As 13 accounting for investments

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Querist : Anonymous

Querist : Anonymous (Querist)

17 September 2011 Dear Sirs/Madam

According to AS 13, When right shares are brought on cum right basis ( say @ Rs.105) and if the post rights issue price drops to a price lower than the acquisition cost ( say Rs.100),then according to AS 13 the sale proceeds from sale of rights ( say Rs.7) are used for REDUCING THE COST OF INVESTMENT TO REFLECT ITS MARKET VALUE and any excess sale proceeds ( of Rs.2) treated as income.
what is the case if post rights issue price drops down to Rs.95, in this case we can reduce from Cost only to the extent of Rs.7 which brings the Invest.to Rs.98 (105-7.whereas the market price is @ Rs.95. how far is it justified to say that investment shall be brought down to reflect market value?? bringing down the value from 98 to 95 is not deinately justified because we do valuatino on the closing day but not on post rights day.

Kindly clarify.

CA Sumat Singhal

CA Sumat Singhal (Expert)
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17 September 2011 Dear, generally post right prices do not go down such level to arise above situation, rather to some extent so accordingly this rules have been laid down keeping in view practical situation in the market.

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Querist : Anonymous

Querist : Anonymous (Querist)

17 September 2011 yeah you re correct in practical situation.. but my question is on the theoritical part of interpreting the standard.

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CA Pushpendra Gaur

CA Pushpendra Gaur (Expert)
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26 September 2011 well dear the concept behind deducting the price of right from the cost of cum-right shares is to bring the cost of shares on ex-right basis.
Therefore in case of Market value from 105 to 100, you are required to bring the value of investment to its market value i.e. 100, you deduct only Rs 5
In Case of Market value becoming from rs 105 to 95, only Rs 7 are required to be deducted jsut as to bring the cost of cum-right share as ex-right share cost and u r absolutely right marking to Rs 95 to be done on the closing date,a s it is all about valuation of Investment.

Theoritically, after every issue of either the bonus and right issue, The "THEORITICAL POST PRICE OF SHARE" comes down as compared to previous price