According to Ind AS (Indian Accounting Standards), Property, Plant, and Equipment (PPE) and Investment Property are different assets, which follow separate accounting standards. This separation of the asset type depends upon the type of the usage.
Below are in detail:
1. Property, Plant, and Equipment (PPE):
> Meaning
√ Accounting Standard:-Ind AS 16
√ Property, Plant, and Equipment (PPE) covers all the following kinds of tangible assets, which have been held for either :
a) for use, directly or indirectly, in the production or supply of goods or services, or
b) for administration purposes
> Characteristics
√ Used in the business operations.
√ Creates economic benefits over time through production or service delivery.
> Example
i. Factory Building: It is used in producing goods.
ii. Machinery: Used in manufacturing processes.
iii. Office Equipment: Used in performing administrative work.
2. Investment Property:
> Meaning
- Accounting Standard:-Ind AS 40
- Investment property includes property (land or a building or both) held:
– To earn rentals, or
– For capital appreciation, or both.
> Characteristics:
√ Not used in the production or supply of goods/services or for administrative purposes.
√ The source of economic benefit is generally either rental income or appreciation in value.
> Example
i. Office Building Rented Out: A commercial property held for rent to third parties to produce rental income.
ii. Land Held for Capital Appreciation Vacant land purchased with an expectation of selling it for a higher amount at a later date.
> Key Differences:
| Feature | Property, Plant, and Equipment (PPE) | Investment Property |
| Purpose | Used in the production or supply of goods or services, or for administrative purposes | Held to earn rentals or for capital appreciation, or both |
| Valuation | Initially recognized at cost and subsequently measured at cost less accumulated depreciation and impairment losses. | Initially recognized at cost and subsequently measured at either fair value or cost model |
| Depreciation | Depreciated over its useful life | Not depreciated under the fair value model |
| Income Recognition | Income is recognized from the core operations of the entity.
However, Rental income from PPE is recognised as other income. |
Income is recognised from rental income or future sale.
However, Rental income from investment property is recognised as investment income |
| Examples | Factory, machinery, office equipment etc. | Land held for sale, rented-out buildings etc. |
| Accounting Models | Cost or revaluation model | Cost model with fair value disclosures. |
> Illustrative Example:
√ Scenario 1
A company has a factory building where it manufactures its products.
Classification: It is classified under PPE (Ind AS 16) because the building is used in the production of goods.
√ Scenario 2:
The same company owns another building that it rents out to a third party for commercial purposes.
Classification: It is classified under Investment Property (Ind AS 40) because it is used to generate rental income.
√ Scenario 3
A business owns land, which will eventually be used for constructing its office.
Classification: It is classified under PPE (Ind AS 16) since it will be used in administrative activities in the future.
√ Scenario 4
A business owns land and holds it exclusively for its appreciation in price.
Classification: It is classified under Investment Property (Ind AS 40).
> Accounting Entries
√ PPE (Ind AS 16)
a) Initial Recognition:
Property, Plant, and Equipment…….. Debit
To Cash/ Accounts Payable……… Credit
b) Depreciation:
Depreciation Expense….… Debit
To Accumulated Depreciation…… Credit
c) Impairment Loss:
Impairment Loss……. Debit
To Accumulated Impairment Loss…… Credit
√ Investment Property (Ind AS 40)
a) Initial Recognition:
Investment Property ……. Debit
To Cash or Accounts Payable……. Credit
b) Fair Value Model:
Fair Value Increase:
Investment Property…… Debit
To Fair Value Gain…… Credit
Fair Value Decrease:
Fair Value Loss……. Debit
To Investment Property….. Credit
> Key Points to Remember:
√ The classification of an asset as PPE or investment property depends on its intended use.
√ The choice of valuation model for investment property (fair value or cost) should be made at the initial recognition of the asset and should not be changed subsequently.
√ Changes in fair value of investment property are recognised in the income statement, whereas changes in the carrying amount of PPE on account of depreciation or impairment recognized in the income statement as expense.
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