Analysis of IND AS 40 - Accounting and disclosure of investment property

Objective

Accounting and disclosure of investment property.

Meaning of Investment Property

1. Land or building (or part of) or both held for

• Capital appreciation
• Rental purpose
• Both

2. Land held for in-determinable use

3. Entity's business or operating income should not be from rent.

Leasing arrangement

Ind AS 40 is covered when

1. Investment Property is held under ownership and given on operating lease.
2. Investment Property is held under finance lease and given on operating lease.

Property held for more than 1 purpose

If property is held for more than 1 purpose i.e.

1. For the purpose of ownership (i.e. for production/supply of goods and services as well as for administration purpose) and
2. For the purpose of investment.

And if it can be accounted for separately, only if it can be sold or leased out separately.

Ancillary services

If the entity provides ancillary services to the occupants of the property it holds and if such services are

1. Significant to the arrangement as a whole then it is treated as an owner occupied property
2. Insignificant to the arrangement as a whole then it is treated as an Investment property.

Example for investment property

Maintenance services which includes parking, security, etc. are examples of services offered that are insignificant to the arrangement as a whole.

Example for owner occupied property

In case of a hotel being operated, the services offered to the guests are significant to the arrangement as a whole.

Property leased out to the other group members

1. To be treated as owner occupied property in CFS
2. To be treated as an Investment Property in the separate financial statements.

Initial recognition

Two conditions are to be met:

1. Cost should be reliably measured.
2. It is probable that future economic benefits will flow to the entity.

Subsequent costs

1. To be charged off to the P&L Account in case it is day to day servicing costs.
2. To be capitalized if it meets the recognition criteria.
3. In case of capitalization, old replaced parts should be de-recongnized based on their carrying amount.

Initial Measurement

Includes

1. Purchase price
2. Direct attributable costs
   1. Legal fee
   2. Professional fee
   3. Property taxes
3. Initial operating losses incurred before planned occupancy
4. Abnormal wastage of material, labour or other resources, insured at construction.

Fair value for disclosure purpose

1. Entity is encouraged to but not required to disclose the fair value of the investment property.
2. Fair valuation shall be done by an independent valuer having relevant and recognized qualification and recent experience in the valuation of investment property

Investment property in the course of construction

1. If it is difficult to ascertain the value of a property during the course of construction and if the value could be ascertained only after completion, then the fact should be disclosed in notes to account.
2. When the value cannot be ascertained, it means fair value cannot be reliably measured.
3. Following disclosures are to be made in such scenarios:
   • Description of the investment property
   • Explanation as why fair value cannot be reliably measured
   • Range of estimates within which fair value is likely to be measured

Inability to measurable fair value reliably

1. IND AS 40 contains rebuttable assumption ( holds true until proven wrong) that fair value can be measured reliably
2. In exceptional circumstances, there may be clear evidence that fair value of investment property cannot be measured reliably. This arises when
   1. Market for comparable properties is in-active
      • No current price quotations
      • Only few recent price transactions
      • Observed transactions indicate that seller was forced to sell.
   2. Alternative reliable measurements of fair value based on discounted future cash flow projects is not available.

Transfer to and from Investment Property

In case of transfers between investment property and owner occupied property or inventories which happens due to change in use or asset's purpose, the carrying amount of the asset remains intact.

Exception: In case of an asset being re-valued under Ind AS 16 and is now transferred to Ind AS 40, the same is to be measured under Ind AS 40 at the erstwhile carrying amount of Ind AS 16, disregarding the re-valuation.

De-recognization

On disposal
When Investment Property is permanently withdrawn from use and no future economic benefit is expected.