INDIAN ACCOUNTING STANDARD 40 6.

285

UNIT 6 :
INDIAN ACCOUNTING STANDARD 40 : INVESTMENT
PROPERTY

LEARNING OUTCOMES

After studying this unit, you will be able to

 List the objective and scope of this standard.
 Define the terms like investment property and owner-occupied property.
 Identify and recognize an investment property.
 Measure the investment property in accordance with the standard.
 Comply with disclosure requirements.

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UNIT OVERVIEW

Overview of Ind AS 40

Objective Classification Recognition Measurement Measurement Transfer

of property as at after
investment Recognition Recognition
Scope property or
owner ‑ Disposal
occupied
property Accounting policy
Definitions Disclosure

Fair value measurement Transitional

Provisions

Cost model

Ind AS 116 Transfers of

investment
property

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6.1 OBJECTIVE
The objective of this standard is to prescribe the accounting treatment for property (land and/or
buildings) held to earn rentals or for capital appreciation (or both) and related disclosure
requirements. Ind AS 40 prescribes the cost model for accounting for investment property.

6.2 SCOPE
1) Ind AS 40 should be applied in the recognition, measurement and disclosure of investment
property.
2) This Standard does not apply to:
a) biological assets related to agricultural activity (see Ind AS 41 ‘Agriculture’ and
Ind AS 16 ‘Property, Plant and Equipment’); and
b) mineral rights and mineral reserves such as oil, natural gas and similar non-regenerative
resources.

6.3 RELEVANT DEFINITIONS

The following are the key Investment Property-related definitions:
1) Investment property is property (land or a building — or part of a building — or both) held
(by the owner or by the lessee as a right-of-use asset) to earn rentals or for capital
appreciation or both, rather than for:
a) use in the production or supply of goods or services or for administrative purposes; or
b) sale in the ordinary course of business.
Property mentioned in (a) above would be covered under Ind AS 16 ‘Property, Plant and
Equipment’ and property specified in (b) above would be dealt with under Ind AS 2
‘Inventories’.
2) Owner-occupied property is property held (by the owner or by the lessee as a right-of-use
asset) for use in the production or supply of goods or services or for administrative purposes.
Ind AS 16 ‘Property, Plant and Equipment’ applies to owner-occupied property and
Ind AS 116 ‘Leases’ applies to owner-occupied property held by a lessee as a right-of-use
asset.
3) Fair value is the price that would be received to sell an asset or paid to transfer a liability in

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an orderly transaction between market participants at the measurement date. (See
Ind AS 113 ‘Fair Value Measurement’).
4) Cost is the amount of cash or cash equivalents paid or the fair value of other consideration
given to acquire an asset at the time of its acquisition or construction or, where applicable,
the amount attributed to that asset when initially recognized in accordance with the specific
requirements of other Ind AS, e.g. Ind AS 102, Share Based Payment.
5) Carrying amount is the amount at which an asset is recognized in the balance sheet.

6.4 CLASSIFICATION OF PROPERTY AS INVESTMENT

PROPERTY OR OWNER-OCCUPIED PROPERTY
1) Nature of Investment property
Investment property is held to earn rentals or for capital appreciation or both. Therefore, an
investment property generates cash flows largely independent of the other assets held by an
entity. This distinguishes investment property from owner-occupied property. Accordingly,
investment properties could represent a cash generating unit since they generate cash
inflows that are largely independent of the cash inflows from other assets or group of assets,
thus meeting the definition of cash generating unit laid down in Ind AS 36, ‘Impairment of
Assets’.
The production or supply of goods or services (or the use of property for administrative
purposes) generates cash flows that are attributable not only to property, but also to other
assets used in the production or supply process. Ind AS 16 ‘Property, Plant and Equipment’
applies to owner-occupied property and Ind AS 116 applies to owner-occupied property held
by a lessee as a right-of-use asset.
2) Examples of investment property
The following are examples of investment property:
a) land held for long-term capital appreciation rather than for short-term sale in the ordinary
course of business.
b) land held for a currently undetermined future use. (If an entity has not determined that
it will use the land as owner-occupied property or for short-term sale in the ordinary
course of business, the land is regarded as held for capital appreciation.)
c) a building owned by the entity (or a right-of-use asset relating to a building held by the
entity) and leased out under one or more operating leases.
d) a building that is vacant but is held to be leased out under one or more operating leases.

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e) property that is being constructed or developed for future use as investment property.
3) Examples of items which are not investment property
The following are examples of items that are not investment property and are therefore
outside the scope of this Standard:
a) property intended for sale in the ordinary course of business or in the process of
construction or development for such sale (see Ind AS 2, Inventories), for example,
property acquired exclusively with a view to subsequent disposal in the near future or
for development and resale.
b) owner-occupied property (see Ind AS 16 and Ind AS 116), including, (among other
things)
(i) property held for future use as owner-occupied property,
(ii) property held for future development and subsequent use as owner-occupied
property,
(iii) property occupied by employees (whether or not the employees pay rent at market
rates) and
(iv) owner-occupied property awaiting disposal.
c) property leased to another entity under a finance lease.
Not Investment Property
Sale in the ordinary course
Owner - occupied property Employee occupied property
of business
Ind AS 16 Ind AS 16
Ind AS 2

4) Property held for more than one purpose

In circumstances when property is held partly for capital appreciation and/or rentals, and
partly for production or supply of goods or services or for administrative purposes, the two
parts are accounted for separately if they could be sold, or leased out separately under a
finance lease, separately. If they could not be sold (or leased out under a finance lease)
separately, the property is accounted for as an investment property only if an insignificant
portion is held for use in the production or supply of goods or services or for administrative
purposes.

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Dual Purpose – Able to split

Owner Occupied Rental Income

Ind AS 16 Ind AS 40

Dual Purpose – Unable to split Ind AS 40 only if

insignificant portion
Owner Occupied Rental Income is owner-occupied.

