Pipara & Co LLP

investment property

Objective

The objective of this Standard is to prescribe the accounting treatment for investment property and related disclosure requirements.

Scope
  • This Standard shall be applied in the recognition, measurement and disclosure of investment property.
  1. Omitted1
  2. This Standard does not apply to:
    1. biological assets related to agricultural activity (see Ind AS 41,

Agriculture and Ind AS 16 Property, Plant and Equipment); and

  1. mineral rights and mineral reserves such as oil, natural gas and similar non-regenerative resources.
Definitions
  • The following terms are used in this Standard with the meanings specified:

Carrying amount is the amount at which an asset is recognised in the balance sheet.

Cost is the amount of cash or cash equivalents paid or the fair value of other consideration given to acquire an asset at the time

# This Ind AS was notified vide G.S.R. 111(E) dated 16th February, 2015 and was amended vide Notification No. G.S.R. 365(E) dated 30th March, 2016, G.S.R. 310(E) dated 28th March, 2018, G.S.R. 273(E) dated 30th March, 2019 and G.S.R. 419(E) dated 18th June, 2021.

1 Refer Appendix 1. Omitted vide Notification No. G.S.R. 273(E) dated 30th March, 2019.

of its acquisition or construction or, where applicable, the amount attributed to that asset when initially recognised in accordance with the specific requirements of other Ind ASs, eg Ind AS 102, Share-based Payment.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. (See Ind AS 113, Fair Value Measurement).

2Investment property is property (land or a building—or part of a building—or both) held (by the owner or by the lessee as a right- of-use asset) to earn rentals or for capital appreciation or both, rather than for:

  • use in the production or supply of goods or services or for administrative purposes; or
  1. sale in the ordinary course of business.

3Owner-occupied property is property held (by the owner or by the lessee as a right-of-use asset) for use in the production or supply of goods or services or for administrative purposes.

Classification of property as investment property or owner-occupied property
  1. 4Investment 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. Ind AS 16 applies to owned owner-occupied property

2 Substituted vide Notification No. G.S.R. 273(E) dated 30th March, 2019.

3 Substituted vide Notification No. G.S.R. 273(E) dated 30th March, 2019.

4 Substituted vide Notification No. G.S.R. 273(E) dated 30th March, 2019. Editorial correction notified vide Notification No. G.S.R. 419(E) dated 18th June, 2021.

and Ind AS 116, Leases applies to owner-occupied property held by a lessee as a right-of-use asset.

  1. The following are examples of investment property:
    1. land held for long-term capital appreciation rather than for short- term sale in the ordinary course of business.
    2. land held for a currently undetermined future use. (If an entity has not determined that it will use the land as owner-occupied property or for short-term sale in the ordinary course of business, the land is regarded as held for capital appreciation.)
    3. 5a building owned by the entity (or a right-of-use asset relating to a building held by the entity) and leased out under one or more operating leases.
    4. a building that is vacant but is held to be leased out under one or more operating leases.
    5. property that is being constructed or developed for future use as investment property.
  2. The following are examples of items that are not investment property and are therefore outside the scope of this Standard:
    1. property intended for sale in the ordinary course of business or in the process of construction or development for such sale (see Ind AS 2, Inventories), for example, property acquired exclusively with a view to subsequent disposal in the near future or for development and resale.
    2. Omitted 6
    3. 7owner-occupied property (see Ind AS 16 and Ind AS 116), 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

5 Substituted vide Notification No. G.S.R. 273(E) dated 30th March, 2019.

6 Refer Appendix 1. Substituted vide Notification No. G.S.R. 365(E) dated 30th March, 2016 and, thereafter, omitted vide Notification No. G.S.R. 310(E) dated 28th March, 2018.

7 Substituted vide Notification No. G.S.R. 273(E) dated 30th March, 2019.

occupied by employees (whether or not the employees pay rent at market rates) and owner-occupied property  awaiting disposal.

  1. [Refer Appendix 1]
  2. property that is leased to another entity under a finance lease.
  1. Some properties comprise a portion that is held to earn rentals or for capital appreciation and another portion that is held for use in the production or supply of goods or services or for administrative purposes. If these portions could be sold separately (or leased out separately under a finance lease), an entity accounts for the portions separately. If the portions could not be sold separately, the property is investment property only if an insignificant portion is held for use in the production or supply of goods or services or for administrative purposes.
  2. 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.
  3. 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.
  4. It may be difficult to determine whether ancillary services are so significant that a property does not qualify as investment property. For example, the owner of a hotel sometimes transfers some responsibilities to third parties under a management contract. The terms of such contracts vary widely. At one end of the spectrum, the owner’s position may, in substance, be that of a passive investor. At the other end of the spectrum, the owner may simply have outsourced day-to-day functions while retaining significant exposure to variation in the cash flows generated by the operations of the hotel.
  5. Judgement is needed to determine whether a property qualifies as investment property. An entity develops criteria so that it can exercise that judgement consistently in accordance with the definition of investment property and with the related guidance in paragraphs 7–13.

