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Investment Property Accounting Standard
Investment Property Accounting Standard
323
UNIT 7 :
INDIAN ACCOUNTING STANDARD 40 : INVESTMENT
PROPERTY
LEARNING OUTCOMES
UNIT OVERVIEW
Classification of property as
Objective and Scope investment property or owner-
occupied property
Investment Property
Ind AS 40
Transfers and Disposals Recognition and Measurement
7.1 OBJECTIVE
The objective of this standard is to prescribe the accounting treatment for property (land and/or
buildings) held to earn rentals or for capital appreciation (or both). Ind AS 40 prescribes the cost
model for accounting for investment property.
7.2 SCOPE
1) Ind AS 40 should be applied in the recognition, measurement and disclosure of investment
property.
2) This Standard does not apply to:
a) biological assets related to agricultural activity (see Ind AS 41, Agriculture and Ind AS 16
Property, Plant and Equipment); and
b) mineral rights and mineral reserves such as oil, natural gas and similar non-regenerative
resources.
c) a building owned by the entity (or a right-of-use asset relating to a building held by
the entity) and leased out under one or more operating leases.
d) a building that is vacant but is held to be leased out under one or more operating leases.
e) property that is being constructed or developed for future use as investment property.
The following are examples of items that are not investment property and are therefore outside
the scope of this Standard:
a) property intended for sale in the ordinary course of business or in the process of
construction or development for such sale (see Ind AS 2, Inventories), for example,
property acquired exclusively with a view to subsequent disposal in the near future or for
development and resale.
b) owner-occupied property (see Ind AS 16 and Ind AS 116), including property held for
future use as owner-occupied property, property held for future development and
subsequent use as owner-occupied property, property occupied by employees (whether
or not the employees pay rent at market rates) and owner-occupied property awaiting
disposal.
c) property leased to another entity under a finance lease.
Ind AS 16 Ind AS 40
Example
Sun Ltd owns a building having 15 floors of which it uses 5 floors for its office; the remaining
10 floors are leased out to tenants under operating leases. According to law company could
sell legal title to the 10 floors while retaining legal title to the other 5 floors.
In the given scenario, the remaining 10 floors should be classified as investment property,
since they are able to split the title between the floors.
Example
Moon Ltd uses 35% of the office floor space of the building as its head office. It leases the
remaining 65% to tenants, but it is unable to sell the tenant’s space or to enter into finance
leases related solely to it.
Therefore, the company should not classify the property as an investment property as the
35% of the floor space used by the company is significant.
Example
An entity owns a hotel, which includes a health and fitness centre, housed in a separate
building that is part of the premises of the entire hotel. The owner operates the hotel and
other facilities on the hotel with the exception of the health and fitness centre, which can be
sold or leased out under a finance lease. The health and fitness centre will be leased to an
independent operator. The entity has no further involvement in the health and fitness centre.
In this scenario, management should classify the hotel and other facilities as property, plant
and equipment and the health and fitness centre as investment property.
If the health and fitness centre could not be sold or leased out separately on a finance lease,
then because the owner-occupied portion is not insignificant, the whole property would be
treated as an owner-occupied property.
4) Ancillary services
In some cases, an entity provides ancillary services to the occupants of a property it holds. An
entity treats such a property as investment property if the services are insignificant to the
arrangement as a whole. An example is when the owner of an office building provides security
and maintenance services to the lessees who occupy the building.
In other cases, the services provided are significant. For example, if an entity owns and manages
a hotel, services provided to guests are significant to the arrangement as a whole. Therefore, an
owner-managed hotel is owner-occupied property, rather than investment property.
Example
The owner of an office building provides security and maintenance services to the lessees who
occupy the building. In such a case, since the services provided are insignificant, the property
would be treated as an investment property.
If an entity owns and manages a hotel, services provided to guests are significant to the
arrangement as a whole. In such case, an owner-managed hotel is owner-occupied property,
rather than investment property.
Services
Rental Income
Ind AS 40
It may be difficult to determine whether ancillary services are so significant that a property does
not qualify as investment property. For example, the owner of a hotel sometimes transfers
some responsibilities to third parties under a management contract. The terms of such
contracts vary widely. At one end of the spectrum, the owner’s position may, in substance, be
that of a passive investor. At the other end of the spectrum, the owner may simply have
outsourced day-to-day functions while retaining significant exposure to variation in the cash
flows generated by the operations of the hotel.
Judgement is needed to determine whether a property qualifies as investment property.
Judgement is also required to determine whether the acquisition of Investment Property is the
acquisition of an asset or a group of assets or a business combination within the scope of Ind
AS 103, Business Combinations.
7.5 RECOGNITION
1) General principle
An owned investment property shall be recognised as an asset when, and only when:
a) it is probable that the future economic benefits that are associated with the investment
property will flow to the entity; and
b) the cost of the investment property can be measured reliably.