Examples 1 - 3
1. Sun Ltd owns a building having 15 floors of which it uses 5 floors for its office; the
remaining 10 floors are leased out to tenants under operating leases. According to
law company could sell legal title to the 10 floors while retaining legal title to the other
5 floors.
In the given scenario, the remaining 10 floors should be classified as investment
property since they are able to split the title between the floors.
2. Moon Ltd uses 35% of the office floor space of the building as its head office. It leases
the remaining 65% to tenants, but it is unable to sell the tenant’s space or to enter
into finance leases related solely to it.
Therefore, the company should not classify the property as an investment property as
the 35% of the floor space used by the company is significant.
3. An entity owns a hotel, which includes a health and fitness centre, housed in a
separate building that is part of the premises of the entire hotel. The owner operates
the hotel and other facilities on the hotel with the exception of the health and fitness
centre, which can be sold or leased out under a finance lease. The health and fitness
centre will be leased to an independent operator. The entity has no further
involvement in the health and fitness centre. In this scenario, management should
classify the hotel and other facilities as property, plant and equipment in accordance
with Ind AS 16 and the health and fitness centre as investment property under
Ind AS 40.

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If the health and fitness centre could not be sold or leased out separately on a finance
lease, then because the owner-occupied portion is not insignificant, the whole
property would be treated as an owner-occupied property.

5) Ancillary services
In some cases, an entity provides ancillary services to the occupants of a property it holds.
An entity treats such a property as investment property if the services are insignificant to the
arrangement as a whole. An example is when the owner of an office building provides
security and maintenance services to the lessees who occupy the building.
In other cases, the services provided are significant. For example, if an entity owns and
manages a hotel, services provided to guests are significant to the arrangement as a whole.
Therefore, an owner-managed hotel is owner-occupied property, rather than investment
property.

Example 4
The owner of an office building provides security and maintenance services to the lessees
who occupy the building. In such a case, since the services provided are insignificant, the
property would be treated as an investment property.
If an entity owns and manages a hotel, services provided to guests are significant to the
arrangement as a whole. In such a case, an owner-managed hotel is owner-occupied
property, rather than investment property.
Services

Rental Income Ind AS 40

Owner-occupied
Services Rental Income Property

6) Difficulty in deciding classification under investment property

It may be difficult to determine whether ancillary services are so significant that a property
does not qualify as investment property. For example, the owner of a hotel sometimes
transfers some responsibilities to third parties under a management contract. The terms of
such contracts vary widely. At one end of the spectrum, the owner’s position may, in

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substance, be that of a passive investor. At the other end of the spectrum, the owner may
simply have outsourced day-to-day functions while retaining significant exposure to variation
in the cash flows generated by the operations of the hotel.
Judgement is needed to determine whether a property qualifies as investment property. An
entity develops criteria so that it can exercise that judgement consistently in accordance with
the definition of investment property and with the related guidance as discussed above. The
standard requires an entity to disclose these criteria based upon which it distinguishes
investment property from owner-occupied property and from property held from sale in the
ordinary course of business when classification is difficult.
Judgement is also required to determine whether the acquisition of Investment Property is
the acquisition of an asset or a group of assets or a business combination within the scope
of Ind AS 103, Business Combinations. Reference should be made to Ind AS 103 to
determine whether it is a business combination. The discussion in the above points relates
to whether or not property is owner-occupied property or investment property and not to
determining whether or not the acquisition of property is a business combination as defined
in Ind AS 103. Determining whether a specific transaction meets the definition of a business
combination as defined in Ind AS 103 and includes an investment property as defined in this
Standard requires the separate application of both Standards.
7) Property leased to other group members – treatment of same asset differently in the
individual financial statements and the consolidated financial statements
In some cases, an entity owns property that is leased to, and occupied by, its parent or
another subsidiary. The property does not qualify as investment property in the consolidated
financial statements, because the property is owner-occupied from the perspective of the
group. However, from the perspective of the entity that owns it, the property is investment
property if it meets the definition of Investment Property. Therefore, the lessor treats the
property as investment property in its individual financial statements.
Tabular summarisation

S. Property Does it Which

No. meet Ind AS is
definition Applicable
of
investment
property
1. Owned by a company and leased out under an operating Yes Ind AS 40
lease

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2. Held as a right-to-use asset and leased out under an Yes Ind AS 40

operating lease
3. Held as a right-to-use asset and leased out under finance No Ind AS 116
lease
4. Property acquired with a view for development and resale No Ind AS 2
5. Property partly owner occupied and partly leased out Depends Ind AS 16
under operating lease Ind AS 40
6. Land held for currently undetermined use Yes Ind AS 40
7. Property occupied by employees paying rent at less than No Ind AS 16
market rate
8. Investment property held for sale No Ind AS 105
9. Existing investment property that is being redeveloped for Yes Ind AS 40
continued use as investment property

6.5 RECOGNITION
1) General principle
An owned investment property shall be recognized as an asset when, and only when:
a) it is probable that the future economic benefits that are associated with the investment
property will flow to the entity; and
b) the cost of the investment property can be measured reliably.
This general principle is used to consider whether capitalisation is appropriate both in respect
of the cost incurred initially to acquire or construct an owned investment property and costs
incurred subsequently to add to, replace part of, or service a property.
An investment property held by a lessee as a right-of-use asset shall be recognized in
accordance with Ind AS 116.
2) Subsequent costs
Day-to-day servicing costs
Under the recognition principle set out above, an entity does not recognize in the carrying
amount of an investment property the costs of the day-to-day servicing of such a property.
Rather, these costs are recognized in the profit or loss as incurred. Costs of day-to-day
servicing are primarily the cost of labour and consumables and may include the cost of minor
parts. The purpose of these expenditures is often described as for the ‘repairs and
maintenance’ of the property.

