In India, every investment made is not investment in property; and neither every property purchased is considered as investment. Now a question might pop in your mind that what is investment in property? To be precise, any purchase of land or building made with an intention of earning a return either through rental income or through appreciation of the value of land or building or intension for both returns and appreciation will be defined as investment property. Any individual or company or any other body or their group can be the owner of the invested property.
As per IND AS 40, in this standard, holding a building or land for any of the following objectives shall not be as investment property:
For production or supply of goods or services as per your business model, or
For administrative purposes in office premises, or
For sale in ordinary course of business.
In case you are using for above two purposes then IND AS-16 needs to be referred and for last one (Sale in ordinary course of business) we need to refer IND AS 2.
A good judgment is also required to bifurcate investment property. For instance, a property dealer purchases land or building to earn return. But, the property is an inventory to him. Thus, this won’t fall in investment property.
However, the standard won’t be applied in the following cases:
The assets covered under IND AS 116 on Lease of asset;
Biological assets used for agricultural use covered under IND AS 41; and
Mineral rights and Mineral reserves such as Oil, Natural gas and similar non-regenerative resources.
Recognition of Investment property An asset should be recognized as an investment property only if the following two conditions are met:
Future economic benefits associated with the asset are most likely to flow to the entity; and
Reliable measurement of cost of the asset.
The rules for recognizing investment property are going to be the same as stated in IND AS 16 for property, plant, and equipment
Initial Recognition As per Ind AS 40, Investment property shall be initially measured at cost, including the transaction cost. The cost of investment property includes:
Purchase price and
Directly attributable expenditure, such as legal fees or professional fees, property taxes, etc.
However, shall NOT include:
Operating losses that you incur before planned possession is achieved;
Abnormal waste of material, labour or other resources incurred on construction;
Most importantly, any deferred paymentfor investment Property should be recorded at present value; and
Start-up expenses incurred to put in use state. However, if these start-up expenses are directly attributable to the item of investment property, then you can include them. Although, general Start-up expenses are not included in the cost of Investment Property.
De-recognition of Investment property The de-recognition means removal of asset from books of the company. You can derecognize investment property in the following circumstances:
When the investment property is disposed or held for disposal, or
The asset is given on finance lease, or
When the investment property is does not have any economic benefit anymore.
You need to calculate gain or loss on disposal as a difference between net disposal proceeds and Asset’s carrying amount. The difference of gain/loss on disposal shall be recognized in statement of Profit and Loss.
Transfers from Investment property to business usage Once an asset recognized as Investment property can be transferred and determined as an asset under any other IND AS. Transfer here means the change in classification of investment property. In other words, transfer means change in purpose of the usage of an asset but not the physical movement of an asset.
For instance, a building was previously given on operational lease and thus was held as an investment property under IND AS 40; later it was taken back and was utilized for administrative work, thus was recognized as an asset under IND AS 16 Property, plant, and equipment. Thus, we can say that the transfer is possible, but only when there’s a change in use or change in the purpose of holding asset.
Before going forward, the following is the list of IND AS which shall be related with the transfer cases of asset. The asset classified under IND AS 40 can be transferred and classified under any of the following IND AS:
IND AS 16 deals with Property, Plant and equipment;
IND AS 2 deals with Inventory which can be Raw, WIP or Finished;
IND AS 105 deals with Non-Current asset held for sale or group disposal; and
IND AS 115 deals with revenue from customers
For better understanding, following can be the cases which shall be considered as the transfer of investment property:
Previously, rented out the property on operational lease and start using it for manufacturing goods to supply in the ordinary course of business. (IND AS 40 to IND AS 116); or vice versa
Previously held land for the undefined purpose and decided to construct in the ordinary course of real estate business (IND AS 40 to IND AS 2) or vice versa.
Disclosures Requirements As per provisions of IND AS 40, the following disclosures are mandatory to be made in notes to accounts of financial statements of the company related to investment property:
Measurement model used by the company it can be either cost based or of financial statements of the company related to Investment property:
Measurement model used by the company it can be either cost based or fair value based;
Rental income from the asset earned during the year;
Operating expense net off from rental income;
Depreciation model used for the asset;
Fair value measurement if not done by professional valuer then a reason shall be given for the same;
Reconciliation statement for the year; and
Assumptions, if any, used to determine fair value of asset
Here at Itseki Mercurius India, we assist our clients in ensuring proper disclosures while preparing the financial statements, also we assist in bookkeeping, taxation and audit. If you have any questions or want to know more about investment in property, kindly contact us.