Question

What methods are used to account for short-term investments?

Answer 1

A current investment / short term investment is an investment that is by its nature readily realisable and is intended to be held for not more than one year from the date on which such investment is made.

• Accounting Standard – 13

If a company has idle cash lying prefers short term investments to earn small return while still being able to access the funds for its operating needs on short notice. Examples of short-term investments are savings accounts, RDs/FDs, money market instruments like treasury bills, gold/silver, even investment in tradable securities like equities, debt or mutual funds.

In company’s balance sheet, short term investments are classified under current assets and in some cases are grouped as ‘Cash and Cash Equivalents’.

Accounting for short-term investment –

These are recorded at the purchase price inclusive of acquisition charges, brokerage fees and duties.

However, carrying amount for such investments should be lower of cost and fair value. Since the market value of such investments can be easily determined and the intent of such investment is to be dispose in near future, the periodic fluctuations should be reported in the books. Some companies maintain Valuation adjustment account as an alternative approach to adjust short term investment to its fair value separately rather than individually to each account.