Understanding investment terminology is essential for proper accounting of investments:

• Capital gain: A profit earned from the sale of an asset or security which has increased in value during the holding period.

• Contractual claim: A specified amount that must be paid in accordance with a legal agreement. For financial assets, it is the amount that must be paid to the owner of a security periodically according to the terms of the financial asset.

• Dividend: The distribution of some of a company's profit to its shareholders, as approved by the board of directors.

• Inflation: The general increase in the price of goods and services, or a fall in the purchasing power of money.

• Investor: A person who puts money into an entity or asset with the aim of getting financial returns.

• Liquidity: How easily an asset or security can be converted into cash without affecting its market value.

• Stock exchange: A centralised market where shares of publicly traded companies are bought and sold.

• Financial assets: Assets such as cash, bonds, and equity whose value comes from a contractual claim. Examples include certificates of deposit, accounts receivable, shares, bonds, and treasury bills.

• Shares and stock: A share is a unit of ownership representing an equal proportion of a company's capital, while stock is the aggregation of shares ownership in a company.

• Face value: Also known as par value or nominal value. It is the nominal or stated value assigned to each share by the company at the time of issuance. It represents the minimum price at which the share can be issued.

Investments are generally divided into two major categories:

1. Real Assets

Real assets include tangible properties such as plants, equipment, and real estate. They provide income through activities such as renting property.

2. Financial Assets

Financial assets are intangible assets whose value comes from contractual claims. They include shares, bonds, and treasury bills. This chapter focuses on investments in financial assets, specifically ordinary shares (equity securities) and bonds (fixed income securities).

Advantages and Disadvantages

Definition of Financial Assets

According to IAS 32, a financial asset can take various forms: cash, equity instruments in other entities, contractual rights to receive cash, or contracts settled in the entity's own equity instruments. In this context, the term pertains specifically to investments in ordinary shares and bonds.

Nature of Investment in Financial Assets

The nature of investment is determined by liquidity:

• Short-term investments: Easily converted into cash within a short period, less risky, but promise less return (e.g., bank deposits).

• Long-term investments: Not easily converted into cash in the near period (e.g., shares and bonds). They are attached to long-term objectives but may offer higher returns.

Characteristics of Financial Assets

1. Promises for future returns: Buying a share means owning part of a company with rights to dividends and capital gain. Buying a bond creates a creditor relationship with fixed interest income.

2. Store of value (purchasing power): Their value rests on faith that the issuer will honor contractual promises. Financial assets do not physically depreciate like physical goods.

3. Fungible: They can easily be converted into another form and substituted for other assets.

Financial assets are subdivided into two main groups:

1. Variable Income-Bearing Investments (Ordinary Shares)

Variable income-bearing investments are those where income varies from one period to another. The most popular is common stock or ordinary share. Benefits include:

• Voting rights in the firm's operations
• Returns in the form of dividends or capital gain
• Opportunity for bonus shares and rights issues

2. Fixed Income-Bearing Investments (Bonds)

Fixed income-bearing investments attract a fixed amount of interest or dividend after specific intervals. Types include:

• Certificate of Deposits (CDs): Issued by banks, require minimum deposit for fixed duration, offer higher interest rates than savings accounts.

• Treasury Bills: Short-term government securities issued at discount with maturity less than one year (in Tanzania: 35, 91, 182, and 364 days).

• Government Bonds: Government securities with maturity more than one year (in Tanzania: 2, 5, 7, 10, 15, and 20 years). Interest paid semi-annually.

• Corporate Bonds: Long-term bonds issued by companies to borrow funds for operations.

• Preference Shares: Shares issued by companies with promise of annual payment but no maturity period.

For an investor: Provides opportunity to allocate financial resources wisely instead of holding non-producing cash. Investments are a source of regular income.

For issuing firms and government: Source of funds to finance operations and development projects. Can be used as a macroeconomic stabilising tool through monetary policy.

For private entities: Source of capital for operations, project development, and economic development.

In Tanzania, financial assets are traded through the Dar es Salaam Stock Exchange (DSE), except government bonds which are initially traded through auction by the Bank of Tanzania (BoT).

Steps to invest:

1. Open a Central Depository System (CDS) account with DSE
2. For individuals: Submit application form, information sheet, and copy of ID
3. For corporations: Submit application form, certificate of incorporation, memorandum and articles of association, and directors' ID cards
4. Account opening is free of charge
5. To buy: Fill purchase order form, deposit money
6. To sell: Submit certificate of deposit, fill sale order form, and provide payment details
7. Transactions can be facilitated through a broker

On 1st April 2023, Zitendwa Ltd. purchased 2,000 ordinary shares of TZS 2,000 each from Mkakati Plc at TZS 4,800,000. On 1st August 2023, Mkakati Plc issued bonus shares of 1 share for every 5 shares held.

Solution:

The nominal value of bonus shares = (1/5) × 2,000 shares × TZS 2,000 = TZS 800,000

Investment Account (Ordinary Shares of Mkakati Plc)

Workings:

• Nominal value of original shares: 2,000 × TZS 2,000 = TZS 4,000,000
• Purchase price: TZS 4,800,000 (paid at a premium above nominal value)
• Bonus shares received: (1/5) × 2,000 = 400 shares
• Bonus issue nominal value: 400 × TZS 2,000 = TZS 800,000

A Form 5 student in Tanzania might use these investment concepts when helping a family member plan for future expenses. For example, if a parent receives a retirement package of TZS 5,000,000 and wants to finance a child's university education in two years, understanding the difference between short-term investments (like treasury bills with 35-364 days maturity) and long-term investments (like shares or bonds) helps them choose appropriately — short-term for liquidity and safety, or long-term for potentially higher returns while accepting more risk. The student could advise on opening a CDS account at the DSE to buy shares or government bonds through a broker, applying the concepts of face value, dividends, and interest income covered in this topic.