This general principle is used to consider whether capitalisation is appropriate both in respect
of the cost incurred initially to acquire or construct an owned investment property and costs
incurred subsequently to add to, replace part of, or service a property.
An investment property held by a lessee as a right-of-use asset shall be recognised in
accordance with Ind AS 116.
2) Subsequent costs
Under the recognition principle set out above, an entity does not recognise in the carrying
amount of an investment property the costs of the day-to-day servicing of such a property and
costs incurred to replace parts of the original property being recognised in the investment
property if they meet the recognition criteria.
When the cost of replacement parts is capitalised, the carrying amount of the replaced parts is
derecognised.
Illustration 1
X Limited owns a building which is used to earn rentals. The building has a carrying amount of
` 50,00,000. X Limited recently replaced interior walls of the building and the cost of new
interior walls is ` 5,00,000. The original walls have a carrying amount of ` 1,00,000. How
X Limited should account for the above costs?
Solution
Under the recognition principle, an entity recognises in the carrying amount of an investment
property the cost of replacing part of an existing investment property at the time that cost is
incurred if the recognition criteria are met and the carrying amount of those parts that are
replaced is derecognised.
So, X Limited should add the cost of new walls and remove the carrying amount of old walls.
The new carrying amount of the building = ` 50,00,000 + ` 5,00,000 – ` 1,00,000 = ` 54,00,000.
****
Illustration 2
X Limited purchased a building for ` 30,00,000 in 1st May, 20X1. The purchase price was funded by
a loan. Property transfer taxes and direct legal costs of ` 1,00,000 and ` 20,000 respectively were
incurred in acquiring the building. In 20X1-20X2, X Limited redeveloped the building into retail
shops for rent under operating leases to independent third parties. Expenditures on redevelopment
were:
` 2,00,000 planning permission.
` 7,00,000 construction costs (including ` 40,000 refundable purchases taxes).
The redevelopment was completed and the retail shops were ready for rental on
2nd September, 20X1.
What is the cost of building at initial recognition?
Solution
The cost of a purchased investment property comprises its purchase price and any direct attributable
expenditure.
So, the cost of the building = ` (30,00,000 +1,00,000 + 20,000 + 2,00,000 + 7,00,000 - 40,000) =
` 39,80,000.
****
Illustration 3
X Limited purchased a land worth of ` 1,00,00,000. It has option either to pay full amount at the time
of purchases or pay for it over two years for a total cost of ` 1,20,00,000. What should be the cost
of the building under both the payment methods?
Solution
Using either payment method, the cost will be ` 1,00,00,00. If the second payment option is used,
` 20,00,000 will be treated as interest expenses over the period of credit i.e., 2 years.
****
investment property on a continuing basis. But in exceptional cases, when an entity first acquired
(or when an existing property first becomes investment property after a change in use), there may
be clear evidence that the fair value of the investment property is not reliably measurable on a
continuing basis. This arises when, and only when, the market for comparable properties is
inactive (e.g. there are few recent transactions, price quotations are not current or observed
transaction prices indicate that the seller was forced to sell) and alternative reliable
measurements of fair value (for example, based on discounted cash flow projections) are not
available.
Above exception is available only when the investment property is first recognised as such. If
an entity has previously measured the fair value of an investment property, it should continue
to measure the fair value of that property until disposal (or until the property becomes owner-
occupied property or the entity begins to develop the property for subsequent sale in the
ordinary course of business) even if comparable market transactions become less frequent or
market prices become less readily available.
If an entity determines that the fair value of an investment property (other than an investment
property under construction) is not reliably measurable on a continuing basis, the entity should
make the disclosures as prescribed under Ind AS 40.
In the exceptional cases when an entity is compelled, for the reason given above to make the
disclosures, it should determine the fair value of all its other investment property, including
investment property under construction. In these cases, although an entity may make the
disclosures as required for one investment property, the entity should continue to determine
the fair value of each of the remaining properties for disclosure as required.
4) Investment property in the course of construction
If an entity determines that the fair value of an investment property under construction is not
reliably measurable but expects the fair value of the property to be reliably measurable when
construction is complete, it should measure the fair value of that investment property either when
its fair value becomes reliably measurable or construction is completed (whichever is earlier).
Once an entity becomes able to measure reliably the fair value of an investment property under
construction for which the fair value was not previously measured, it should measure the fair
value of that property.
Once construction of that property is complete, it is presumed that fair value can be measured
reliably. If this is not the case, the entity should make the disclosures as required by Ind AS 40.
The presumption that the fair value of investment property under construction can be measured
reliably can be rebutted only on initial recognition. An entity that has measured the fair value
of an item of investment property under construction may not conclude that the fair value of the
completed investment property cannot be measured reliably.
