What is 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:
– To earn rentals income.
– For the capital appreciation of property; or Both.
Here, In this standard, the strong emphasis is given on purpose. If company is holding a building or land for any of the following objectives, then it can never be classified as an investment property:
1. For production or supply of goods or services as per your business model,
2. For administrative purposes in office premises, or
3. For sale in the ordinary course of business.
If company using its building or land for the purposes given in 1 &2 above, then it should without any doubt apply IND AS 16;
Otherwise, IND AS 2 Inventories when it use for the sale in the ordinary course of business.
Example of Investment property can be given as below;
1. 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)
2. However, if company buy a land or building and it 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.
3. A building that is owned by the entity and leased out under operating leases. This includes a building that is still vacant, but company are going to plan to lease it out
4. Any property that company is getting constructed or developed for future use as an investment property.
The following are examples of items that are not investment property and are therefore outside the scope of this Standard:
- property intended for sale in the ordinary course of business or in the process of construction or development for such sale
- owner-occupied property (see 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 that is leased to another entity under a finance lease
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 such case owner need to consider as property as investment property.
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.
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 in paragraph 5. Therefore, the lessor treats the property as investment property in its individual financial statements.
Company A is into retail business and has established various retail outlets and derives revenue. Both businesses and assets held for each are independent. Further, Company A also provide ancillary activities to various retail outlets like Housekeeping, Maintenance, security, electricity etc. This ensures that the owner may simply have outsourced day-to-day functions and not retained any exposure to variation in the cash flows generated by the operations of independent outlets operator. Thus, the owner’s position, in substance, is that of a passive investor. Also, the asset can generate cash flows largely independent of other assets of the Company. Thus, the Company A shall classify the land & building on which various retail outlets are given on lease basis require to show under investment property. The situation would have been different if Company A retain the control on the cashflow generated by retail outlet then the property let out is consider under Property, plant, and equipment.
Recognition of Investment property
A entity should recognize an investment property as an asset only if two conditions are met:
1. It is most likely probable that future economic benefits associated with the asset will flow to the entity; and
2. The cost of the asset can be measured reliably.
How Investment property initially should be measured
As per Ind AS 40, Investment property shall be initially measured at cost, including the transaction cost. The cost of investment property includes:
1. Purchase price and
2. Directly attributable expenditure, such as legal fees or professional fees, property taxes, etc.
However, it does not includes.
- Operating losses that Company has incurred 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,
- 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.
Subsequent measurement of investment property
After initial recognizing the investment property, you have two choices available for measuring your investment property
Option 1: Fair value model
Under the fair value model, an investment property is always carried at fair value at the reporting date. The fair value is determined in accordance with the standard IND AS 113 Fair Value
Measurement. Any gain or loss arising from re-measurement to fair value shall be recognized in profit or loss statement.
Option 2: Cost model
The second alternative for subsequent measurement of investment property is a cost model. Here, IND AS 40 does not describe it in detail but refers to the standard IND AS 16 Property, Plant and Equipment. It means Company need to take the same methodology which is adopted in IND AS 16.
Change the models of Measurement from Fair value to Cost model or Vice versa
A company can change model of measurement from fair value to cost model or vice versa provided change is require for presenting more reliable information of company’s financial position, results and other events.
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