Ind AS 40 – Investment Property: The basis and rationale for classification of property held by an entity as Investment Property, Inventories and Property, Plant and Equipment.
Extract of Ind AS 40
Investment property – is property (land or a building – or part of a building – or both) held (by the owner or by the lessee under a finance lease) 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;
(b) sale in the ordinary course of business
Para 7 – Investment property is held to earn rentals or for capital appreciation or both. Therefore, an investment property generates cash flows largely independently of the other assets held by an entity. This distinguishes investment property from owner-occupied property. 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.
Company A owns farming / agricultural land in various parts of the country. All of these have been leased out to farmers in the respective regions for a period of 10 years under an operating lease arrangement. Farmers in respective regions shall undertake farming activities and Company A shall have no right on the cash flows / earnings from the produce. 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 has also acquired industrial land in certain areas (other than agricultural land) and has been holding it for capital appreciation.
1. As evident above since Company A holds agricultural land with an intention to derive rental income under an operating lease arrangement. Further, no ancillary services are being provided by Company A and it does not hold any right on any other associated inflows from this land. 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. Thus, the owner’s position, in substance, is that of a passive investor. Also, the asset is capable of generating cash flows largely independent of other assets of the Company.
Thus, the Company A shall classify the agricultural land held under investment property. Further, the same will be measured using cost model of accounting.
2. Land acquired in industrial areas have been held by the Company A solely for purpose of capital appreciation and hence, this shall be classified as investment property.
Para 57 – 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.
Para 58 – 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 derecognised (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.
Para 59 – 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.
Para 67 – The disposal of an investment property may be achieved by sale or by entering into a finance lease. 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.
Continuing the above illustration,
a. Company A at the end of lease tenure (10 years) with farmers of the owned agricultural land, does not roll-over the lease agreement but intends to sell these owned lands.
Since, the Company intends to dispose of the investment property without any development, the same shall continue to be classified under investment property until sold off and will not be reclassified under owner-occupied property or inventory.
b. Also, Company A has executed varied contracts with third party and initiated activities to undertake development of a theme park on the industrial land owned by it.
As the Company intends to use it for business purpose, the same shall be re-classified to Property, Plant & Equipment. Further, the said transfer will not change carrying amount of property transferred for measurement or disclosure purpose.
Below are certain illustrations to guide on classification:
|S No||Nature of Property||Classification|
|1.||Building owned by Company but rented out under finance lease||Accounting as per Ind 116|
|2.||Building owned by Company but rented out under operating lease to various entities||Investment Property|
|3.||Real estate Company whose principal business is dealing / trading in land & building (floors / flat of the building)||Inventories|
|4.||Building acquired to carry out administrative activities of business||Property, Plant & Equipment – Owner occupied property|
|5.||Company is into sale of ready-made garments & owns retail outlets in malls at varied locations in its brand name to sell these garments||Property, Plant & Equipment – owner occupied property|
|6.||Factory building used to manufacture finished goods owned by the Company||Property, Plant & Equipment –|
|7.||Factory building used to manufacture finished goods held by the Company under lease||Only lease rentals paid to be accounted in accordance with Ind AS 116|
|8.||Company has acquired land, yet to determine its use||Investment Property – assumed to be held for capital appreciation|
|9.||Company has acquired building comprising of 35 storeys. Off this, 20 has been self-occupied and rest have been leased out under operating lease to earn rentals||Property, Plant & Equipment – 20 floors
Investment property – 15 floors.
Since, it is feasible to segregate the components / portions, it shall be accounted separately
|10.||Company has acquired a floor. Company leases out significant part of this floor under co-working space to third party / external party||Investment property – The component / portion cannot be sold separately but a floor as a whole shall be sold and since, significant portion is held to earn lease rentals only this will be classified under|
|11.||Company owns a property which has been leased out under an operating lease arrangement and provides catering / canteen services to the occupants of the property||Investment property – Since, the catering services forms an insignificant portion and further, the catering service shall be accounted as per Ind AS 115|
|12.||Company owns a property which has been developed into a hotel. Day to day management has been outsourced at fixed price while retaining the rights over the cash flow earned / derived. Outsourced Company holds no right / has no linkage to the earnings but operates / provides services merely for a fixed agreed consideration||Property, Plant & Equipment – Since, functions have been outsourced for ease of operations only whilst retaining significant exposure to variation in cash flows generated, this shall not be an investment property|
|13.||Company owns a property which has been developed into a hotel. Day to day management has been outsourced at variable price while retaining the rights of 5% only over the cash flow earned / derived. Outsourced Company holds Significant right on the earnings.||Investment Property – since, owner is a passive investor|
|14.||Company has acquired a building but is yet to lease out and intends to lease out under operating lease arrangement||Investment Property|