7.8 TRANSFERS
1) An entity shall transfer a property to, or from, investment property when, and only when, there
is a change in use. A change in use occurs when the property meets, or ceases to meet, the
definition of investment property and there is evidence of the change in use. In isolation, a
change in management’s intentions for the use of a property does not provide evidence of a
change in use. Examples of evidence of a change in use include:
a) commencement of owner-occupation, or of development with a view to owner-occupation,
for a transfer from investment property to owner-occupied property;
Ind AS 40 Ind AS 16
b) commencement of development with a view to sale, for a transfer from investment
property to inventories;
Ind AS 40 Ind AS 2
c) end of owner-occupation, for a transfer from owner-occupied property to investment
property; or
Ind AS 16 Ind AS 40
d) inception of an operating lease to another party, for a transfer from inventories to
investment property.
Ind AS 2 Ind AS 40
2) When an entity decides to dispose of an investment property without development, it continues
to treat the property as an investment property until it is derecognised (eliminated from the
balance sheet) and does not reclassify it as inventory. Similarly, if an entity begins to redevelop
an existing investment property for continued future use as investment property, the property
remains an investment property and is not reclassified as owner-occupied property during the
redevelopment.
3) Transfers between investment property, owner-occupied property and inventories do not
change the carrying amount of the property transferred and they do not change the cost of that
property for measurement or disclosure purposes.
Illustration 4
Moon Ltd has purchased a building on 1 st April, 20X1 at a cost of ` 10 million. The building was
used as a factory by the Moon Ltd and was measured under cost model. The expected useful life of
the building is estimated to be 10 years. Due to decline in demand of the product, the Company
does not need the factory anymore and has rented out the building to a third party from
1st April, 20X5. On this date the fair value of the building is ` 8 million. Moon ltd uses cost model
for accounting of its investment property.
Solution
(` Million)
Carrying amount of the building after depreciation of 4 years 6
(10-10/10 x 4).
The company has applied cost model under Ind AS 16 till now.
There is no impairment as the fair value is greater than the carrying amount of building.
Revaluation Surplus credited to Other Comprehensive Income ---
(not applicable since cost model is used under Ind AS 16)
Building initially recognised as Investment Property 6
(Cost model Ind AS 40)
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7.9 DISPOSALS
1) An investment property should be derecognised (eliminated from the balance sheet)
a. on disposal or
b. when the investment property is permanently withdrawn from use and no future economic
benefits are expected from its disposal.
2) The disposal of an investment property may be achieved by:
a. sale or
b. entering into a finance lease.
3) The date of disposal for investment property that is sold is the date the recipient obtains control
of the investment property in accordance with the requirements for determining when a
performance obligation is satisfied in Ind AS 115. Ind AS 116 applies to a disposal effected by
entering into a finance lease and to a sale and leaseback.
4) Gains or losses arising from the retirement or disposal of investment property should be
determined as the difference between the net disposal proceeds and the carrying amount of
the asset and shall be recognised in profit or loss (unless Ind AS 116 requires otherwise on a
sale and leaseback) in the period of the retirement or disposal.
5) The amount of consideration to be included in the gain or loss arising from the derecognition
of an investment property is determined in accordance with the requirements for determining
the transaction price as per Ind AS 115. Subsequent changes to the estimated amount of the
consideration included in the gain or loss shall be accounted for in accordance with the
requirements for changes in the transaction price in Ind AS 115.
6) An entity applies Ind AS 37 or other Standards, as appropriate, to any liabilities that it retains
after disposal of an investment property.
7) Compensation from third parties for investment property that was impaired, lost or given up
shall be recognised in profit or loss when the compensation becomes receivable.
Example:
Sun Ltd, an aeronautics company is having a building which is given on an operating lease.
The book value of such building in the books is ` 2,00,000.
Case -A
Pluto Ltd. offers to buy the building at ` 4,00,000.
Bank Dr 4,00,000
To Investment Property 2,00,000
To Gain on disposal 2,00,000
Case- B
Pluto Ltd. offers to take the building on finance lease for 10 years at a lease rental of
` 80,000 p.a. The present value of minimum lease payments is ` 3,20,000.
Lease Receivable Dr 3,20,000
To Investment Property 2,00,000
To Gain on Disposal 1,20,000
7.10 DISCLOSURE
The disclosures below apply in addition to those in Ind AS 116. In accordance with Ind AS
116, the owner of an investment property provides lessors’ disclosures about leases into
which it has entered. A lessee that holds an investment property as a right-of-use asset
provides lessees’ disclosures as required by Ind AS 116 and lessors’ disclosures as required
by Ind AS 116 for any operating leases into which it has entered.
An entity should disclose:
1) its accounting policy for measurement of investment property.
2) the criteria it uses to distinguish investment property from owner-occupied property and from
property held for sale in the ordinary course of business.
3) the extent to which the fair value of investment property (as measured for disclosed in the financial
statements) is based on a valuation by an independent valuer who holds a recognised and relevant
professional qualification and has recent experience in the location and category of the investment
property being valued. If there has been no such valuation, that fact shall be disclosed.