Finance & Accounting

Indian Accounting Standard 40 – Accounting for Investment Property

An investment property is a property that has been purchased to earn the return either through rental income or to resale the property which has been purchased. In Indian Accounting Standard there is a prescribed standard mentioned for accounting treatment for an investment property i.e. IND-AS 40. The main objective of this standard is to keep common accounting treatment and this standard deals with recognition, measurement, and disclosure of investment property.

Let’s understand the Common Terms prescribed under IND-AS 40

“Investment Property” is a property held by the owner or lessee to earn rentals or for capital appreciation.

“Fair Value” is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

“Carrying Amount” is the amount at which an asset is recognized in the balance sheet.

“Cost” is the amount of cash or cash equivalents paid or the fair value of other consideration given to acquire the asset at the time of its acquisition or construction, where applicable, the amount attributed to that asset when initially recognized in accordance with specific requirements of other IND-AS.

Classification of Property

Investment Property: It is the property held by the owner or lessee to earn rental or capital appreciation or both. The investment^[1] property generates cash flow independently through production or supply of goods or service that is attributable not only to property but also the asset utilized in the production or supply process. This is the reason it differs from the owner-occupied property.

Following are the example of Investment Property

1. The Land purchased for the long term purpose in the ordinary course of the business.
2. A building is owned by the entity and leases out for a certain period of time under an operating lease.
3. Property that is being constructed or developed for future use as an investment property.

Owner-Occupied Property: It is the property which is held by the entity or owner for use in production or supply of goods or service or administrative purpose.

When the Investment Property shall be recognized?

In IND-AS 40 recognition of Investment property mentioned below:

• The future economic benefits shall be associated with the investment property and
• The cost of the investment should be measured reliably.

Our Recommendation: Applicability of Indian Accounting Standards.

Disclosure Required to be disclosed in the Financial Statement

• The accounting policy for measurement of investment property.
• When the classification is difficult to recognize, then according to the criteria it is used to distinguish investment property from the owner-occupied property.
• The fair value of investment property is based on a valuation carried out by an independent valuer who holds a professional degree and the category of the investment property being valued. If there is no such valuation then the fact required to be disclosed.

The amount to be recognized in profit or loss for:

• Rental income received from the investment property.
• Direct expenses like repair and maintenance arising from the investment property that generates the rental income or that investment property that does not generate the rental income.
• The existence and amount of restrictions on the reliability of investment property or remittance of income and proceeds of disposal.
• If entered in the contractual obligations to purchase, construct or develop the investment property or for repairs, maintenance, or enhancement.

In addition to the above, the following additional disclosure is also required to be mentioned.

• The depreciation methods adopted and useful lives and the depreciation rate calculated.
• Gross amount carried forward and the accumulated depreciation at the beginning and the end of the period.
• A reconciliation of the carrying amount of investment property at the beginning and the end of the period showing the following;
• Additions of income generated by way acquisitions and those resulting from expenditure recognized as an asset;
• Assets classified as held for sale or in a disposal group classified as sale and other disposals.
• Depreciation rate and the amount calculated.
• The number of impairment losses recognized and impairment of the losses recovered.
• Transfer to and from inventories and owner-occupied property.
• Any changes as applicable.

How to measure the cost of the Investment Property after recognizing?

As per IND-AS 40 investment property shall be measured at the cost including the transaction charges i.e. Professional fees for legal services, property taxes, and other transaction costs.

After recognizing, the entity shall measure all the investment property at cost. This standard requires all entities to consider the fair value of investment property, but for the disclosure purpose, they required to follow the cost model. An entity is encouraged but not required to determine the fair value of investment property based on a valuation by an Independent valuer who recognized and possess the relevant professional qualification.

Transfer of Property:

An entity shall transfer the property only when there is a change in use. It only occurs when a property meets or ceases to meet the requirement mentioned or covered under the definition of Investment Property.

Example of change in use includes:

1. Investment property of owner-occupation, or development with a view to owner-occupation for a transfer from investment property to owner-occupied property.
2. With a view to sale, for transfer from Investment property to inventories.
3. Transfer from owner-occupation property to investment property.
4. Don’t want to continue as Owner occupation.
5. Executing an operating lease for another party, for a transfer from inventories to investment property.

Read Also: What are the Income Computation and Disclosure Standards (ICDS)?.

Disposals of Investment Property as per IND-AS 40

Based on the following points the Investment property shall be considered for the disposal;

• If it is derecognized on disposal
• When the investment property is permanently not required for the use.
• If no future economic benefits are arising from its disposal.

Conclusion

When an investment property purchased by the entity and if Indian Accounting Standard is applicable then it is mandatory to adopt and disclose the accounting treatment as mentioned in IND-AS 40.