IND AS – 40 Investment Property

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What need for issuing Separate Standard Definitions

Mandatory requirement – fair value disclosures even though cost model is followed.

Generates cash flows largely independently.

Accounting for the Completed and rent generating real estate assets held by Real Estate Investment Trust ( REIT)

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Definitions Investment Property –

a property ( land or a building or part of a building or both )

held by owner or lessee under finance lease

to earn rentals or for capital appreciation or both.

Not for sale in the ordinary course of business ( Ind AS 2)

Owner –occupied Property-

held by owner or by the lessee under finance lease.

for use in the production

for Supply good or services.

for administrative purposes

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Examples Investment Property

Land held for long –term capital appreciation.

Land held for undetermined future use.

Building leased out under an operating lease.

Vacant building held to be leased out under an operating lease.

Property being constructed /developed for future use as an investment property.

Not Investment Property

Held for use in production or supply of goods or services or for administrative purposes ( Ind AS 16- PPE).

Held for sale in ordinary course of business or in the process of construction or development for such sale ( Ind AS 2- Inventory).

Property leased to another entity under finance lease ( Ind AS 17).

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Special case- Judgment required for classification – Dual own properties –

if assets is used partly for own use and partly to earn rentals or capital appreciation, and if these portions can be sold or leased out separately then the rented out portion is considered as an investment property.

If these portions can not be sold or leased out separately , the property is an investment property only if the owner –occupied portion is insignificant.

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Special case- Judgment required for classification –

Property with provision of services –

If services e.g. security or maintenance services are a relatively insignificant component of the arrangement as a whole, then the entity may treat the property an investment property.

Where the services provided are more significant ( such as in the case of an owner- managed hotel), the property should be classified as owner- occupied property.

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Special case- for classification Property leased to group Companies –

Property rented to a parent or subsidiary is not an investment property in consolidated financial statements.

Such property will be an investment property in the separate financial statements of the lessor.

Property where rentals determined with reference to the operation in the property –

It may be inappropriate to consider a property as an investment property if the owner is significantly exposed to the operation of the business in the property.

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Scope

Applicable

In the recognition , measurement and disclosure of investment property.

To the measurement in a lessee’s financial statements of investment property interest held under a lease accounted for as a finance lease.

To the measurement in a lessor’ s financial statements of investment property provided to a lessee under an operating lease.

Not Applicable

Bilogical Assets related to Agriculture activity ( Ind AS 41)

Mineral rights and mineral reserves

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Recognition

Conditions for Recognition

It is probable that the future economic benefits that are associated with the investment property will flow to the entity

Cost can be measured reliably.

Others

All cost related to investment property , whether on initial recognition or subsequent must meet the recognition criteria at the point at which the expenditure is incurred if they are to be capitalized.

Cost of the day-to-day servicing of such property shall recognized in profit and loss

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Measurement

Initial Measurement

at cost including transaction costs.

Cost includes

Purchase price and any directly attributable expenditure.

Purchase price is the amount of cash or cash equivalents paid or fair value of other consideration given to acquire an asset at the time of acquisition or construction.

If assets purchased under finance lease , its cost is determined in accordance with the principles of Ind AS-17.

Cost excludes

Start up costs.

Abnormal amount of waste.

Initial operating losses incurred before the investment property achieves the planned level of occupancy

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Measurement

Subsequent Measurement

All investment property – cost model ( except held for sale or included in disposal group).

Cost model – recognized at cost , depreciated systemically over its useful life and impaired when appropriate.

Assets held for sale or included in disposal group should measure in accordance with Ind AS -105 i.e. lower of its carrying amount and fair value less cost to sell at date of such classification.

Assets held for sale or included in disposal group should not be depreciated or amortized from the date of classification.

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Fair Value Measurement

Ind AS 40 does not allow the use of fair value model for subsequent measurement of investment property.

It requires to measure its fair value for disclosure in the notes on accounts.

An entity can reliably measure the fair value on a continuing basis except some exceptional cases.

An entity should ensure that fair value reflects – rental income and assumption which will be considered while pricing.

If property measured at fair value, it shall continue to measure the property at fair value until disposal.

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Disposals

Derecognize or disposal or permanent withdrawn from use

No future economic benefit is expected from its disposal.

Disposal may be achieved by sale or by entering into finance lease.

Date of disposal is the date of recipient obtains control in accordance with Ind AS 115*.

Gain or losses recognized in the profit and loss.

