07-03-2007, 06:40 PM
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.
INITIAL MEASUREMENT
- 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
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.
YOUR QUERY
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,
Kamran.
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.
INITIAL MEASUREMENT
- 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
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.
YOUR QUERY
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,
Kamran.