Ind AS-40

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• Ind AS-40
• INVESTMENT PROPERTY
• by
• CA. D.S. Rawat
• Partner, Bansal Co.

2
Introduction

• A real estate property that has been purchased
  with the intention of earning a return on the
  investment (purchase) either through rent
  (income), the future resale of the property or
  both. An investment property is like any other
  investment, the goal is to generate a profit.
• The way in which a property is used has a
  significant impact on its value. Investors
  sometimes conduct studies to determine the best
  and most profitable use of a property. This is
  often referred to as its highest and best use.

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What is investment property

• Investment Property is property (land or building
  or part of a building or both) held to earn
  rentals or for capital appreciation or both.
• Rather than for -
• Use in the production or supply
• Sale in the ordinary course of business

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Scope

• The Standard applies to the measurement in a
  lessees financial statements of investment
  property held under a finance lease and to the
  measurement in the lessors financial statements
  of investment property leased out under an
  operating lease.
• However this Standard does not apply to
• the matter covered in Ind AS-17, Leases.
• biological assets related to agricultural
  activity (Ind AS-41) or,
• mineral rights and mineral reserves such as oil,
  natural gas and similar non-regenerative
  resources.

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Classification of Property

• Investment property - Land or building, or part
  of a building, or both, held by the owner or the
  lessee under a finance lease to earn rentals
  and/or for capital appreciation, rather than for
  
• use in production or supply of goods and services
  or
• use in administrative purposes or
• sale in the ordinary course of business.

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OwnerOccupied Property

• Held (by the owner or by the lessee under finance
  lease) for use in the production or supply of
  goods or services or for administrative purposes.
• One of the distinguishing characteristics of
  investment property (compared to owner-occupied
  property) is that it generates cash flows that
  are largely independent from other assets held by
  an entity. Owner-occupied property is accounted
  for under Ind AS-16, Property, Plant, and
  Equipment.
•  

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Examples of Investment Properties

• Land held for long-term capital appreciation
  rather than for short-term sale in the ordinary
  course of business.
• Land held for a currently undetermined future
  use.
• A building owned by the entity (or held by the
  entity under a finance lease) and leased out
  under one or more operating leases.
• A building that is vacant but is held to be
  leased out under one or more operating leases.
• Property that is being constructed or developed
  for future use as investment property.

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Examples of Not the Investment Properties

• Property intended for sale in the ordinary course
  of business or in the process of construction or
  development for such sale (Ind AS-2,
  Inventories).
• owner-occupied property ( Ind AS-16), including
  (among other things) 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.
• Property that is leased to another entity under a
  finance lease.

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Questions

• X Ltd. and its subsidiaries have provided you,
  their Ind AS specialist, with a list of the
  properties they own
• (a) Land held by X Ltd. for undetermined future
  use
• (b) A vacant building owned by X Ltd. and to be
  leased out under an operating lease
• (c) Property held by a subsidiary of X Ltd, a
  real estate firm, in the ordinary course of its
  business
• (d) Property held by X Ltd. for the use in
  production
• (e) A hotel owned by Z Ltd., a subsidiary of X
  Ltd, and for which Z Ltd provides security
  services for its guests belongings
•  Advise X Ltd. and its subsidiaries as to which
  of the above-mentioned properties would qualify
  under Ind AS-40 as investment properties. If they
  do not qualify thus, how should they be treated
  under Ind AS?

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Solution

• Properties described under items (a), (b), and
  (e) would qualify as investment properties under
  Ind AS- 40. With respect to item (e), it is to be
  noted that Ind AS- 40 requires that when the
  ancillary services are provided by the entity and
  they are considered relatively insignificant
  component of the arrangement, then the property
  is considered an investment property. These
  properties qualify as investment properties
  because they are being held for rental or for
  capital appreciation as opposed to actively
  managed properties that are used in the
  production of goods.
• Property described in item (c) is to be treated
  as inventory under Ind AS- 2. Property
  described in item (d) is treated as a Property,
  Plant and Equipment under Ind AS-16.
•  

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Recognition

• Investment property shall be recognized as an
  asset when and only when
• It is probable that future economic benefits will
  flow to the entity and
• The cost of the investment property can be
  measured reliably.
•  

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Initial Measurement

• An investment property shall be measured
  initially at its cost, including transaction
  charges.
•  
• However, property held under a finance lease
  shall be measured initially using the principles
  contained in Ind AS-17, Leases - at the lower of
  the fair value and the present value of the
  minimum lease payments. A key matter here is that
  the item accounted for at fair value is not the
  property itself but the lease interest.
•  

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Cost of Purchased Investment Property

• It comprises its purchase price and any directly
  attributable expenditure. Directly attributable
  expenditure includes, for example, professional
  fees for legal services, property transfer taxes
  and other transaction costs.
• However cost of an investment property does not
  include
• Start-up costs
• Operating losses incurred before the investment
  property achieves the planned level of occupancy,
  or
• Abnormal amounts of wasted material, labour or
  other resources incurred in constructing or
  developing the property
• Interest cost in case of deferred payment

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Measurement after Recognition

• An entity shall also measure subsequently after
  initial recognition all its investment property
  at cost.
•  
• This Standard requires all entities to measure
  the fair value of investment property, for the
  purpose of disclosure even though they are
  required to follow the cost model. An entity is
  encouraged, but not required, to measure the fair
  value of investment property on the basis of 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.

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Transfers

• Transfers to, or from, investment property shall
  be made when, and only when, there is a change in
  use, evidenced by
• commencement of owner-occupation, for a transfer
  from investment property to owner-occupied
  Property
• commencement of development with a view to sale,
  for a transfer from investment property to
  inventories
• end of owner-occupation, for a transfer from
  owner-occupied property to investment property
• Commencement of an operating lease to another
  party, for a transfer from inventories to
  investment property.
• 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.

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Disposal

• An investment property shall be derecognized on
  disposal or at the time that no benefit is
  expected from future use or disposal. Any gain or
  loss is determined as the difference between the
  net disposal proceeds and the carrying amount and
  is recognized in the income statement.

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Disclosure

• Classification criteria (to distinguish
  owner-occupied investment property, property held
  for sale in situations where classification is
  difficult).
• Methods and assumptions used to determine fair
  value.
• Extent of involvement of independent used to
  determine fair value
• Extent of involvement of independent,
  professional and recently experienced valuers in
  the determination of fair value (whether used as
  measurement basis or disclosed)
• Amounts included in profit or losses for
• Rental income
• Direct operating expenses from rented property
• Direct operating expenses from non-rented
  property
• Restrictions on realisibility or property or
  remittance of income/disposal proceeds

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• THANK
• YOU
• CA, D.S.RAWAT
• Partner, BANSAL Co.