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Replacement costs
Parts of investment properties may have been acquired through replacement. Under the
recognition principle, an entity recognizes costs incurred to replace parts of the original
property in the carrying amount of investment property if they meet the recognition criteria.
The carrying amount of those parts that are replaced is derecognized in accordance with the
derecognition provisions of this Standard.

it is probable
that the future
economic Costs include *Recognize in
benefits that are * costs incurred the carrying
associated with initially to amount the cost
Investment the investment of replacing part
acquire an
property property will of an existing
investment
shall be flow to the entity investment
property and
recognized as property when it
an asset * costs incurred is incurred.
when, and subsequently to
only when add to, replace * The carrying
the cost of the part of, or amount of
investment service a replaced part is
property can be property derecognized
measured
reliably

Illustration 1
X Limited owns a building which is used to earn rentals. The building has a carrying amount
of 50,00,000. X Limited recently replaced interior walls of the building and the cost of new
interior walls is 5,00,000. The original walls have a carrying amount of 1,00,000.
Advise, how X Limited should account for the above costs.
Solution
Under the recognition principle, an entity recognizes in the carrying amount of an investment
property the cost of replacing part of an existing investment property at the time that cost is
incurred if the recognition criteria are met and the carrying amount of those parts that are
replaced is derecognized.
So, X Limited should add the cost of new walls and remove the carrying amount of old walls.
The new carrying amount of the building = 50,00,000 + 5,00,000 – 1,00,000
= 54,00,000.
****

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6.6 MEASUREMENT AT RECOGNITION

1) Measurement at recognition - general
An owned investment property should be measured initially at its cost. Transaction costs are
included in the initial measurement.
Cost Inclusions
The cost of a purchased investment property comprises its purchase price and any directly
attributable expenditure (e.g. professional fees for legal services, property transfer taxes and
other transaction costs).
Cost Exclusions
The cost of an investment property is not increased by:
a) start-up costs (unless they are necessary to bring the property to the condition
necessary for it to be capable of operating in the manner intended by management),
b) operating losses incurred before the investment property achieves the planned level of
occupancy, or
c) abnormal amounts of wasted material, labour or other resources incurred in
constructing or developing the property.

An investment property shall be

measured initially at

Its cost Including Transaction costs

any directly attributable

purchase price
expenditure including, for example

professional fees for legal

services

property transfer taxes

other transaction costs

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Illustration 2
Netravati Ltd. purchased a commercial office space as an Investment Property, in the Global
Trade Centre Commercial Complex, for 5 crores. However, for purchasing the same, the
Company had to obtain membership of the Global Trade Centre Commercial Complex
Association by paying 6,25,000 as a one-time joining fee. Netravati Ltd. wants to write off
the one-time joining fees paid as an expense under Membership and Subscription Charges
and value the investment property at 5 crores. Advise.
Comment whether your answer will change if the office space was purchased with the
intention of using it as an administrative centre of the company.
Solution

Cost of Investment Property

As per Ind AS 40, the cost of a purchased investment property comprises its purchase price
and any directly attributable expenditure (e.g. professional fees for legal services, property
transfer taxes and other transaction costs). Accordingly, on initial recognition, the one-time
joining fee of 6,25,000 should be added to the purchase price. Therefore, the investment
property should be measured at 5,06,25,000 (i.e. cost of the commercial office space +
one-time joining fee). Writing off the amount of 6,25,000 to the P&L is not appropriate.

Use as Administrative Office

If the property is used as an administrative centre, it is not an investment property, but rather
an ‘owner occupied property’. Hence, Ind AS 16 will be applicable.

Even under Ind AS 16, all direct costs relating to the acquisition of the asset should be added
to the purchase price. Hence, cost of the asset under Ind AS 16 would be 5,06,25,000.

*****

Illustration 3
X Limited purchased a building for 30,00,000 on 1 st May, 20X1 with an intention to earn
rentals. The purchase price was funded by a loan, interest on which is payable @ 5%.
Property transfer taxes and direct legal costs of 1,00,000 and 20,000 respectively were
incurred in acquiring the building. X Limited redeveloped the building into retail shops for
rent under operating leases to independent third parties. Expenditures on redevelopment
were:
 2,00,000 planning permission.
 7,00,000 construction costs (including 40,000 refundable purchase taxes)

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The building does not qualify the substantial period criteria for redevelopment of property
under Ind AS 23.
Compute the cost of the building as per Ind AS 40.
Solution
As per Ind AS 40, the cost of a purchased investment property comprises its purchase price
and any directly attributable expenditure (e.g. professional fees for legal services, property
transfer taxes and other transaction costs).
Accordingly, cost of the building is arrived at as under:
Particulars Amount Total
in
Purchase price 30,00,000
Add: Property transfer taxes 1,00,000
Direct legal costs 20,000
Fee for planning permission 2,00,000
Construction costs 7,00,000
Less: Refundable purchase taxes 40,000 6,60,000
Cost of the building as per Ind AS 40 39,80,000

Note: Since the building does not qualify the substantial period criteria for redevelopment of
property under Ind AS 23, borrowing cost of loan fund has not been capitalised.
****
2) Deferred payments
If payment for an investment property is deferred, its cost is the cash price equivalent. The
difference between this amount and the total payments is recognized as interest expense
over the period of credit.
Illustration 4
X Limited purchased a land worth of 1,00,00,000. It has option either to pay full amount at
the time of purchases or pay for it over two years for a total cost of 1,20,00,000.
Determine the cost of the building under both the payment methods.
Solution
Using either payment method, the cost will be 1,00,00,000. If the second payment option
is used, 20,00,000 will be treated as interest expenses over the credit period of 2 years.
****

