IndAS 40 additional qns
Qn 16 (ak pg20.4)
● X Ltd., a construction company, prepares financials up to 31st March each year.
● On 1st April, 20X1, X Ltd. purchased a large property (land) for ₹2,00,00,000 and
leased it to Y Ltd. on an operating lease.
● Annual rental = ₹20,00,000
● On 31st March, 20X5, the fair value = ₹2,60,00,000
● Y Ltd. cancelled lease with six months’ notice on 30th September, 20X5
● Fair value on 30th September, 20X5 = ₹2,90,00,000
● On 1st Oct, 20X5, X Ltd. started converting property into 10 separate flats for sale
● By 31st March, 20X6, ₹60,00,000 was spent on development; estimated ₹40,00,000
more needed to complete
● Each flat can be sold for ₹50,00,000 (Total: ₹5,00,00,000)
Required:
Explain how these events would be reported in financial statements of X Ltd. for year
ending 31st March, 20X6 as per Ind AS.
Solution
1. Initial Classification (From 1st April, 20X1):
○ Property was held to earn rentals, so classified as Investment Property
under Ind AS 40
○ Measured using cost model:
■ Carrying value = ₹2,00,00,000
2. Rental Income:
○ Lease is an operating lease, so rental income = ₹10,00,000
■ (₹20,00,000 × 6/12)
○ To be recognised in P&L for the year ended 31st March, 20X6
3. Change in Use (From 30th September, 20X5):
○ X Ltd. ceased leasing and began developing flats for sale
○ Therefore, property ceases to be Investment Property
○ It is now inventory under Ind AS 2 – Inventories
○ As per Para 59 of Ind AS 40, change in use does not affect cost basis, so:
■ Carrying amount remains at ₹2,00,00,000
4. Development Costs:
○ Till 31st March, 20X6, development costs = ₹60,00,000
○ These are added to the cost of inventory
○ Total carrying amount = ₹2,60,00,000
5. Further Costs and NRV:
○ Further estimated cost to complete = ₹40,00,000
○ Expected sale value = ₹5,00,00,000 (10 flats × ₹50,00,000)
○ Total cost = ₹2,60,00,000 + ₹40,00,000 = ₹3,00,00,000
○ Therefore, NRV = ₹5,00,00,000 – ₹40,00,000 = ₹4,60,00,000
○ Since NRV > cost, inventory is measured at cost ₹2,60,00,000
6. Presentation: Flats will be shown under inventory as a current asset in financial
statements
Qn 17 (Past Exam – May 2018, July 2021 | MTP May 2023)(ak pg 20.9)
Scenario: Stars Ltd. owns 3 properties purchased on 1st April 2016. Details are:
● Property 1: Factory, cost ₹30,000, FV on 31-03-17 ₹32,000, life 10 years
● Property 2: Factory, cost ₹20,000, FV on 31-03-17 ₹22,000, life 10 years
● Property 3: Let-out building, cost ₹24,000, FV on 31-03-17 ₹27,000, life 10 years
Measurement models chosen:
● Property 1: Cost model
● Property 2: Revaluation model
● Property 3: Revaluation model
Requirement:
Analyse if classification and valuation policies comply with Ind AS, and correct if required.
Show relevant BS extracts.
