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need help on accounting standard. - um@ir - 07-02-2007

well i am going through a confusion. so please help me out.

Suppose if one company (listed on stock Exchange) has some holding in other company (not listed on stock exchange). Now AS when the accounts are closed, According to the MARK to MARKET principle. we move from book value towards market value.

now my question is .....

Will the Company(listed) will revalue its investment of that company which is not listed ? [B)]


- kamranACA - 07-03-2007

Dear Umair,

First of all you must consider and make part of ur query the clarification regarding the accounting framework within which you expect the answer to be. Whether it is IFRSs or some other country's local accounting framework or accounting standards?

However, as far as IFRSs are concerned, I would like to invite ur attention towards IAS-39 which stipulates certain requirements for the recognition, initial and subsequent measurements and de-recognition of financial instruments etc.

Investment in unlisted securities is a financial instrument as per definitions provided by IAS 32 and 39. Financial instruments have to be classified at the outset either as

- designated as financial instruments at FAIR VALUE THROUGH PROFIT AND LOSS (i.e. held for trading;
- designated as available for sale;
- designated as held to maturity; and
- designated as loans and advances

Now, recognition, initial measurement and derecognition, everything has been seprately discussed in IAS 39. I restrict my explanation maximum to measurement and subsequent measurement to remained focussed on ur query and leave rest of issues pertaining to recognition, transfers and derecognition etc.


- On initial recognition all financial instruments (except for the "financial instument through profit or loss") have to be measured at FAIR VALUE, and;

- In case of a "financial instrument througn profit or loss" (i.e. held for trading), on initial measurement it has to be measured at fair value plus transaction costs that are directly attributable to the acquisition or the issue of the financial asset or finnacial liability.

Therefore, as per above criteria no financial instrument can initially be accounted for merely on cost. Every financial asset and financial liability ha sto be stated at fair value on initial recognition. However, practically speaking in so many cases cost could be the best estimate of the fair value for initial measurement.


Subsequent measurement has to be made differently for each of the above four categories of the financial assets/liabilities.

Financial Asset

- Financial assets that are either "available for sale" or "financial assets through profit or loss" have to be subsequently measured at Fair Value; and

- loans and advances and held to maturity investments have to be measured subsequently at amortised cost using the effective interest method.

However, paragraph 46 © of IAS 39 allows to measure at cost the equity instruments that do not have quoted / listed market price in an active market and whose fair value cannot be reliablly measured.

Financial Liabilities

- Subsequent measurement of all financial liabilities has to be made at amortized cost using effective interest rate, except for "financial liability through profit or loss"

- "Financial liability through profit or loss" has to be measured at Fair Value in all subsequent measurements. (There is also another exception pertaining to transfer of financial asset that does not qualifiy for de-recognition which has also to be measured at Fair Value. However, it is not being discussed here in detail).

It means that except for held for trading liabilities, all financial liabilities have to be measured at amortised cost in all subsequent measurements.


Coming to your query after having gone through above clarification.

Yes, of course the investment in the unlisted securities have to be stated at fair value initially as well as in all subsequent measurements, if it is designated as available for sale financial instrument.

Paragraph 48 of IAS 39 requires to follow paragraphs AG69-AG82 of its Appendix "A" for determination of fair value (specially paragraphs AG74 to AG 82). You can see the principles provided in these paragraphs that how the fair value of an unquoted securtiy could be determined using valuation techniques, if it has no active market.

Notwithstanding the above, if it is concluded by all means that the fair value of an unquoted investment cannot be RELIABLY measured, then it could be simply stated at COST in the financial statements instead of FAIR VALUE.

For clarity, I mention that whenever some financial instrument will be measured at fair value, the gains and loss would be recognised as under

- in case of "financial instrument through profit or loss", it will be recognised in profit and loss account.

- in all other cases, it will be taken directly to equity (through statement of changes in equity) and profit and loss account will not be effected.

Hope you will get benefit from this clarification which is in iteself a brief of IAS 39's some of facets.

Best regards,


- kamranACA - 07-05-2007

Dear Umair,

You have not given any comments on the above explanation. Is it suitable to ur query?



- um@ir - 07-10-2007

first of all thankyou very much KAMRAN for your detailed reply. infact it took me long to reply cuz i was buzy in reading it. [)]

Now i think i should clarify my Query.

Bank Alfalh limited (BAFL) has a stake in Warid telcome (16.2%). so we can say that BAFL and WARID are Associates. Now As you may know that their are reports in the newspaper that SINGTEL is intrested to buy a 30% stake in WARID.

My Query is;

If SUPPOSE BAFL DISINVEST its 10% stake (i-e) to sell it to singtell at a price with some decent premium. So

<b>Would BAFL will mention the Remaining 6.2 % at mark to market in its books ?</b>(Annual report)

Thankyou !

- um@ir - 07-10-2007

PS WArid is not LISTED.

& BAFL is listed on the Karachi Stock MARKET.

- kamranACA - 07-12-2007

Dear Umair,

First of all Warid does not become BAFL's associate just on account of 16.20 % holding by BAFL.

IAS-28 lays down the requirement of at least 20% holding for making it an associate that it declares to be a sufficient evidence of having significant influence over investee.

There could be some exceptions and a company can be treated as associate even if lesser than 20% holding it has but for this purpose the company has to justify that how can it exercise the significant influence over the investee without having 20% holding.

Further, a company may not be an associate despite the 20% holding but again it has to be proved and disclosed that why there is no significant influence in the presence of 20% holding.

For detail you can study IAS 28.

Now coming back to your question. BAFL, if treats Warid as its associate under IAS 28, then it has to show its investment in Warid in its financial statements under equity method of acounting proposed by IAS 28 and not at fair value/market value under IAS 39.

However, I dont know how BAFL is treating its investment i.e. whether as Associate or Avaialbale-for-Sale.

If Warid is not being treated as an Associate by BAFL, then the investment should be recognised as "Availabale-for-sale" or "financial asset through profit or loss" under IAS 39(as in my view it does not qualify for recognition as "held-to-maturity"). In both these cases it should be measured/stated at Fair Value on initial recognition as well as all subsequent reporting dates.

The fair value gain/loss in case of "financial asset through profit or loss" has to be taken to profit and loss account while in case of "Availabale-for-sale", any fair value gain/loss has to be taken directly into equity.

IAS 39 requires that if some entity initially recognises some financial instrument / asset as "financial asset through profit or loss" then on all subsequent dates it has to be treated as "financial asset through profit or loss". There could be no re-designation of such a financial asset. It has always to be treated in the same category.

In my view best option is to treat such investment as "Availabale-for-sale" and gains/loss on measurement at fair value should be taken to equity directly.

Fair values can be determined even in case of unlisted shares. IAS 39, paragraphs AG 69 to AG 82 provide guidelines for this purpose.

However, if some investment's fair value is not determinable by all means, then it could be stated at cost in the financial statements. (Paragraph 46 © of IAS 39.

This all discussion has nothing to do with what BAFL will be doing in its financial statements. Infact all these procedures and way outs are the given options under various IFRSs and any one of them can suit any particular situation. Professional Judgment has to be made before deciding anything.

Best regards,


- kamranACA - 07-17-2007

No comments.