Valuation of Stock in trade of Bonds

Save Share

This query is : Resolved

nikhil bapat (Querist)
Follow

12 April 2010 hi friends

i need ur inputs on following matter

What should be the valuation policy to be adopted by a company, who is trading in Bonds, in respect of closing stock of Bonds?
What would be the applicable accounting standard?

DEEPIKA GOEL

DEEPIKA GOEL (Expert)
Follow

12 April 2010 There is no specific accounting standard which describe the procedure of valuation of bond for trading organisation. We can refer the AS-2, Inventories which is in general. Bonds will be covered in inventories as for trading organisation bought with the motive of sale in future not to holding till maturity.

AS per AS-2, the closing stock will be valued at cost or market value whichever is less. And for determination of closing stock, the FIFO or weighted average method to be followed.

Now the question is how to derive the market value of the bond. Generally the fair value of bond i.e. present value of cash flows which is expected to generate from the bond discounted at discount rate should be considered the market value of the bond. So you can derive the value of the bond on this basis.

nikhil bapat

nikhil bapat (Querist)
Follow

14 April 2010 but AS 2 specifically excludes shares, debentures & similar financial instruments from its scope

Aashok Kumar Sharma online

Aashok Kumar Sharma

(Expert)
Follow

02 August 2025 You're right — AS 2 *excludes* shares, debentures, bonds, and similar financial instruments from its scope of inventory valuation.

---

### So, for **valuation of bonds held as stock-in-trade** (i.e., trading bonds), what should be done?

1. **Accounting Standard Guidance:**

* AS 2 does not apply to bonds.
* Instead, **AS 13 - Accounting for Investments** applies to valuation of such financial instruments.

2. **Valuation Principles under AS 13 for trading bonds:**

* Investments held for trading are valued at **fair value**.
* Fair value generally means **market price** or **net realizable value**.
* If market price is not available, **fair value can be estimated** as the present value of expected future cash flows discounted at an appropriate market rate.

3. **Summary for bonds in stock-in-trade:**

* Record the bonds at **cost** on purchase.
* At reporting date, revalue to **lower of cost and fair value**.
* Fair value should be determined based on:

* Quoted market price if available.
* Otherwise, discounted present value of expected cash flows.

4. **Methods:**

* Use **discounted cash flow (DCF) method** to arrive at fair value if market price unavailable.
* Discount cash flows using appropriate yield or discount rate (reflecting market rate of interest for similar bonds).

---

### So, practically:

* Bonds in trading stock = valued at **lower of cost or fair value**.
* Fair value = **market price or discounted value of expected cash flows**.

---

If you want, I can help you with the formula or Excel model to calculate the discounted value for a bond! Would you like that?

You need to be the querist or approved CAclub expert to take part in this query .
Click here to login now