Companies can own investments in exactly the same way as a natural person would, for example, a company may have subsidiaries or own a portfolio of shares in other companies. These are assets.
- If investments are held for the long term, they should be shown in the Balance Sheet as a non-current asset.
- If investments are held only for the short term, with the intention of selling them in the fairly near future, they should be shown in the Balance Sheet as a current asset.
Income from investments (i.e. dividends received by a company) is shown in the Profit and Loss Account.
‘Writing down’ investments
Investments are usually shown at cost (without impairment). If their value falls, however, they should be ‘written down’ to their new, lower value. This will involve the following adjustments to the accounts:
- reduction in the value of the asset in the Balance Sheet by the amount of the decrease in value; and
- reduction in value to be treated as an expense in the Profit and Loss Account (‘impairment of investments’).
These adjustments have the following effect:
- the increase in the expenses reduces the profit for the year at the bottom of the Profit and Loss Account to the same extent; and
- the reduction in size of the ‘Profit for the year’ figure which is carried across to the SoCiE causes a similar reduction in the size of Retained Earnings (profit and loss carried forward) in the Balance Sheet, thus maintaining the balance.