Ind AS40 : Investment Property

An investment in property is a real estate property that has been purchased with the intention of earning a return on the investment either through rent or resale of the property in future or both. An investment property is like any other investment, the goal is to generate a profit.

The way to which a property is used 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.

The objective of AS40 is to prescribe common accounting treatment for investment property.

Scope:

This 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: It is a land and/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: It is a 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 Property:

Land held for long-term capital appreciation rather than for short-term sale;
A building owned by the entity 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.
Recognition criteria:

Investment property shall be recognized as an asset if and only if

it is probable that future economic benefits will flow towards entity; and
the cost of the investment property can be measured reliably.
Initial Measurement:

An investment property shall be measured initially at 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.

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 recognized 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.

Derecognition:

An investment property shall be derecognized:

on disposal or
when 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 is recognized in the income statement.

Disclosure Requirements:

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, professional and recently experienced valuers in the determination of fair value
Amounts included in profit or losses for:
Rental income
Direct operating incomes from rented property
Direct operating incomes from non-rented property
Restrictions on realisability or property or remittance of income/disposal proceeds.