Paragraph 75(c) requires an entity to disclose these criteria when classification is difficult.

14A Judgement is also needed to determine whether the acquisition of investment property is the acquisition of an asset or a group of assets or a business combination within the scope of Ind AS 103, Business Combinations. Reference should be made to Ind AS 103 to determine whether it is a business combination. The discussion in paragraphs 7–

14 of this Standard relates to whether or not property is owner- occupied property or investment property and not to determining whether or not the acquisition of property is a business combination as defined in Ind AS 103. Determining whether a specific transaction meets the definition of a business combination as defined in Ind AS 103 and includes an investment property as defined in this Standard requires the separate application of both Standards.

  1. 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.
Recognition
  • 8An owned investment property shall be recognised as an asset when, and only when:
  • it is probable that the future economic benefits that are associated with the investment property will flow to the entity; and
  • the cost of the investment property can be measured reliably.
  1. An entity evaluates under this recognition principle all its investment property costs at the time they are incurred. These costs include costs incurred initially to acquire an investment property and costs incurred subsequently to add to, replace part of, or service a property.

8 Substituted vide Notification No. G.S.R. 273(E) dated 30th March, 2019.

  1. Under the recognition principle in paragraph 16, an entity does not recognise in the carrying amount of an investment property the costs of the day-to-day servicing of such a property. Rather, these costs are recognised in profit or loss as incurred. Costs of day-to-day servicing are primarily the cost of labour and consumables, and may include the cost of minor parts. The purpose of these expenditures is often described as for the ‘repairs and maintenance’ of the property.
  2. Parts of investment properties may have been acquired through replacement. For example, the interior walls may be replacements of original walls. Under the recognition principle, an entity recognises in the carrying amount of an investment property the cost of replacing part of an existing investment property at the time that cost is incurred if the recognition criteria are met. The carrying amount of those parts that are replaced is derecognised in accordance with the derecognition provisions of this Standard.

19A 9An investment property held by a lessee as a right-of-use asset shall be recognised in accordance with Ind AS 116.

Measurement at recognition
  • 10An owned investment property shall be measured initially at its cost. Transaction costs shall be included in the initial measurement.
  1. The cost of a purchased investment property 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.
  2. [Refer Appendix 1]
  3. The cost of an investment property is not increased by:
    1. start-up costs (unless they are necessary to bring the property to the condition necessary for it to be capable of operating in the manner intended by management),
    2. operating losses incurred before the investment property achieves the planned level of occupancy, or

9 Inserted vide Notification No. G.S.R. 273(E) dated 30th March, 2019.

10 Substituted vide Notification No. G.S.R. 273(E) dated 30th March, 2019.

  1. abnormal amounts of wasted material, labour or other resources incurred in constructing or developing the property.
    1. If payment for an investment property is deferred, its cost is the cash price equivalent. The difference between this amount and the total payments is recognised as interest expense over the period of credit.
  • Omitted11
  1. Omitted12
  2. One or more investment properties may be acquired in exchange for a non-monetary asset or assets, or a combination of monetary and non- monetary assets. The following discussion refers to an exchange of one non-monetary asset for another, but it also applies to all exchanges described in the preceding sentence. The cost of such an investment property is measured at fair value unless (a) the exchange transaction lacks commercial substance or (b) the fair value of neither the asset received nor the asset given up is reliably measurable. The acquired asset is measured in this way even if an entity cannot immediately derecognise the asset given up. If the acquired asset is not measured at fair value, its cost is measured at the carrying amount of the asset given up.
  3. An entity determines whether an exchange transaction has commercial substance by considering the extent to which its future cash flows are expected to change as a result of the transaction. An exchange transaction has commercial substance if:
    1. the configuration (risk, timing and amount) of the cash flows of the asset received differs from the configuration of the cash flows of the asset transferred, or
    2. the entity-specific value of the portion of the entity’s operations affected by the transaction changes as a result of the exchange, and
    3. the difference in (a) or (b) is significant relative to the fair value of the assets exchanged.