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3) Investment property acquired through exchange of another asset
One or more investment properties may be acquired in exchange for a non-monetary asset
or assets, or a combination of monetary and non-monetary assets. The cost of such an
investment property is measured at fair value unless:
a) the exchange transaction lacks commercial substance or
b) the fair value of neither the asset received, nor the asset given up is reliably measurable.
The acquired asset is measured in this way even if an entity cannot immediately derecognize
the asset given up. If the acquired asset is not measured at fair value, its cost is measured
at the carrying amount of the asset given up.
An entity determines whether an exchange transaction has commercial substance by
considering the extent to which its future cash flows are expected to change as a result of
the transaction. An exchange transaction has commercial substance if:
a) the configuration (risk, timing and amount) of the cash flows of the asset received differs
from the configuration of the cash flows of the asset transferred, or
b) the entity-specific value of the portion of the entity’s operations affected by the
transaction changes as a result of the exchange, and
c) the difference in (a) or (b) is significant relative to the fair value of the assets exchanged.
For determining whether an exchange transaction has commercial substance, the entity-
specific value of the portion of the entity’s operations affected by the transaction as
mentioned above shall reflect the post-tax cash flows. The result of these analysis may be
clear without an entity having to perform detailed calculations.
The fair value of an asset is reliably measurable if:
a) the variability in the range of reasonable fair value measurements is not significant for
that asset or
b) the probabilities of the various estimates within the range can be reasonably assessed
and used when measuring fair value.
If the entity is able to measure reliably the fair value of either the asset received or the asset
given up, then the fair value of the asset given up is used to measure cost unless the fair
value of the asset received is more clearly evident.
An investment property held by a lessee as a right-of-use asset shall be measured initially
at its cost in accordance with Ind AS 116.

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Entity
Buys Sells

Investment property Asset given up

acquired / received Measured at

Whether exchange transaction has

commercial substance
Yes Or No
the fair value (FV) is reliably
measurable?

Which FV is more An investment property is

clearly evident? measured at the carrying
amount of the asset given up

FV of asset FV of asset FV of both the asset

received given up received and FV of asset
given up are equally
evident

An investment An investment
property is property is An investment
measured at measured at property is measured
FV of asset FV of asset at FV of asset given
received given up up

Example 5
Sun Ltd acquired a building in exchange of a warehouse whose fair value is 5,00,000
and payment of cash is 2,00,000. The fair value of the building received by the
Company is 8,00,000. The company decided to keep that building for rental purposes.
The building is acquired with the purpose to earn rentals. Hence, it is a case of Investment
Property acquired in exchange for a combination of monetary and non-monetary asset.
Therefore, Journal entry at the time of acquisition is :
Investment Property (Building) (5,00,000 + 2,00,000) Dr. 7,00,000
To Cash 2,00,000
To PPE (Property, Plant and Equipment) i.e. Warehouse 5,00,000

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Note: When the fair value of both the asset given up and acquired is mentioned, it is
presumed that both the fair values are equally evident. In such a case, the fair value of
the asset given up is considered as the cost of the asset purchased.
However, if the fair value of property acquired is more clearly evident, then the fair value
of the asset acquired is considered. In such a situation, the Journal Entry at the time of
acquisition (taking information given in the above example) would be
Investment Property (Building) Dr. 8,00,000
To Cash 2,00,000
To PPE (Warehouse) 5,00,000
To Gain on Sale of PPE 1,00,000

6.7 MEASUREMENT AFTER RECOGNITION

1) Accounting Policy
An entity shall adopt as its accounting policy the cost model for all of its investment property.
Cost Model
After initial recognition, an entity shall measure investment property:
(a) in accordance with Ind AS 105, Non-current Assets Held for Sale and Discontinued
Operations, if it meets the criteria to be classified as held for sale (or is included in a
disposal group that is classified as held for sale);
(b) in accordance with Ind AS 116 if it is held by a lessee as a right-of-use asset and is not
held for sale in accordance with Ind AS 105; and
(c) in accordance with the requirements in Ind AS 16 for cost model in all other cases.
Entities are required 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.
2) Fair Value Measurement
While measuring the fair value of investment property in accordance with Ind AS 113, an
entity should ensure that the fair value reflects, among other things, rental income from
current leases and other assumptions that market participants would use when pricing
investment property under current market conditions.

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When a lessee measures fair value of an investment property that is held as a right-of-use
asset, it shall measure the right-of-use asset, and not the underlying property at fair value.

If fair value of
an investment
All entities property is
shall measure not reliably
The cost the fair value measurable
model to all of for the on a
An entity shall its investment purpose of continuing
adopt as its property disclosure
Measurement accounting basis, the
only entity shall
after policy
make the
recognition disclosures for
the same as
well

3) Inability to measure fair value reliably

There is a rebuttable presumption that an entity can reliably measure the fair value of an
investment property on a continuing basis.
Situations when fair value is not reliably measurable:
 In exceptional cases, there is clear evidence when an entity first acquires an
investment property (or when an existing property first becomes investment property
after a change in use) that the fair value of the property will not be reliably measurable
on a continuing basis.
 The usefulness of a single point measure of fair value which is required gets negated in
the above exceptional cases due to – (a) great variability in the range of reasonable fair
value measurements, and (b) high difficulty in the assessment the probabilities of the
various outcomes.
 This arises when, and only when
(a) the market for comparable properties is inactive (e.g. there are few recent
transactions, price quotations are not current or observed transaction prices
indicate that the seller was forced to sell) and
(b) alternative reliable measurements of fair value (for example, based on discounted
cash flow projections) are not available.

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Treatment when Fair Value is not reliably measurable

Investment property Investment property (other

under construction than investment property
under construction)

Entity determines that the fair

Entity determines that the fair value
value is not reliably
is not reliably measurable on a
measurable
continuing basis

But entity expects that the fair

value of the property will be Entity shall disclose the following:
reliably measurable when
(i) A description of the investment
construction is complete
property
(ii) Explanation of why fair value
cannot be measured reliably;
Then the entity shall measure the fair
value of such investment property and
either when it becomes reliably (iii) If possible, the range of
measurable, or construction is estimates within which fair value
completed, whichever is earlier
is likely to lie

Important Points:
 Once an entity becomes able to measure reliably the fair value of an investment property
under construction for which the fair value was not previously measured, it should
measure the fair value of that property.
 Once construction of that property is complete, it is presumed that fair value can be
measured reliably. If this is not the case, the entity should make the disclosures as
mentioned under investment property (other than investment property under
construction) above.
 The presumption that the fair value of investment property under construction can be
measured reliably can be rebutted only on initial recognition. An entity that has
measured the fair value of an item of investment property under construction may not
conclude that the fair value of the completed investment property cannot be measured
reliably.