Solution
(i) Classification of assets:
Property 1 and 2: Used as factory buildings, hence classified as PPE under Ind AS 16
Property 3: Let out to unrelated party for rental income → should be classified as
Investment Property under Ind AS 40
Thus,
Classification of P 1 & 2 as PPE is correct
Classification of Property 3 as PPE is incorrect → should be shown separately as
Investment Property
(ii) Valuation of assets:
Ind AS 16: Entity must apply cost or revaluation model to entire class of PPE
Property 1 is on cost model, Property 2 on revaluation model
→ Inconsistent with Ind AS 16
Therefore, both PPE (Prop 1 & 2) must follow same model – either cost or revaluation
Ind AS 40: For Investment Property (Prop 3), only cost model is permitted for measurement
→ However, fair value must be disclosed in Notes
(iii) Revaluation impact:
Property 1 (FV 32,000 – Cost 27,000): Gain ₹5,000
Property 2 (FV 22,000 – Cost 18,000): Gain ₹4,000
→ Total revaluation surplus = ₹9,000
Revaluation surplus is routed through OCI → shown under Revaluation Reserve in Equity
(iv) Depreciation treatment:
As per Ind AS 16, depreciation to be charged even if FV > Carrying Value
Deprn to continue till the end of useful life
Rectified Presentation in Balance Sheet (Two Cases):
Case 1: Stars Ltd. applies Cost Model to entire class of PPE:
Property 1: ₹30,000 – Dep ₹3,000 = ₹27,000
Property 2: ₹20,000 – Dep ₹2,000 = ₹18,000
Property 3 (Investment Prop.): ₹24,000 – Dep ₹2,400 = ₹21,600
Balance Sheet extract:
● Property, Plant and Equipment: ₹27,000 + ₹18,000 = ₹45,000
● Investment Property: ₹21,600
Case 2: Stars Ltd. applies Revaluation Model to entire class of PPE:
● Property 1: Shown at FV ₹32,000
● Property 2: Shown at FV ₹22,000
● Revaluation Reserve: ₹9,000 (₹5,000 + ₹4,000)
● Property 3 (Investment Prop.): ₹21,600 (Cost less dep., FV disclosed in notes)
Balance Sheet extract:
● Property, Plant and Equipment: ₹32,000 + ₹22,000 = ₹54,000
● Investment Property: ₹21,600
● Revaluation Reserve (Equity): ₹9,000
Qn 18 (MTP – Aug 2018)(ak pg 20.8)
Scenario: UK Ltd. purchased a new office building for ₹10 crores. The building has 10
floors, out of which floors 8, 9, and 10 are leased out on long-term basis.
● Lease Terms:
○ Tenure: 5 years
○ Non-cancellable: 3 years
○ Lease rentals: ₹10,00,000 per floor per annum
○ Escalation: 5% p.a.
● Internal Use (floors 1–7): Used for admin, HR, MD office, canteen etc.
● Based on architect's certificate:
○ Floors 8, 9, 10 = 30% of total space
○ Cost allocation: Land 25%, Building 75%
○ Land = ₹2.5 crores, Building = ₹7.5 crores → Floor-wise: Land ₹0.75 cr,
Building ₹2.25 cr
● Useful life of building = 50 years
● Valuation as on 31 March 2018 = ₹15 crores
● UK Ltd. wants to use:
○ Cost model for PPE
○ Fair value model for Investment Property (IP)
Analysis:
● As per Ind AS 40, leased-out portions under operating lease are classified as
Investment Property
● Lease period (5 years) is short compared to the useful life (50 years)
● Rental income = ₹10L × 3 floors = ₹30L p.a.
○ 3-year income = ₹90L + 5% annual escalation
○ Not enough to recover FV of ₹4.5 crore → Hence, lease = Operating Lease
Conclusion:
● Floors 1–7 → PPE (70%)
● Floors 8–10 → Investment Property (30%)
● Since UK Ltd. uses Cost Model for PPE and Fair Value model for IP, it's
acceptable as per Ind AS 40
Accounting Treatment in Books:
Cost Allocation:
Component Total ₹ Cr PPE (70%) ₹ Cr Investment Property (30%) ₹ Cr
Land (25%) 2.50 1.75 0.75
Building (75%)7.50 5.25 2.25
Total 10.00 7.00 3.00
Valuation as on 31st March 2018:
Note: For PPE – Cost model followed
For IP – Fair value model (as per para 30 of Ind AS 40)
Component Total ₹ Cr PPE (70%) ₹ Cr Investment Property (30%) ₹ Cr
Land (25%) 3.75 2.625 1.125
Building (75%)11.25 7.875 3.375
Total 15.00 10.50 4.50
Depreciation & Carrying Amounts (As on 31st March 2018):
● Useful life = 50 years
● Depreciation (only on Building):
○ PPE Building: ₹5.25 Cr / 50 = ₹0.105 Cr
○ IP Building: ₹2.25 Cr / 50 = ₹0.045 Cr
● Depreciation on Land = Nil
Final Carrying Amounts:
Component Cost ₹ Cr Depreciation ₹ Cr Carrying Amount ₹ Cr
Land (PPE) 1.75 0.00 1.75
Building (PPE)5.25 0.105 5.145
Building (IP) 3.00 0.06 2.94
