Ind AS 40 " Investment Property"

Let us understand Ind AS 40 which deals with the Investment property. I have tried to compile the entire standard for your easy reference and understanding

Scope:

1.?Recognition, Measurement and disclosure of Investment property.

2. Shall not apply to:

a. Biological assets related to agricultural activities (Covered under Ind As 41).

b. Mineral rights and Mineral reserves such as oil, Natural Gas and similar non-generative resources.

What is an Investment Property?

A property held to earn rentals or for the capital appreciation or both, rather than for:

a.?Use in the production, supply of goods or services or administrative purpose (Commonly called as Owner Occupied Property)- Covered in Ind AS 16.

b.?Sale in the ordinary course of business -Covered in Ind AS 2

Here, the property Includes Land or Building or both or a part of it which has been held by entity the under an ownership or under a lease as a Right of use asset.

It is very clear that if an entity is having land or a building which is being solely for the purpose of rentals or for the capital appreciation, it will be classified as investment property. Correspondingly any assets which are integral part of an investment property (E.g., Elevators, Escalators, etc) also will be classified as Investment Property.

Land which is held by the entity for undetermined future use will also be classified as investment property.

Property for Dual Use (Owner Occupied and Rental):

If any property is used both for the administrative purposes or production purposes by the owner and Party has been given for rental Purpose, following criteria must be met to be classified as Investment property:

a.?If the Property could be sold legally or leased out under a finance lease

b.?Insignificant portion of the total property is occupied by the owner (Significant meaning has not been defined by the standard, commonly considered as 10% or more)

** if any ancillary services are being provided by the owner of the property like security services or maintenance services, the same will be clubbed as Investment property if the same is not significant to the arrangement as a whole.

Initial Recognition:

Generally, no owned investment property shall be recognized as an asset unless the following points are met with:

a. It is probable that the Future economic benefit will flow to the entity

b.?Cost can be measured reliably.

This principle is used to capitalize an investment property in the books of accounts (At Cost)

This cost includes:

a. Purchase Price

b. Direct expenses

c.?Non-Refundable taxes

d.?Borrowing cost (In Compliance with Ind As 23)

e.?Cash price equivalent in case of deferred payment **, etc

Exclusions

a.?Start up costs unless required to bring the property of the present condition and location for the intended use or

b. Abnormal losses or

c.?Operating losses incurred the Property achieves the planned level of occupancy.

** In case of Deferred the cost will be the cash equivalent of the property and the difference between the total amount paid after the contractual period and cash equivalent will be the interest expense which will be recognized during the period of credit.

Exchange of Investment property:

Sometimes entity might have acquired an investment property by the exchange if non-monetary asset or group of assets, then following treatment must be followed:

1.?If the exchange has no commercial substance of the fair value of the Property cannot be measured reliably, then Cost of Investment property will be the carrying value of assets given

2.?If the exchange has commercial substance of the fair value of the Property can be measured reliably then the cost will:

a.?Fair value of assets received if the Fair value of assets received is more evident than fair value of assets given

b.?Fair value of assets given if the Fair value of assets given is more evident than fair value of assets given.

c.?If the fair value of both assets given and received are evident, consider the Fair value of assets given.

Subsequent Recognition:

Unlike Ind AS 16, The subsequent recognition of Investment property must be done at Cost only. No Revaluation model is allowed in Ind AS 40.

However, the fair valuation will be done which is solely for the purpose of presentation in the Notes to accounts.

If the fair value is not reliability measured on a continuing basis, the same also has to be disclosed appropriately.

Transfers:

It is possible that the Board might have to change the intention of use of the property. In such cases, the asset will cease to meet the condition of Investment property and hence need to re-classify the same to the difference head (Example from Investment property to PPE)

All the transfers are done always at the carrying value of assets.

De-recognition:

1.?An investment will be de-recognized if:

a.?It is disposed of (Sale or Under Finance Lease)

b.?Permanent withdrawn From the Intended use.

c.?No Future economic benefit are expected from the use of such property.

In such cases, the investment property should be written off and any profit or loss on such De-recognition must be transferred to Profit and loss account.

Presentation and Disclosures:

1.?Accounting Policy for measurement.

2.?Fair value of all the investment properties held by the entity.

3.?Fair value Principles followed as per Ind AS 113 and also any exception situation when the entity cannot measure the fair value of investment property reliably

4.?Amount recognized in Profit and loss account.

5.?Reconciliation of carrying amount of investment Property at the beginning and the end.

6.?Depreciation method used and its estimations, etc.