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 In the exceptional cases when an entity is compelled, for the reason given above to
make the disclosures, it should determine the fair value of all its other investment
property, including investment property under construction. In these cases, although
an entity may make the disclosures as required for one investment property, the entity
should continue to determine the fair value of each of the remaining properties for
disclosure as required.
 If an entity has previously measured the fair value of an investment property, it shall
continue to measure the fair value of that property until disposal (or until the property
becomes owner-occupied property or the entity begins to develop the property for
subsequent sale in the ordinary course of business) even if comparable market
transactions become less frequent or market prices become less readily available.

6.8 TRANSFERS
1) An entity shall transfer a property to, or from, investment property when, and only when,
there is a change in use. A change in use occurs when the property meets, or ceases to
meet, the definition of investment property and there is evidence of the change in use. In
isolation, a change in management’s intentions for the use of a property does not provide
evidence of a change in use. Examples of evidence of a change in use include:
a) commencement of owner-occupation, or of development with a view to owner-
occupation, for a transfer from investment property to owner-occupied property;
Ind AS 40 Ind AS 16
b) commencement of development with a view to sale, for a transfer from investment
property to inventories;
Ind AS 40 Ind AS 2
c) end of owner-occupation, for a transfer from owner-occupied property to investment
property; or
Ind AS 16 Ind AS 40
d) inception of an operating lease to another party, for a transfer from inventories to
investment property.
Ind AS 2 Ind AS 40
2) When an entity decides to dispose of an investment property without development, it
continues to treat the property as an investment property until it is derecognized (eliminated
from the balance sheet) and does not reclassify it as inventory. Similarly, if an entity begins
to redevelop an existing investment property for continued future use as investment property,
the property remains an investment property and is not reclassified as owner-occupied
property during the redevelopment.

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3) 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.
Illustration 5
Moon Ltd. has purchased a building on 1 st April, 20X1 at a cost of 10 million. The building was
used as a factory by the Moon Ltd. and was measured under cost model. The expected useful
life of the building is estimated to be 10 years. Due to decline in demand of the product, the
Company does not need the factory anymore and has rented out the building to a third party from
1 st April, 20X5. On this date, the fair value of the building is 8 million. Moon Ltd. uses cost
model for accounting of its investment property.
Determine the value of the building on reclassification as investment property.
Solution
( Million)
Carrying amount of the building after depreciation of 4 years 6
(10-10/10 x 4)
The company has applied cost model under Ind AS 16 till now.
There is no impairment as the fair value is greater than the carrying amount of building.
Revaluation Surplus credited to Other Comprehensive Income ---
(not applicable since cost model is used under Ind AS 16)
Building initially recognized as Investment Property 6
(Cost model Ind AS 40)
****

6.9 DISPOSALS
1) An investment property should be derecognized (eliminated from the balance sheet)
a. on disposal or
b. when the investment property is permanently withdrawn from use and no future
economic benefits are expected from its disposal.
2) The disposal of an investment property may be achieved by:
a. sale or
b. entering into a finance lease.
3) The date of disposal for investment property that is sold is the date the recipient obtains
control of the investment property in accordance with the requirements for determining when
a performance obligation is satisfied in Ind AS 115. Ind AS 116 applies to a disposal effected
by entering into a finance lease and to a sale and leaseback.

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4) De-recognition of replaced parts:

a. If, in accordance with the recognition principle in paragraph 16, an entity recognizes in
the carrying amount of an asset the cost of a replacement for part of an investment
property, it derecognizes the carrying amount of the replaced part.
b. A replaced part may not be a part that was depreciated separately.
c. If it is not practicable for an entity to determine the carrying amount of the replaced part,
it may use the cost of the replacement as an indication of what the cost of the replaced
part was at the time it was acquired or constructed.
5) Gains or losses arising from the retirement or disposal of investment property should be
determined as the difference between the net disposal proceeds and the carrying amount of
the asset and shall be recognized in profit or loss (unless Ind AS 116 requires otherwise on
a sale and leaseback) in the period of the retirement or disposal.
6) The amount of consideration to be included in the gain or loss arising from the derecognition
of an investment property is determined in accordance with the requirements for determining
the transaction price as per Ind AS 115. Subsequent changes to the estimated amount of
the consideration included in the gain or loss shall be accounted for in accordance with the
requirements for changes in the transaction price in Ind AS 115.
7) An entity applies Ind AS 37 or other Standards, as appropriate, to any liabilities that it retains
after disposal of an investment property.
8) Compensation from third parties for investment property that was impaired, lost or given up
shall be recognized in profit or loss when the compensation becomes receivable.
9) Impairments or losses of investment property, related claims for or payments of
compensation from third parties and any subsequent purchase or construction of
replacement assets are separate economic events and are accounted for separately as
follows:
Items Treatment
Impairments of investment property Recognized in accordance with Ind AS 36
Retirements or disposals of investment Recognized in accordance with Ind AS 40
property
Compensation from third parties for Recognized in profit or loss when it
investment property that was impaired, lost or becomes receivable
given up
The cost of assets restored, purchased or Determined in accordance with Ind AS 40
constructed as replacements

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An investment property should be

derecognized

On disposal
When the investment No future economic
property is permanently benefits are expected
withdrawn from use from its disposal

Sale

Entering into a finance lease

S. Particular Detail
No.
1. Date of disposal  The date is when the recipient obtains control of the
for investment investment property for determining when a
property performance obligation is satisfied.
 Ind AS 116 applies to a disposal effected by entering
into a finance lease and to a sale and leaseback.
2. Measurement of  The consideration receivable on disposal of an
consideration investment property is recognized initially at fair value
receivable on  If payment for an investment property is deferred, the
disposal consideration received is recognized initially at the
cash price equivalent.
 The difference between the nominal amount of the
consideration and the cash price equivalent is
recognized as interest revenue
3. Compensation  Compensation from third parties for investment
property that was impaired, lost or given up shall be
recognized in profit or loss when the compensation
becomes receivable.

