Ind AS-40
INVESTMENT PROPERTY
by
CA. D.S. Rawat
Partner, Bansal & Co.
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.
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
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.
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.
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, 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?
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.
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.
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
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.
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.
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.
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
income/disposal proceeds
or
property
or
remittance
of
THANK
YOU
CA, D.S.RAWAT
Partner, BANSAL & Co.