Interpretation of Ind-As 40 (Investment Property-Part 2)
Introduction : In part-1 we have discussed what is investment property and it is to be initially recognized or how it is to be initially recognized and how carrying amount is to be determined. 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 will be accounted and the residual matters as stated under Ind-As 40.
Change in use of asset
How change in use of asset is to be accounted?
It may happen due to change in business condition and that change gives evidence of change in use of asset than in that case classification of asset is required to be changed. It is also important to note that only change in management’s intentions for the use of a property does not provide evidence of change and classification will not be revised.
Changes may happen in following manner
Illustration : XYZ Ltd. has purchase a vacant land; initial cost of land is Rs. 40 Crores. As management was of the intention that they will have capital appreciation there, they didn’t used the asset for any other purpose. After few years price of land fell down to Rs. 25 Crores and the entity decided that they will use such vacant land as parking space for there business. How the change is to be accounted for under the books of account?
In above case, property is to recognized as investment property when entity is of the intention that property will not be used in business or will not be treated as item in which entity will undertake the trading but instead it is kept for the purpose of earning rentals or for capital appreciation. Also, if property is recognized as investment property than in that case it is only allowed to follow the cost model. Now, after there is change in use of asset, classification of property is needed to be revised; as property is used in business such will be accounted under Ind-AS 16 i.e., Property Plant Equipment. Carrying amount for this purpose will be the amount at which asset was initially recognized (Rs. 40 Crore). However, after that that may check for any revaluation gain or loss; i.e., in this case Rs. 15 Crore will be treated as revaluation loss.
Exchange of Asset
It may happen that entity is acquiring investment property in exchange of asset (may be monetary i.e., cash or convertible in fixed sum of money; or non-monetary i.e., not convertible in fixed sum of money receivable). In such case asset which is acquired is to be recognized at Fair value of asset received if not available than at fair value of asset given
In case if exchange transaction lacks commercial substance or fair value of neither the asset received nor the asset given up is reliably measurable than in that case asset is to be initially recognized at carrying amount of asset which is given.
Disposal of Asset
The accounting in relation of disposal of asset which is held as investment property will be same as accounting which is generally followed on sale of any other asset. But it is important to know what will be treatment of gain or loss which is arising to entity on disposal of investment property.
Gain or loss on account of sale of investment property will be directly to be transferred to profit and loss account.
After this article and the explanation and treatment which is mentioned in part-1; we have completely covered the Ind-As 40.