1. Ind AS-40 INVESTMENT PROPERTY by CA. D.S. Rawat Partner, Bansal & Co.

2. Introduction A real estate property that has been purchased with the intention of earning a return on the investment (purchase) either through rent (income), the future resale of the property or both. An investment property is like any other investment, the goal is to generate a profit. The way in which a property is used has a significant 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.

3. What is investment property Investment Property is property (land or building or part of a building or both) held to earn rentals or for capital appreciation or both. Rather than for -  Use in the production or supply  Sale in the ordinary course of business

4. Scope The 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.

5. Classification of Property Investment property - Land 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.

6. Owner–Occupied 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.

7. Examples of Investment Properties Land held for long-term capital appreciation rather than for short-term sale in the ordinary course of business. Land held for a currently undetermined future use. A building owned by the entity (or held by the entity under a finance lease) 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.

8. Examples of Not the Investment Properties Property intended for sale in the ordinary course of business or in the process of construction or development for such sale (Ind AS-2, Inventories). owner-occupied property ( Ind AS-16), including (among other things) property held for future use as owner-occupied property, property held for future development and subsequent use as owner-occupied property, property occupied by employees (whether or not the employees pay rent at market rates) and owner-occupied property awaiting disposal. Property that is leased to another entity under a finance lease.

9. Questions X Ltd. and its subsidiaries have provided you, their Ind AS specialist, with a list of the properties they own: (a) Land held by X Ltd. for undetermined future use (b) A vacant building owned by X Ltd. and to be leased out under an operating lease (c) Property held by a subsidiary of X Ltd, a real estate firm, in the ordinary course of its business (d) Property held by X Ltd. for the use in production (e) A hotel owned by Z Ltd., a subsidiary of X Ltd, and for which Z Ltd provides security services for its guests’ belongings Advise X Ltd. and its subsidiaries as to which of the above-mentioned properties would qualify under Ind AS-40 as investment properties. If they do not qualify thus, how should they be treated under Ind AS?

10. Solution Properties described under items (a), (b), and (e) would qualify as investment properties under Ind AS- 40. With respect to item (e), it is to be noted that Ind AS- 40 requires that when the ancillary services are provided by the entity and they are considered relatively insignificant component of the arrangement, then the property is considered an investment property. These properties qualify as investment properties because they are being held for rental or for capital appreciation as opposed to actively managed properties that are used in the production of goods. Property described in item (c) is to be treated as “inventory” under Ind AS- 2. Property described in item (d) is treated as a Property, Plant and Equipment under Ind AS-16.

11. Recognition Investment property shall be recognized as an asset when and only when: It is probable that future economic benefits will flow to the entity; and The cost of the investment property can be measured reliably.

12. Initial Measurement An investment property shall be measured initially at its 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. A key matter here is that the item accounted for at fair value is not the property itself but the lease interest.

13. 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

14. 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 recognised and relevant professional qualification and has recent experience in the location and category of the investment property being valued.

15. 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.

16. Disposal An investment property shall be derecognized on disposal or at the time that 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 and is recognized in the income statement.

17. Disclosure 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 used to determine fair value Extent of involvement of independent, professional and recently experienced valuers in the determination of fair value (whether used as measurement basis or disclosed) Amounts included in profit or losses for:  Rental income  Direct operating expenses from rented property  Direct operating expenses from non-rented property Restrictions on realisibility or property or remittance of income/disposal proceeds

18. THANK YOU CA, D.S.RAWAT Partner, BANSAL & Co.