CA Anuj Agrawal
Entities usually invest strategically into various properties to earn some kind of rentals or value appreciations in future (in substance) and made them available for sale as per the requirements or plans made by the Management. These investments usually keep separately and shown in the financial statements under “long term investments” as per the current accounting regime.
Below are some of the references from AS-13 “Accounting for Investments” which governs such investments in property under current accounting practices-
Para 3.4– An “investment property” is an investment in land or buildings that are not intended to be occupied substantially for use by, or in the operations of, the investing enterprise
Para 30 – An enterprise holding investment properties should account for them as long term investments.
Para 32 – Investments classified as long term investments should be carried in the financial statements at cost. However, provision for diminution shall be made to recognize a decline, other than temporary, in the value of the investments, such reduction being determined and made for each investment individually.
Para 33 – Any reduction in the carrying amount and any reversals of such reductions should be charged or credited to the profit and loss statement.
After reading the above provisions/ references, one can easily draw a conclusion that there is a very specific definition which per se covers what kind of properties can be covered under the current accounting regime and as the standard made itself very clear that such investments will be classified under long term Investments and will be tested for impairment only. As per schedule III of the Companies Act 2013, these are being classified as non- current Investments.
After the applicability of Ind-As/ IFRS for the entities those invest in such properties will change in a way how it is being understood in past and its different accounting impact/ implications. Ind-As 40- “Investment Property” deals specifically with such investments and it would be better to highlight some very practical/ understandable approach (can be used a tool to navigate this further) which can be read as below-
- Ind-As- 40 para 5 contains various definitions and describes 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………..” which essentially means that now an entity can classify a part (Portion) of building/ land as Investment property, it can be finance leased asset for the entity also and criteria will be to earn rentals and/or capital appreciation which made the scope much wider to classify more investments into this category unlike in current accounting practices,
- Ind-As allows to classify such investments as Investment Property even if these are financed leased assets. It is interesting to note that the version of this standard as issued by IASB (i.e IAS -40 “Investment Property”) gives an option to recognize such investment property either at Cost modal or fair value subsequent to its initial recognition , however Indian versione Ind-As -40 has been brought into with a CARVE-OUT which does not allow fair value model for such Investments. For readers to note that even Operating Leases could have been classified as Investment property (only with Fair value option) if recognition criteria is met but this will not be applicable in Indian version since fair value option has been deleted,
- Once the recognition criteria as defined in para 5 of Ind-As 40 (as mentioned above) is met then such Investment property will be initially recognized at cost including all directly attributable costs etc. For subsequent measurement it will only be recognized at cost (since fair value option is not available in Indian version) and depreciation will be recognized into the PL together with any impairment (as defined in Ind-As -36 “Impairment of Assets”),
- Asset held under finance lease (which is to be classified as Investment Property) will be recognized at lower of its fair value and the present value of minimum lease payments. An equal amount of liability will be recognized,
- Standard itself made it clear that all such criteria that is there in Ind-As 16 – “Property, Plant & Equipment” will be applicable for the measurement of such Investment properties at cost,
- However the standard allows only to recognize such investment properties at cost (fair value modal is not allowed in India), it requires to show FAIR VALUE also as one of the disclosure and such fair valuation is recommended to be done by one of a Certified Valuer,
- There could be a situation where a land/ building is vacant and there is no expected use has been identified , then in such cases it is a general practice to classify them as “Investment Property” referring to this standard,
- One another interesting thing to note, when a Parent provides a premises/ Land or building to one of its subsidiary and show it as Investment Property in separate financial statement will no longer be allowed to show as Investment property in its consolidated financial statement because for “Group” (parent together with its subsidiaries) this will be treated to be used for business purposes however if this property was given to some associate, JV etc (as defined in Ind-As 28) then the property will still be shown as Investment property in Consolidated Financial Statements because Group does not include associate and/or JV (as per Ind-As 110),
It will be interesting to note that there are some changes that certainly will affect how management classify/ records such investments and it will require some incremental cost e.g. fair valuation of such properties to be done by Valuers and related disclosures.
One has to look into all related facts and patterns before concluding this type of assessment based on this concept. Readers are requested not to take this article as any kind of advice (it is not exhaustive in nature) and should evaluate all relevant factors of each individual cases separately.
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