For the purpose of determining whether an exchange transaction has commercial substance, the entity-specific value of the portion of the

11 Omitted vide Notification No. G.S.R. 273(E) dated 30th March, 2019.

12 Omitted vide Notification No. G.S.R. 273(E) dated 30th March, 2019.

entity’s operations affected by the transaction shall reflect post-tax cash flows. The result of these analyses may be clear without an entity having to perform detailed calculations.

  1. The fair value of an asset is reliably measurable if (a) the variability in the range of reasonable fair value measurements is not significant for that asset or (b) the probabilities of the various estimates within the range can be reasonably assessed and used when measuring fair value. If the entity is able to measure reliably the fair value of either the asset received or the asset given up, then the fair value of the asset given up is used to measure cost unless the fair value of the asset received is more clearly evident.

29A 13An investment property held by a lessee as a right-of-use asset shall be measured initially at its cost in accordance with Ind AS 116.

Measurement after recognition
Accounting policy
  • An entity shall adopt as its accounting policy the cost model prescribed in paragraph 56 to all of its investment property.
  1. [Refer Appendix 1]
  2. 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.
32A-32C [Refer Appendix 1]
Fair value measurement
33-35 [Refer Appendix 1] 36-39 [Refer Appendix 1]
  1. When measuring the fair value of investment property in accordance with Ind AS 113, an entity shall ensure that the fair value reflects,
  13 Inserted vide Notification No. G.S.R. 273(E) dated 30th March, 2019.   among other things, rental income from current leases and other assumptions that market participants would use when pricing investment property under current market conditions. 40A 14When a lessee measures fair value of an investment property that is held as a right-of-use asset, it shall measure the right-of-asset, and not the underlying property at fair value.
  1. [Refer Appendix 1] 42-47 [Refer Appendix 1]
48 In exceptional cases, there is clear evidence when an entity first acquires an investment property (or when an existing property first becomes investment property after a change in use) that the variability in the range of reasonable fair value measurements will be so great, and the probabilities of the various outcomes so difficult to assess, that the usefulness of a single measure of fair value is negated. This may indicate that the fair value of the property will not be reliably measurable on a continuing basis (see paragraph 53). 49-52 [Refer Appendix 1] Inability to measure fair value reliably
  • There is a rebuttable presumption that an entity can reliably measure the fair value of an investment property on a continuing basis. However, in exceptional cases, there is clear evidence when an entity first acquires an investment property (or when an existing property first becomes investment property after a change in use) that the fair value of the investment property is not reliably measurable on a continuing basis. This arises when, and only when, the market for comparable properties is inactive (eg there are few recent transactions, price quotations are not current or observed transaction prices indicate that the seller was forced to sell) and alternative reliable measurements of fair value (for example, based on discounted cash flow projections) are not available. If an entity determines that the fair value of an investment property under construction is not reliably measurable but expects the fair value of the property to be reliably measurable when construction is complete, it shall measure the fair value of that investment property either when its
  14 Inserted vide Notification No. G.S.R. 273(E) dated 30th March, 2019.   fair value becomes reliably measurable or construction is completed (whichever is earlier). If an entity determines that the fair value of an investment property (other than an investment property under construction) is not reliably measurable on a continuing basis, the entity shall make the disclosures required by paragraphs 79(e)(i), (ii) and (iii). 53A Once an entity becomes able to measure reliably the fair value of an investment property under construction for which the fair value was not previously measured, it shall measure the fair value of that property. Once construction of that property is complete, it is presumed that fair value can be measured reliably. If this is not the case, in accordance with paragraph 53, the entity shall make the disclosures required by paragraphs 79(e)(i), (ii) and (iii). 53B The presumption that the fair value of investment property under construction can be measured reliably can be rebutted only on initial recognition. An entity that has measured the fair value of an item of investment property under construction may not conclude that the fair value of the completed investment property cannot be measured reliably.
    1. In the exceptional cases when an entity is compelled, for the reason given in paragraph 53, to make the disclosures required by paragraphs 79(e)(i), (ii) and (iii), it shall determine the fair value of all its other investment property, including investment property under construction. In these cases, although an entity may make the disclosures required by paragraphs 79(e)(i), (ii) and (iii) for one investment property, the entity shall continue to determine the fair value of each of the remaining properties for disclosure required by paragraph 79(e).
  • If an entity has previously measured the fair value of an investment property, it shall continue to measure the fair value of that property until disposal (or until the property becomes owner- occupied property or the entity begins to develop the property for subsequent sale in the ordinary course of business) even if comparable market transactions become less frequent or market prices become less readily available.
 
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