Ind AS 40 | Indian Accounting Standard-Investment Property | Summary
By: Prashant Kumar
Tags: Investing, Accounting

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:

Accounting for IND AS 40: Investment Property

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

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:

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.

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.

The cost of investment property includes:

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

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.

Option 1: Fair value model

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.

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

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:

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:

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

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.