Example 6
Sun Ltd, an aeronautics company is having a building which is given on an operating
lease. The book value of such building in the books is 2,00,000.

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Case -A
Pluto Ltd. offers to buy the building at 4,00,000.
Bank Dr. 4,00,000
To Investment Property 2,00,000
To Gain on disposal 2,00,000
Case-B
Pluto Ltd. offers to take the building on finance lease for 10 years at a lease rental of
80,000 p.a. The present value of minimum lease payments is 3,20,000.
Lease Receivable Dr. 3,20,000
To Investment Property 2,00,000
To Gain on Disposal 1,20,000

6.10 DISCLOSURE
The disclosures below apply in addition to those in Ind AS 116. In accordance with Ind AS 116,
the owner of an investment property provides lessors’ disclosures about leases into which it has
entered. A lessee that holds an investment property as a right-of-use asset provides lessees’
disclosures as required by Ind AS 116 and lessors’ disclosures as required by Ind AS 116 for any
operating leases into which it has entered.
An entity should disclose:
1) its accounting policy for measurement of investment property.
2) when classification is difficult, the criteria it uses to distinguish investment property from
owner-occupied property and from property held for sale in the ordinary course of business.
3) the extent to which the fair value of investment property (as measured for disclosed in the
financial statements) is based on 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. If there has been no such valuation,
that fact shall be disclosed.
4) the amounts recognized in profit or loss for:
a) rental income from investment property;
b) direct operating expenses (including repairs and maintenance) arising from investment
property that generated rental income during the period; and
c) direct operating expenses (including repairs and maintenance) arising from investment
property that did not generate rental income during the period.
5) the existence and amounts of restrictions on the realisability of investment property or the
remittance of income and proceeds of disposal.

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6) contractual obligations to purchase, construct or develop investment property or for repairs,
maintenance or enhancements.
7) In addition to the general disclosures required above, an entity is required to disclose:
a) the depreciation methods used;
b) the useful lives or the depreciation rates used;
c) the gross carrying amount and the accumulated depreciation (aggregated with
accumulated impairment losses) at the beginning and end of the period;
8) An entity is also required to provide a reconciliation of the carrying amount of investment
property at the beginning and end of the period, showing the following:
a) additions, disclosing separately those additions resulting from acquisitions and those
resulting from subsequent expenditure recognized as an asset;
b) additions resulting from acquisitions through business combinations;
c) assets classified as held for sale or included in a disposal group classified as held for
sale in accordance with Ind AS 105 and other disposals;
d) depreciation;
e) the amount of impairment losses recognized, and the amount of impairment losses
reversed, during the period in accordance with Ind AS 36;
f) the net exchange differences arising on the translation of the financial statements into
a different presentation currency, and on translation of a foreign operation into the
presentation currency of the reporting entity;
g) transfers to and from inventories and owner-occupied property; and
h) other changes.
9) An entity is also required to disclose the fair value of investment property. In the exceptional
cases when an entity cannot measure the fair value of the investment property reliably, it
should disclose:
a) a description of the investment property;
b) an explanation of why fair value cannot be measured reliably; and
c) if possible, the range of estimates within which fair value is highly likely to lie.

6.11 EXTRACTS OF FINANCIAL STATEMENTS OF LISTED

ENTITY
Following is the extract from the financial statements of the listed entity ‘GMR
Infrastructure Limited’ for the financial year 2021-2022 with respect to ‘Investment
Property’ and its accounting policy thereon.

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Consolidated balance sheet as at March 31, 2022

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(b) Investment property under construction including land as at March 31, 2022 represents
Nil acres (March 31, 2021 : 1,284 acres) of land held by the Group consisting of Nil
acres (March 31, 2021 : 814 acres) of land held by GKSIR for the purpose of SEZ at
Krishnagiri and Nil acres (March 31, 2021 : 470 acres) of land held by various other
entities.

(c) Investment property of the Group has been pledged for the borrowing taken by the
Group. Refer note 18 and note 23.

(d) Certain investment properties are leased to tenants under long-term operating leases
with rentals payable monthly. Refer note 40 for details on future minimum lease
rentals.

(e) Refer to note 39 (b) for disclosure of other commitments for investment property.

(f) Fair value hierarchy disclosures for investment property have been provided in note
50.

ACCOUNTING POLICY

Investment property

Investment properties are measured initially at cost, including transaction costs.

Subsequent to initial recognition, investment properties are stated at cost less
accumulated depreciation and accumulated impairment loss, if any.

The cost includes borrowing costs for long-term construction projects if the recognition
criteria are met.

Depreciation is recognized using straight line method so as to write off the cost of the
investment property less their residual values over their useful lives specified in Schedule
II to the Companies Act, 2013, or in the case of assets where the useful life was
determined by technical evaluation, over the useful life so determined. Depreciation
method is reviewed at each financial year end to reflect the expected pattern of
consumption of the future benefits embodied in the investment property. The estimated
useful life and residual values are also reviewed at each financial year end and the effect

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of any change in the estimates of useful life/ residual value is accounted on prospective
basis. Freehold land and properties under construction are not depreciated.

Investment properties are derecognized either when they have been disposed off or when
they are permanently withdrawn from use and no future economic benefit is expected
from their disposal.

The difference between the net disposal proceeds and the carrying amount of the asset
is recognized in profit or loss in the period of derecognition.

Investment property under construction

Investment property under construction represents expenditure incurred in respect of

capital projects and are carried at cost. Cost includes land, related acquisition
expenses, development/construction costs, borrowing costs and other direct
expenditure.

(Source: Annual Report 2021-2022 - GMR Infrastructure Limited)

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FOR SHORTCUT TO IND AS WISDOM: SCAN ME!

