Ind AS 40 | Indian Accounting Standard-Investment Property | Summary

Do you think that there is only one standard which is applicable to Property Plant and Equipment: IND AS 16 Property, Plant and Equipment.

The answer is No. Aren't you Surprised?

On one hand, it’s 100% true that you are required to apply IND AS 16 for most of your long-term tangible assets, but it’s not the hard and fast rule for long term assets. In this article, I am going to try to prove this myth wrong.

Except for IND AS 16, we have a few other Indian accounting standards which are arranging the long term assets. IND AS 40 Investment Property is one of them.

In today’s article, you’ll be going to learn:

• What the investment property stands for,
• How you should account for it at initial accounting and subsequently,
• You’ll also be learning that the fair value model is NOT going to be the same as the revaluation model, and 

I hope you’ll enjoy it!

Accounting for IND AS 40: Investment Property

Are you ready? Let's Go!

The accounting for IND AS 40 Investment Property is VERY identical to that of IND AS 16 (Property, Plant and Equipment),

EXCEPT

that IND AS 40 revaluations (both positive and negative) will always go to the profit and loss statement (not revaluation reserve)

AND

there is no depreciation allowance if revaluations are carried out every year.

DONE!

Any remaining seconds should be spent on learning the classifications and rules of IND AS 40 Investment Property.

Now, let’s take the route of Rajni style as per Professor Kapleshwar Bhalla 

IND AS 40 Investment Property: Objective

IND AS 40 Investment Property prescribes lays down the accounting treatment and disclosure with respect to investment property.

But the question arises, what is an investment property?

The investment property is now no doubt a land, a building (or a part of it), or both, if they are held for the following specific purposes:

• To earn rentals income; 
• For the capital appreciation of property; or 
• Both. 

Here, In this standard, the strong impact is given on purpose. If you are holding a building or land for any of the following objectives, then it can never be classified as an investment property:

• For production or supply of goods or services as per your business model,
• For administrative purposes in office premises, or
• For sale in the ordinary course of business.

If you’re using your building or land for the first 2 purposes, then you should without any doubt apply IND AS 16; and the standard IND AS 2 Inventories when you are using them for the sale in the ordinary course of business.

Some Examples of investment property

So, what can be classified as investment property?

Here are a couple of examples:

• The land is held as an investment for a long-term capital gain, or for future "not ascertained use" (i.e. you don’t know yet how you are going to use it in the future).
• However, if you buy a land or building and you intend to build some cinema hall for your own business purposes sometime in the future period, then this land is NOT called as an investment property.
• A building that is owned by the entity and leased out under operating leases. This includes a building that is still vacant, but you are going to plan to lease it out.
• Any property that you are actually getting constructed or developed for future use as an investment property.

Be careful here again, because when you are constructing a building for some customers in your ordinary course of business, this is NOT an investment property, but you should apply IND AS 115 Revenue from Contracts with Customers. 

When investment property should be Recognized

The rules for recognizing investment property are going to be the same as stated in IND AS 16 for property, plant, and equipment, i.e. you should recognize an investment property as an asset only if two  conditions are met: 

• It is most likely probable that future economic benefits associated with the asset will flow to the entity; and
• The cost of the asset can be measured reliably.

How investment property initially should be measured

As per Ind AS 40, Investment property shall be initially measured at cost, including the transaction cost. 

The cost of investment property includes: 

• purchase price and
• directly attributable expenditure, such as legal fees or professional fees, property taxes, etc.

You should NOT include: 

• Operating losses that you incur before planned possession is achieved, and
• Abnormal waste of material, labor or other resources incurred on construction
• Deferred Payment for investment Property should be recorded at present value which is equivalent to the cash price of the property
• Start-up expenses. However, if these start-up expenses are directly attributable to the item of investment property, then you can include them. General Startup expenses are not included in the cost of Investment Property

Let me just mention that actually, you can classify assets held under finance lease as an investment property and in this case, it’s initial cost is calculated in accordance with IND AS 17.

Subsequent measurement of investment property

After initial recognizing the investment property, you have two choices available for measuring your investment property.

Once you make your choice, you should stick to it and measure all of your investment property using the same model.

Option 1: Fair value model

Under the fair value model, an investment property is always carried at fair value at the reporting date.

• The fair value is determined in accordance with the standard IND AS 113 Fair Value Measurement.
• Any gain or loss arising from re-measurement to fair value shall be recognized in profit or loss statement.

It is possible that the fair value cannot be measured reliably after initial recognition. This can happen in absolutely very rare cases (e.g. active marked ceases to exist) and in this case, IND AS 40 prescribes :

• To measure at cost, if investment property has not yet completed and is under construction; or
• To measure using the cost model, if the investment property has completed.

Option 2: Cost model

The second alternative for subsequent measurement of investment property is a cost model.

Here, IND AS 40 does not describe it in detail but refers to the standard IND AS 16 Property, Plant and Equipment. It means you need to take the same methodology which is adopted in IND AS 16.

Switching the models of Measurement

Can you actually switch from a fair value model to a cost model or vice versa from the cost model to a fair value model?

The answer is YES, but only if the change results in the financial statements providing better, more reliable information about the company’s financial position, results, and other events.

What does it mean in practice?

There are high chances or it is most likely probable that Switching from the cost model to a fair value model would probably meet the condition and therefore, you can do it whenever you’re sure that you’ll be able to ascertain the fair value regularly and the fair value model fits better manner.

However, the opposite change – switch from fair value model to cost model – is highly unlikely that financial statements will provide you more reliable presentation. Therefore, it is advisable you should not really switch it, and if – rarely and for good reasons.

Transfers from investment property to business usage

When we speak about the transfer, we mean the change in classification of investment property, for example, you classify a building previously held as investment property under IND AS 40 to property, plant, and equipment under IND AS 16.

The transfer is possible, but only when there’s a change in use or change in the purpose of holding asset:

You start renting out the property that you previously used as your factory (transfer to investment property from property, plant, and equipment under IND AS 16)

You stop renting out the building and start using it for manufacturing goods to supply in the ordinary course of business.

You held land for the undefined purpose and recently, you decided to construct in the ordinary course of your real estate business (transfer from investment property to inventories).

So, what shall be the accounting treatment in this case?

It depends on the type of transfer and the accounting choice for your investment property.

If you opted to account for your investment property at the cost model, then there’s no problem with the transfers, you simply continue with what you did (i.e., WDV value of assets shall be the cost of the investment property.

However, if you picked up a fair value model, then it’s a bit more complex:

When you transfer to an investment property, then the deemed cost is a fair value at the date of transfer. The difference between assets carrying amount and its fair value shall be treated in the same manner as revaluations under IND AS 16.

When you transfer from investment property to property plant and equipment, then the deemed cost shall also be also fair value at the date of transfer.

Derecognition of investment property

The derecognition rules (=when you can remove your investment property from your book of accounts) in IND AS 40 is very similar to the rules given in IND AS 16.

You can derecognize your investment property in the following two circumstances: On disposal, or When the investment property is permanently withdrawn from use and no future economic benefits are expected from its usage.

You need to calculate gain or loss on disposal as a difference between:

• Net disposal proceeds, and
• Asset’s carrying amount.

Gain or loss on disposal shall be recognized in profit or loss.

Disclosures

IND AS 40 Investment property lays down a lot of disclosures to be presented in the financial statements, including the description of the selected model, how the fair value was calculated, what the classification criteria for investment property are, movements in investment property during the reporting period.