Short-term investments - records in the entity's books

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What are short-term investments? How to estimate them - on what date, what methods should be used? With respect to which entrepreneurs are statutory balance audits and what are their obligations? How should an impairment write-down be made to the value of the investment held and what are the effects of this in the records? We answer in this article!

Short-term investments - assets on the balance sheet

The definition of investment can be found in Art. 3 sec. 1 point 17 of the Accounting Act. According to it, investments are assets held by an entity in order to obtain economic benefits from them resulting from the increase in their value, obtaining income in the form of interest, dividends (shares in profits) or other benefits, including from a commercial transaction, in particular financial assets and those immovable property and intangible assets that are not used by the entity, but are held by it for the purpose of obtaining those benefits.

When explaining this long and complicated definition, it should be pointed out that an investment is the acquisition of assets in order to obtain economic benefits from them - profit.

The assets are:

  • tangible assets - movables owned by the entrepreneur, which are intended for sale or consumption within 12 months from the balance sheet date or during the normal operating cycle appropriate for a given activity, if it lasts longer than 12 months;

  • financial assets - payable and due or intended for sale within 12 months from the balance sheet date or from the date of their establishment, issue or purchase, such as cash assets, equity instruments (shares, bonds, shares, loans granted, securities);

  • cash assets - these are assets in the form of domestic means of payment, foreign currencies and foreign currencies that are owned by the entrepreneur. Monetary assets also include, in particular, accrued interest on financial assets.

  • short-term receivables - include all receivables from deliveries and services and all or part of receivables from other titles not classified as financial assets, and which become due within 12 months from the balance sheet date,

  • accruals - are settlements of the entrepreneur that last no longer than 12 months from the balance sheet date.

In order to qualify as short-term investments, one of two conditions must be met:

  • the maturity date of the assets may not exceed 12 months from the balance sheet date;

  • the assets must be held for trading within the next financial year (irrespective of the maturity date).

Short-term investments on the balance sheet

In the balance sheet, short-term investments owned by the entrepreneur are presented broken down into short-term financial assets, taking into account investments held in related and other entities.

Assets item B.III.lit. a / item B.III.lit.b

Assets item B.III.lit.c

Shares

Cash in hand and on accounts

Actions

Other cash

Other securities

Other cash assets

Loans granted

 

Other short-term investments are disclosed under assets under item B.III.2.

Valuation of short-term investments

The method of measuring the short-term investments held depends on whether the entity is required to audit the balance sheet. When it belongs to those entities which - pursuant to the provisions of the Accounting Act - must subject their reports to an audit by a statutory auditor, the provisions of the Regulation of the Minister of Finance of December 12, 2001 on detailed principles of recognition, methods of valuation apply to the valuation of short-term financial assets. , the scope of disclosure and the manner of presenting financial instruments.

The obligation to audit the balance sheet rests on the following entities, pursuant to Art. 64 of the Accounting Act:

  1. domestic banks, branches of credit institutions, branches of foreign banks, insurance and reinsurance companies, main branches and branches of insurance companies, main branches and branches of reinsurance companies and branches of foreign investment companies;

  2. Jumping;

  3. entities operating on the basis of the provisions on trading in securities and provisions on investment funds and management of alternative investment funds

  4. units operating under the provisions on the organization and operation of pension funds;

  5. domestic payment institutions and electronic money institutions

  6. joint-stock companies (except for those that are in organization as at the balance sheet date)

  7. entities which, in the previous financial year for which the financial statements were prepared, met at least 2 conditions:

a) the average annual employment converted into full-time jobs amounted to at least 50 people,

b) the total assets of the balance sheet at the end of the financial year were the Polish currency equivalent of at least EUR 2,500,000,

c) net revenues from sales of goods and products and financial operations for the financial year were the Polish currency equivalent of at least EUR 5,000,000.

It is enough to meet two of the three indicated criteria for the provisions of the Regulation to apply to a given entity.

In their case, short-term investments are entered into the books of accounts as of the date of their purchase, at the purchase price. The purchase price is the fair value of the expenses incurred, taking into account the costs accompanying the asset purchase transaction.

When valuing financial assets as at the balance sheet date, it is done in the so-called reliably determined fair value.

Other entrepreneurs who do not apply the provisions of the regulation, value their short-term investments as at the balance sheet date according to:

- market price (value), or

- purchase price or market price (value),

whichever is the lower.

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Reliably determined fair value

The explanation of this method is included in the above-mentioned regulation of the Minister of Finance - in § 15. There are guidelines for reliable determination of the fair value. These include, for example:

  1. valuation of a financial instrument at a price fixed in active regulated trading, with publicly available information about the price;

  2. assessment of debt financial instruments by a specialized, independent unit providing such services;

  3. application of an appropriate model for the valuation of a financial instrument, and the input data introduced to this model come from active regulated trading;

  4. estimating the price of a financial instrument for which there is no active regulated trading on the basis of a publicly announced, quoted in active regulated trading, a price not significantly different from a similar financial instrument or the prices of components of a complex financial instrument;

  5. estimating the price of a financial instrument using the estimation methods generally accepted as correct.

The value determined in this way is not reduced by the transaction costs that the entrepreneur would incur when selling these assets or excluding them from the accounting books for other reasons, unless the amount of these costs would be significant.

Making a write-down

However, with short-term investments characterized by a short maturity or intended for trading, their market price may change. The measure of value may be, for example, the stock market index. In such a situation, it will be necessary to revalue the value of the introduced asset to the one currently applicable on the market, by making an impairment write-off.

The results of this revaluation are included in the financial revenues or costs of the reporting period in which it was made, respectively. They can also be referred to the revaluation reserve in a situation where the investment is measured at fair value (for entities that are required to audit the balance sheet).

Entrepreneurs who are not obliged to audit the balance sheet, as well as those who are obliged to do so, as a result of investment revaluation, the effects are classified as financial revenues or costs, respectively.