TEST YOUR KNOWLEDGE

Questions
1. On 1 st April, 20X1 an entity acquired an investment property (building) for 40,00,000.
Management estimates the useful life of the building as 20 years measured from the date of
acquisition. The residual value of the building is 2,00,000. Management believes that the
straight-line depreciation method reflects the pattern in which it expects to consume the
building’s future economic benefits. What is the carrying amount of the building on
31 st March, 20X2?
2. X Limited has an investment property (building) which is carried in Balance Sheet on
31 st March, 20X1 at 15,00,000. During the year X Limited has stopped letting out the
building and used it as its office premise. On 31 st March, 20X1, management estimates the
recoverable amount of the building as 10,00,000 and its remaining useful life as 20 years
and residual value is nil. How should X Limited account for the above investment property as
on 31 st March, 20X1?
3. In financial year 20X1-20X2, X Limited incurred the following expenditure in acquiring
property consisting of 6 identical houses each with separate legal title including the land on
which it is built.
The expenditure incurred on various dates is given below:
On 1 st April, 20X1 - Purchase cost of the property 1,80,00,000.
On 1 st April, 20X1 – Non-refundable transfer taxes 20,00,000 (not included in the purchase
cost).

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On 2 nd April, 20X1- Legal cost related to property acquisition 5,00,000.

On 6 th April, 20X1- Advertisement campaign to attract tenants 3,00,000.
On 8 th April, 20X1 - Opening ceremony function for starting business 1,50,000.
Throughout 20X1-20X2, incurred 1,00,000 towards day-to-day repair maintenance and
other administrative expenses.
X Limited uses one of the six houses for office and accommodation of its few staffs. The
other five houses are rented to various independent third parties.
How X Limited will account for all the above-mentioned expenses in the books of account?
4. X Ltd. is engaged in the construction industry and prepares its financial statements up to
31 st March each year. On 1 st April, 20X1, X Ltd. purchased a large property (consisting of
land) for 2,00,00,000 and immediately began to lease the property to Y Ltd. on an operating
lease. Annual rentals were 20,00,000. On 31 st March, 20X5, the fair value of the property
was 2,60,00,000. Under the terms of the lease, Y Ltd. was able to cancel the lease by
giving six months’ notice in writing to X Ltd. Y Ltd. gave this notice on 31 st March, 20X5 and
vacated the property on 30 th September, 20X5. On 30 th September, 20X5, the fair value of
the property was 2,90,00,000. On 1 st October, 20X5, X Ltd. immediately began to convert
the property into ten separate flats of equal size which X Ltd. intended to sell in the ordinary
course of its business. X Ltd. spent a total of 60,00,000 on this conversion project between
30 th September, 20X5 to 31 st March, 20X6. The project was incomplete at 31 st March, 20X6
and the directors of X Ltd. estimate that they need to spend a further 40,00,000 to complete
the project, after which each flat could be sold for 50,00,000.
Examine and show how the three events would be reported in the financial statements of
X Ltd. for the year ended 31 st March, 20X6 as per Ind AS.
5. Shaurya Limited owns a Building A which is specifically used for the purpose of earning
rentals. The Company has not been using the building A or any of its facilities for its own use
for a long time. The company is also exploring the opportunities to sell the building if it gets
the reasonable amount in consideration.
Following information is relevant for Building A for the year ending 31 st March, 20X2:
Building A was initially purchased at the cost of 10 crores. At that time, the useful life of
the building was estimated to be 20 years; out of which 5 years have been expired as on
1 st April, 20X1. The company follows straight line method for depreciation.
During the year, the company has invested in another Building B with the purpose to hold it
for capital appreciation. The property was purchased on 1 st April, 20X1 at the cost of

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2 crores. Expected life of the building is 40 years. As usual, the company follows straight
line method of depreciation.
Further, during the year 20X1-20X2 the company earned/incurred following direct operating
expenditure relating to Building A and Building B:
Rental income from Building A = 75 lakhs
Rental income from Building B = 25 lakhs
Sales promotion expenses = 5 lakhs
Fees & Taxes = 1 lakhs
Ground rent = 2.5 lakhs
Repairs & Maintenance = 1.5 lakhs
Legal & Professional = 2 lakhs
Commission and brokerage = 1 lakhs
The company does not have any restrictions and contractual obligations against Property -
A and B. For complying with the requirements of Ind AS, the management sought an
independent report from the specialists so as to ascertain the fair value of buildings A and
B. The independent valuer has valued the fair value of property as per the valuation model
recommended by International valuation standards committee. Fair value has been
computed by the method by streamlining present value of future cash flows namely,
discounted cash flow method.
The other key inputs for valuation are as follows:
The estimated rent per month per square feet for the period is expected to be in the range of
50 - 60. And it is further expected to grow at the rate of 10 percent per annum for each
of 3 years. The weighted discount rate used is 12% to 13%.
Assume that the fair value of properties based on discounted cash flow method is measured
at 10.50 crores. The treatment of fair value of properties is to be given in the financials as
per the requirements of Indian accounting standards.
What would be the treatment of Building A and Building B in the balance sheet of
Shaurya Limited? Provide detailed disclosures and computations in line with relevant Indian
accounting standards. Treat it as if you are preparing a separate note or schedule, of the
given assets in the balance sheet.
6. X Ltd owned a land property whose future use was not determined as at 31 st March 20X1.
How should the property be classified in the books of X Ltd as at 31 st March 20X1?

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During June 20X1, X Ltd commenced construction of office building on it for own use.
Presuming that the construction of the office building will still be in progress as at
31 st March 20X2
(a) How should the land property be classified by X Ltd in its financial statements as at
31 st March 20X2?
(b) Will there be a change in the carrying amount of the property resulting from any change
in use of the investment property?
(c) Whether the change in classification to, or from, investment properties is a change in
accounting policy to be accounted for in accordance with Ind AS 8, Accounting Policies,
Changes in Accounting Estimates and Errors?
(d) Would your answer to (a) above be different if there were to be a management intention
to commence construction of an office building for own use; however, no construction
activity was planned by 31 st March 20X2?
Answers
1. Cost of the asset is 40,00,000.
Depreciable amount = Cost less Residual value = (40,00,000 - 2,00,000) = 38,00,000
Depreciation for the year = Depreciable amount/useful life
= 38,00,000/20
= 1,90,000.
Carrying amount = Cost less accumulated depreciation
= (40,00,000 - 1,90,000) = 38,10,000.
2. At 31 st March, 20X1, X Limited must transfer the property from investment property to
property, plant and equipment since there is a change in use of the said building.
The transfer should be made at its carrying amount i.e., 15,00,000.
Since recoverable amount of the property as on 31 st March, 20X1 is 10,00,000, impairment
loss 5,00,000 should be recognized in the Statement of Profit and Loss. So, the carrying
amount of Investment property at 31 st March, 20X1 would be 10,00,000.
The entity must disclose the reclassification.
From April, 20X1, X Limited will depreciate the building over its remaining useful life of
20 years.

