the remittance of income and proceeds of disposal

(f) For long term investments stated at revalued amounts

  1. The policy for the frequency of revaluations

  2. The date of the latest revaluation

  3. The basis of revaluation and whether an external value was involved

(g) The movements for the period in revaluation surplus and the nature of such movements

(h) For enterprises whose main business is the holding of investments an analysis of the portfolio of


Internal Control

Where a trading concern holds only a few investments, there is unlikely to be any systematic internal control systems specifically for those investments.

With a larger investment portfolio, there should be a system of internal control which will include:

  1. Authorization procedures for purchases and sales

  2. Register reconciled with control accounts

  3. Control over dividend/interest receipts

  4. Proper division of responsibility and supervision

Verification Procedures

Verification procedures should follow the general approach outlined for tangible non currentassets. However, the following specific points should be noted.

ISA 501 Audit Evidence – Additional Consideration for Specified Items states that audit procedures relating to long term investments normally include considering evidence as to whether the entity has the ability to continue to hold the investments on a long term basis, discussing the matter with management and obtaining written representations to that effect. Other procedures would include the following:

(a) Existence and ownership

Establishment of title and beneficial ownership of investments is not conclusively possible. However, evidence is available in the form of:

  1. Share certificates, correspondence with nominee etc

  2. Payments for securities, brokers,’ bought notes’ or ‘contract notes’

  3. Dividends/interest from securities, dividends ‘warrants’.

  4. Internal control procedures.

(b) Valuation

Valuation of listed securities is easily conformed with appropriated financial publications. Directors’ valuation of unlisted securities is something on which the auditors report, and the basis of the calculations, must therefore be examined. The auditor must also consider whether any write downs for impairment in value are adequate, which may mean examining copies of accounts of companies in which investments are held.

(c) Income

Income from securities can be verified with known interest rates for fixed interest securities, and a share information service for listed shares. Unlisted share income must be verified with copies of the accounts.