Interpretation of Ind-As 40 (Investment Property)
Introduction : In Accounting standards as well as in Ind-As they have made an alignment in relation concept of recognition, measurement, disclosure of Property Plant and Equipment; however Ind-As also provides and separate standard on Investment Property; Therefore it is important to understand that what is Investment Property, How it is measured, How it is to be recognized what are the exception which has been provided in such standard. In this article we will cover all the relevant topic in relation to Investment Property.
What is the scope of Ind-As 40?
It has been specified that Ind-As 40 will not be applicable to biological assets related to agricultural activity as in this relation Ind-As 41 (Agriculture) and Ind-As 16 (Property Plant and Equipment) will be applicable.
Also, it will not be applicable to mineral rights and mineral reserves such as oil, natural gas and similar non-regenerative resources.
What will be Investment Property?
Investment property is property i.e. being (i) Land (ii) Building or Part of Building (iii) or combination of both to earn rentals or for capital appreciation or both.
Further it will be applicable to owner, lessor under operating lease and lessee under finance lease (For lessee under finance lease, in case where it has held the property for subletting or has taken such property on finance lease for capital lease. As all of the above are required to recognized asset in books of account.
What if such property is used by the owner for other than above purpose?
In case if it has been used by the owner in production or supply of goods or services or for administrative purposes (Ind-As 16, Property Plant and Equipment will be applicable), or it has been held for sale in ordinary course of business (Ind-As 2, Inventories) will be applicable.
In above case it shall also be noted that if property is held for use in the production or supply of goods or services or for administrative purposes than it will be termed as Owner-Occupied Property.
What if property is held for more than one purpose?
It may happen that property is held partly for capital appreciation and/or rentals, and partly for production or supply of goods or services or for administrative purposes; in such cases it shall be noted that if (i) If two parts can be sold, or leased out separately under a finance lease than in that case both are separately accounted(ii) In case it is not possible to split, in such case it will be accounted as Property Plant and Equipment if significant portion is used in the production or supply of goods or services or for administrative purposes; in all other case it will be accounted as Investment Property. (In case where there is insignificant use for a production or supply of goods or services or for administrative purposes than also entire property will be treated as Investment Property).
What if along with other income, other ancillary income is also received or accrued?
In case where such ancillary income is insignificant in proportion to main income (i.e. income from arrangement as a whole): – In such case entire income can be treated as income from investment property.
However, in case if such other income is significant to main income than in that case entire income will be treated as income from owner occupied property and will treated under other standard. It will not be treated as income from investment property and such property will be accounted under other standards.
What if renting leasing of property is with the group companies?
It may happen that entity owns property that is leased to, and occupied by, its parent or another subsidiary. In such case treatment is to be determined for 3 books of accounts; i) Books of Accounts of Owner of Property: In that case such property will be treated as Investment property (However, it shall meet the definition as prescribed above). ii) Books of Accounts of Occupier of Property: In his books of account property will not be accounted as they are not the owners of the property. iii) In consolidated financial statement: In consolidated financial statement such property will be treated as owner occupied property.
How entity will be required to measure investment property at initial recognition and at subsequent date?
Investment property will be initial measured at cost (i.e. purchase cost excluding recoverable taxes included if any, any other transaction cost or cost which is directly attributable to purchase.)
It shall be noted that Investment property is always recognized at cost even on subsequent date it will not be premeasured at fair value.
Whether fair value is required to be disclosed mandatorily?
Yes, even in case entity is required to follow cost model, Entities are required to measure the fair value of investment property and will be mandatory for entity that they disclose such value through notes to accounts.
What can be termed as fair value?
It is the price that would be received to
- sell an asset or paid to transfer a liability
- in an orderly transaction
- between market participants
- at the measurement date.
In Part-2 we will discuss how treatment will be made in case there is change in use of property, or how disposal of properties are to be accounted.