* Ind AS 18 – revenue as per draft Ind AS Rules 2016

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Transfers

If there is change in use evidenced by :

• commencement of owner –occupation from Investment to PPE.

• Commencement of development with a view to sale for a transfer from Investment to inventory.

• End of owner- occupation for a transfer from PPE to investment.

• Commencement of operating lease – transfer from inventories to investment.

Action towards affecting a change in use must have been taken.

Whether a change in use has occurred is based on an assessment of all the facts and circumstances.

No change in the carrying value

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Disclosure

Accounting Policy for measurement.

The extent to which the fair value as measured or disclosed is based on valuation by an independent valuer.

The amounts recognized in profit or loss:

Rental income

Direct operating expenses that generate rental income.

Direct operating expenses that did not generate rental income.

The depreciation method used.

Useful lives or depreciation rates used.

The gross carrying amount and the accumulated depreciation at the beginning and end of the period.

Explanation why fair value can not be measured reliably.

Contractual obligations to purchase , construct or develop investment property or for repairs, maintenance.

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First time Adoption

In the case of Ind AS 40, on transition to Ind AS instead of recomputing the carrying value of property , a company has certain choices with respect to calculating investment property balance on transition date.

In the event a company elects such a choice, the amounts so substituted are referred to as the deemed cost.

Note:- for details refer Ind AS 101

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Suggestive Disclosures in Financial Statements Balance Sheet

Assets Notes As at 31st March 2016

As at 31st March 2015

Non-current assets

Property, plant and equipment X XXXX XXXX

Capital work in progress X XXXX XXXX

Investment Properties X XXXX XXXX

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Suggestive Disclosures in Financial Statements Notes to Financial Statement

Assets

Opening Balance as at 1st April, 2015 XXXX

Additions (subsequent expenditure) XXXX

Deductions/adjustments XXXX

Closing Balance at 31st March 2016 XXXX

Depreciation and impairment

Opening Balance as at 1st April, 2015 XXXX

Depreciation XXXX

Deductions/adjustments XXXX

Closing Balance as at 31st March 2016 XXXX

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Suggestive Disclosures in Financial Statements Notes to Financial Statement

31st March 2016

31st March 2015

Net Block XXXX XXXX

Information regarding income and expenditure of Investment property

Rental income derived from investment properties XXXX XXXX

Less:-Direct Operating Expenses generating rental income XXXX XXXX

Less:-Direct Operating Expenses that did not generate rental income

XXXX XXXX

Profit arising from investment properties before Depreciation and indirect expenses

XXXX XXXX

Less:- Depreciation XXXX XXXX

Profit arising from investment properties before Indirect expenses

XXXX XXXX

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Suggestive Disclosures in Financial Statements Notes to Financial Statement

The Company’s investment properties consist of one commercial property in India. As at 31st March 2016 and 31st March 2015, the fair value of the property is Rs. XXXX and Rs. XXXX respectively. These valuations are based on valuations performed by XXXX, an independent valuer. The valuer is a specialist in valuing these types of investment properties. The Company has no restrictions on the realisability of its investment property and no contractual obligations to either purchase, construct or develop investment properties or for repairs, maintenance and enhancements.

Reconciliation of fair value:-

Opening Balance as at 1st April 2015 XXXX

Fair value difference XXXX

Purchase XXXX

Closing balance as at 31st March 2016 XXXX

Description of valuation techniques used and key inputs to valuation on investment property

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Suggestive Disclosures in Financial Statements Accounting Polices

Investment properties are measured initially at cost, including transaction costs. Subsequent to initial investment properties are stated at cost less accumulated depreciation and accumulated impairment loss, if any.

The cost includes the cost of replacing parts and borrowing costs for long-term construction projects if the recognition criteria are met. When significant parts of the property are required to be replaced at intervals, the Company depreciates them separately based on their specific useful lives. All other repair and maintenance costs are recognized in profit or loss as incurred.

The Company depreciates building component of investment property over XX years from the date of original purchase.

Though the Company measures investment property using cost based measurement, the fair value of investment property is disclosed in the notes. Fair values are determined based on an annual performed by an external independent valuer applying a valuation model.

Investment properties are derecognized either when they have been disposed of or when they are permanently withdrawn from use and no future economic benefit is expected from their disposal. The difference between the net disposal proceeds and the carrying amount of the asset is recognised in profit or loss in the period of derecognition.

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