Proposed Accounting Standard for High Risk Investment

Abstract

The purpose of this paper is to suggest a new Accounting Standard, which details the separate disclosures required for ‘High Risk Investment’ held by the entities; those are not investment firms. The outline of the proposal is detailed below. As a matter of fact, majority stake holder look at the overall investments held by an entity and do not distinguish investments, in particular. The ‘High Risk Investment’ is not usually classified separately. Reorganization: The conditions for a high risk investment to be classified are as follows: 1) The entity has invested the funds in other than, its day to day business activity. 2) The investment must be regarded as high risk, obviously bank fixed deposit cannot be classified as high risk investment. 3) In the case of a limited company such investment should be approved by a special resolution in the directors’ Board meeting which seeks three forth majority. 4) An entity has not got the shareholder’s funds at least four times to its ordinary share capital should not invest funds in a ‘High Risk Investment.’ 5) The funds should be invested for atleast a year. 6) The investment should be measured reliably. The criterion for ‘high risk’ investment is a matter of debate. In general, an investment where entity may most likely lose money or high return is expected in a short period of time is classed as high risk investment. For instance, investment in a highly volatile stock of derivative market may be considered high risk investment. Presentation Effects in Income statement A contingency provision for High Risk Investment should be created from current year profit. The journal entry would be: Dr Income statement High Risk Investment Charge Cr Provision for High Risk Investment Effects in Statement of Financial Position Provision for High Risk Investment should be shown in the liability side of the Statement of Financial Position and equal amount is appear as The High Risk Investment in the assets side of the statement of financial position. Subsequent Valuation Due the nature of such these investment, they should be valued each year i.e. revaluation on prevailing market price. Any impairment due to market volatility the Value of High Risk Investment should be mitigated from “Provision for High Risk Investment”. Journal Entry would be: Dr Provision for High Risk Investment Cr High Risk Investment The income statement would not be effected at all even the full amount of investment is written off. Actually, the board would have assumed these funds as forgone funds from the day they invested under the definition of High Risk Investment. Disposal of High Risk Investment When accumulated return generated from such investment or market value of such investment reaches more than or equal to the 25% of the initial Investment cost (approved via Special resolution) investment amount, that excess 25% should be disposed off immediately and the funds should be transferred to the retained earnings. Journal Entry would be: Dr Bank Cr Retained Earnings Disclosure – High Risk Investment High Risk Investment must be disclosed separately from other assets in the balance sheet. The relevant liabilities e.g. Provision of contingencies must also be disclosed separately in the balance sheet. There are several other discloses required, including a description of the High Risk Investment, description of the criteria and level of funds allotted for High Risk Investment.