Ind AS 40: Investment Property
A B
Total Income 100 110
Total Assets 250 250
PAT 40 44
RoA (%) 16 17.60
A B
Total Income 100 110
Total sales 100 90
Other Income 0 20
A B
Total Income 100 110
Total sales 100 90
Other Income 0 20
PAT (R1) 40 44
PAT (Excl. OI) (R2) 40 36
Total Assets 250 250
RoA 16 14.40
A B
Total Income 100 110
Total sales 100 90
Other Income 0 20
PAT (R1) 40 44
PAT (Excl. OI) (R2) 40 36
Total Assets (A1) 250 250
Investment Property 0 30
A B
Total sales 100 90
Other Income 0 20
Total Income 100 110
PAT (R1) 40 44
PAT (Excl. OI) (R2) 40 36
Total Assets (A1) 250 250
Investment Property 0 30
Total Assets - IP (A2) 250 220
A B
Total sales 100 90
Other Income 0 20
Total Income 100 110
PAT (R1) 40 44
PAT (Excl. OI) (R2) 40 36
Total Assets (A1) 250 250
Investment Property 0 30
Total Assets - IP (A2) 250 220
RoA (3): R2/A2 16 16.36
A B
RoA (1): R1/A1 16 17.60
RoA (2): R2/A1 16 14.40
RoA (3): R2/A2 16 16.36
Ind AS 40
i. Objective and Scope of this standard
ii. Define the terms
a. Investment Property
b. Owner-occupied property
iii. Identify and recognise an Investment Property
iv. Measure the Investment Property in accordance with the standard
v. Disclosure requirements
1 (a). 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.
1 (b). Scope
• The Standard applies to the measurement in a lessee’s financial statements
of investment property held under a finance lease and to the measurement
in the lessor’s 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.
2(a). 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
…contd.
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.
…contd.
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.
2(b). Owner–Occupied 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.
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.
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.
Questions
X Ltd. and its subsidiaries have provided you, with a list of the properties they
own:
i.Land held by X Ltd. for undetermined future use
ii.A vacant building owned by X Ltd. and to be leased out under an operating
lease
iii.Property held by a subsidiary of X Ltd, a real estate firm, in the ordinary
course of its business
iv.Property held by X Ltd. for the use in production
v.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?
T e a s e r 1 ( Property held for more than one purpose)
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, how to classify the remaining 10 floors - as
investment property (Ind AS 40) or PPE (Ind AS 16).
T e a s e r 2 ( Property held for more than one purpose)
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.
How the company should classify the property .
Teaser 3 (Ancillary services):
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, how management should classify -
1. Hotel and other facilities
2. Health and fitness centre
Teaser 4 (Ancillary services):
ABC LTd. is owner of an office building (B1), provides security and
maintenance services to the lessees who occupy the building.
How ABC Ltd. should classify B1?
3. 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.
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.
Teaser 5
X Limited owns a building which is used to earn rentals. The building has a
carrying amount of Rs. 50,00,000. X Limited recently replaced interior
walls of the building and the cost of new interior walls is Rs. 5,00,000. The
original walls have a carrying amount of Rs. 1,00,000. How X Limited
should account for the above costs?
Teaser 6
Sun Ltd acquired a building in exchange of a warehouse whose fair value
is Rs. 5,00,000 and payment of cash is Rs. 2,00,000. The fair value of the
building received by the Company is Rs. 8,00,000. The company decided
to keep that building for rental purposes.
The Building is acquired with the purpose to earn rentals, calculate its
carrying amount.
Teaser 7
X Limited purchased a building for Rs. 30,00,000 on May 1, 20X1. The
purchase price was funded by a loan. Property transfer taxes and direct legal
costs of Rs. 1,00,000 and Rs. 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:
i. Rs.2,00,000 - planning permission
ii. Rs. 7,00,000 - construction costs (including Rs. 40,000 refundable
purchases taxes).
The redevelopment was completed and the retail shops were ready for rental
on September 2, 20X1.
What is the cost of building at initial recognition?
Teaser 8
X Limited purchased a land worth of Rs. 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 Rs. 1,20,00,000. What should be the cost of the building
under both the payments method?
Teaser 9
Moon Ltd has purchased a building on 1st April 20X1 at a cost of Rs. 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 was
estimated to be 10 years as on 1st April 20X1 . 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 Rs. 8 million.
Calculate its carrying amount as on 31st March 20X6.