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3. The cost of the property = (1,80,00,000 + 20,00,000 + 5,00,000) = 2,05,00,000.
Since five houses out of six are being rented, so 5/6 th of the property cost will be accounted
for as an investment property and 1/6 th of the property cost will be accounted for as owner-
occupied property.
Cost of the investment property = 2,05,00,000 x 5/6 = 1,70,83,333
Cost of the owner-occupied property = (2,05,00,000 - 1,70,83,333) = 34,16,667.
All other costs, i.e., advertisement expenses, ceremony expenses and repair maintenance
expenses will be expensed off as and when incurred.
4. From 1 st April, 20X1, the property would be regarded as an investment property since it is
being held for its investment potential rather than being owner occupied or developed for
sale.
The property would be measured under the cost model. This means it will be measured at
2,00,00,000 at each year end.
On 30 th September, 20X5, the property ceases to be an investment property. X Ltd. begins
to develop it for sale as flats.
As per para 59 of Ind AS 40, 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. Hence, the
carrying value of the reclassified property will be 2,00,00,000.
Since the lease of the property is an operating lease, rental income of 10,00,000
st
( 20,00,000 x 6/12) would be recognized in P/L for the year ended 31 March, 20X6.
The additional costs of 60,00,000 for developing the flats which were incurred up to and
including 31 st March, 20X6 would be added to the ‘cost’ of inventory to give a closing cost of
2,60,00,000.
The total selling price of the flats is expected to be 5,00,00,000 (10 x 50,00,000). Since
the further costs to develop the flats total 40,00,000, their net realisable value is
4,60,00,000 ( 5,00,00,000 – 40,00,000), so the flats will be measured at a cost of
2,60,00,000.
The flats will be shown in inventory as a current asset.
5. Investment property is held to earn rentals or for capital appreciation or both. Ind AS 40 shall
be applied in the recognition, measurement and disclosure of investment property. An
investment property shall be measured initially at its cost. After initial recognition, an entity

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shall measure all of its investment properties in accordance with Ind AS 16’s requirements
for cost model.
The measurement and disclosure of Investment property as per Ind AS 40 in the balance
sheet would be depicted as follows:

INVESTMENT PROPERTIES:
Particulars Period ended 31 st March, 20X2
( in crores)
Gross Amount:
Opening balance (A) 10.00
Additions during the year (B) 2.00
Closing balance (C) = (A) + (B) 12.00
Depreciation:
Opening balance (D) 2.50
Depreciation during the year (E) (0.5 + 0.05) 0.55
Closing balance (F) = (D) + (E) 3.05
Net balance (C) - (F) 8.95

The changes in the carrying value of investment properties for the year ended
31 st March, 20X2 are as follows:
Amount recognized in Profit and Loss with respect to Investment Properties

Particulars Period ending

31 st March, 20X2
( in crores)
Rental income from investment properties (0.75 + 0.25) 1.00
Less: Direct operating expenses generating rental income
(5 + 1 + 2.5 + 1.5 + 2 + 1) (0.13)
Profit from investment properties before depreciation and indirect
expenses 0.87
Less: Depreciation (0.55)
Profit from earnings from investment properties before indirect
expenses 0.32

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Disclosure Note on Investment Properties acquired by the entity
The investment properties consist of Property A and Property B. As at 31 st March, 20X2, the
fair value of the properties is 10.50 crores. The valuation is performed by independent
valuers, who are specialists in valuing investment properties. A valuation model as
recommended by International Valuation Standards Committee has been applied. The
Company considers factors like management intention, terms of rental agreements, area
leased out, life of the assets etc. to determine classification of assets as investment
properties.
The Company has no restrictions on the realisability of its investment properties and no
contractual obligations to purchase, construct or develop investment properties or for repairs,
maintenance and enhancements.
Description of valuation techniques used and key inputs to valuation on investment
properties:

Valuation technique Significant unobservable inputs Range

(Weighted average)
Discounted cash flow - Estimated rental value per sq. ft. per - 50 to 60
(DCF) method month
- Rent growth per annum - 10% every 3 years
- Discount rate - 12% to 13%

6. As per paragraph 8(b) of Ind AS 40, any land held for currently undetermined future use,
should be classified as an investment property. Hence, in this case, the land would be
regarded as held for capital appreciation. Hence the land property should be classified by
X Ltd as investment property in the financial statements as at 31 st March 20X1.
As per Para 57 of the Standard, an entity can change the classification of any property to,
and from, an investment property when and only when evidenced by a change in use. A
change occurs when the property meets or ceases to meet the definition of investment
property and there is evidence of the change in use. Mere management’s intention for use
of the property does not provide evidence of a change in use.
(a) Since X Ltd has commenced construction of office building on it for own use, the
property should be reclassified from investment property to owner occupied as at
31 st March 20X2.
(b) As per Para 59, transfers between investment property, owner occupied and inventories
do not change the carrying amount of the property transferred and they do not change
the cost of the property for measurement or disclosure purposes.

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(c) No. The change in classification to, or from, investment properties is due to change in
use of the property. No retrospective application is required and prior period’s financial
statements need not be re-stated.
(d) Mere management intentions for use of the property do not evidence change in use.
Since X Ltd. has no plans to commence construction of the office building during
20X1-20X2, the property should continue to be classified as an investment property by
X Ltd. in its financial statements as at 31 st March 20X2.

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