CA Final · Financial Reporting

Ind AS 40 Investment Property: formula sheet

Full chapter guide

Key formulas

Definition of investment property: Land / building / part of building / both + held to earn rentals or for capital appreciation or both; Held by the owner or by a lessee under a right-of-use arrangement. A lessee can classify a leased property as investment property if it meets the definition. Purpose of holding decides the classification.
Owner-occupied property: Held for production or supply of goods or services, or for administrative purposes → Ind AS 16; Includes property held for future use as owner-occupied property, property held for future development and subsequent use as owner-occupied property, and property occupied by employees.
Property held for sale: Held for sale in the ordinary course of business, or under construction or development for such sale → Ind AS 2; Typical for real estate developers. An investment property to be disposed of stays under Ind AS 40 until it meets the held-for-sale criteria of Ind AS 105, when it moves to Ind AS 105. A property being redeveloped for continued future use as investment property stays under Ind AS 40 and is not moved to inventory. Property constructed on behalf of third parties is dealt with under Ind AS 115.
Mixed-use property: Portions separately saleable (or leasable under a finance lease) → account separately; otherwise investment property only if the own-use portion is insignificant; Apply the test on the facts of the property, portion by portion.
Ancillary services test: Insignificant services to occupants → investment property; significant services → owner-occupied; Judgement is needed. The test is whether the services provided are insignificant or a significant component of the arrangement as a whole.
Group property rule: Property leased to a parent, subsidiary or fellow subsidiary → investment property in the owner's separate financial statements, provided it meets the definition of investment property in the owner's separate financial statements; owner-occupied in the consolidated financial statements; The group as a whole uses the property for its own purposes.
Core definition: Investment property = property held to earn rentals and/or for capital appreciation; Not held for own production, supply of goods or services, administration, or sale in the ordinary course of business.
Mixed-use rule: Separately saleable (or finance-leasable) portions → account separately; otherwise → investment property only if owner-used portion is insignificant; If the owner-used portion is significant and cannot be separated, the whole property is owner-occupied under Ind AS 16.
Ancillary services rule: Services insignificant to the whole arrangement → investment property; services significant → owner-occupied; Typical insignificant: security, maintenance. Typical significant: owner-managed hotel.
Group-lets rule: Separate FS of lessor: investment property if it meets the definition; Consolidated FS: owner-occupied (Ind AS 16); The group is the reporting entity in consolidated statements, so intra-group use is own use.
Lessee right-of-use asset: ROU asset meeting the definition (e.g. operating sub-lease) → investment property (Ind AS 40 applies); finance sub-lease → ROU asset derecognised, lease receivable recognised; Ind AS 40 as notified in India permits the cost model only.
Exclusions: Inventory (Ind AS 2) | Constructed for third parties (Ind AS 115) | Owner-occupied (Ind AS 16) | Finance-leased out (derecognised; lease receivable under Ind AS 116); Check these before concluding investment property.
Recognition test: Recognise if: future economic benefits are probable AND cost is reliably measurable; Both conditions must be met. Apply the test to initial and subsequent costs when they are incurred.
Cost of purchased investment property: Cost = Purchase price + Directly attributable costs (legal fees, transfer taxes, other transaction costs); Deduct trade discounts and rebates from the price. Exclude start-up costs, abnormal waste and initial operating losses.
Deferred payment: Cost = Cash price equivalent (present value of payments); Interest expense = Total payments − Cash price equivalent; Recognise the interest in profit or loss over the credit period. Do not capitalise it unless Ind AS 23 permits it.
Exchange with commercial substance: Cost = Fair value of asset given up (+ cash paid, − cash received); Use the fair value of the asset received instead if it is more clearly evident. The difference from the carrying amount of the asset given up is a gain or loss in profit or loss.
Exchange without commercial substance or no reliable fair value: Cost = Carrying amount of asset given up (+ cash paid, − cash received); No gain or loss arises on the asset given up.
Carrying amount under cost model: Carrying amount = Cost − Accumulated depreciation − Accumulated impairment losses; The only measurement basis allowed after recognition under Ind AS 40.
Annual straight-line depreciation: Depreciable amount ÷ Useful life = (Cost − Residual value) ÷ Useful life; Land is not depreciated. Depreciate building and significant components separately if their lives differ.
Fair value disclosure rule: Notes must show fair value of investment property; fair value is NOT recognised in the balance sheet or profit or loss; Fair value is measured under Ind AS 113. Disclose the extent of a registered valuer's valuation, or state that there was none.
Impairment test: Impairment loss = Carrying amount − Recoverable amount, if positive; Recoverable amount = higher of (fair value less costs of disposal) and value in use; A fall in fair value is not an impairment loss by itself. A significant fall in fair value, much more than expected from the passage of time or normal use, is an indicator under Ind AS 36. Then compare carrying amount with recoverable amount, including value in use, before booking a loss.
Ind AS 40 vs IAS 40: Ind AS 40: cost model only. IAS 40: cost model or fair value model (one policy for all investment property, subject to its exceptions); Fair value disclosure is required under both.
Triggers for transfer: Investment property → Owner-occupied: start of owner-occupation | Investment property → Inventory: start of development with a view to sale | Owner-occupied → Investment property: end of owner-occupation | Inventory → Investment property: start of operating lease to another party; A change in use must be evidenced. A mere change in management intention is not evidence.
Cost model: Carrying amount after transfer = Carrying amount before transfer; Applies to all directions. Cost and carrying amount do not change, so there is no gain or loss.
Fair value model: Investment property → Owner-occupied or Inventory: Deemed cost for later accounting = Fair value at date of change in use; The property is already at fair value, with changes in fair value recognised in profit or loss up to the date of change.
Fair value model: Owner-occupied → Investment property: Revaluation difference = Fair value − Carrying amount under Ind AS 16 at date of change in use; Treat the difference as a revaluation under Ind AS 16. An increase goes to OCI (revaluation surplus) except to the extent it reverses an earlier loss in profit or loss. A decrease goes to profit or loss except to the extent it uses an existing surplus.
Fair value model: Inventory → Investment property: Profit or loss = Fair value − Previous carrying amount of inventory; Recognised in profit or loss at the date of transfer.
Gain or loss on derecognition: Gain or (loss) = Net disposal proceeds − Carrying amount of the property; Recognise in profit or loss in the period of retirement or disposal. Not shown as revenue.
Derecognition trigger: Derecognise on (a) disposal, or (b) permanent withdrawal from use with no future economic benefits expected from disposal; Disposal includes sale and a finance lease given as lessor.
Compensation from third parties: Recognise in profit or loss when the compensation becomes receivable; Impairment (Ind AS 36), compensation and replacement purchase are separate events.
Deferred consideration: Consideration = cash price equivalent; excess of total payments over it = interest revenue over the credit period; Applies when payment is deferred beyond normal credit terms.
Replaced part: Derecognise carrying amount of replaced part; if not determinable, the cost of the replacement may be used as an indication; Applies when the cost of the replacement is capitalised.
Fair value disclosure (cost model): Disclose the fair value of investment property; if it cannot be measured reliably, disclose that fact, a description, why, and the range of estimates; Ind AS 40 requires this even under the cost model.

Quick revision

Investment property is land or a building (or part) held to earn rentals, for capital appreciation, or both.
Own-use property falls under Ind AS 16. Property for sale in the ordinary course falls under Ind AS 2.
Ind AS 40 allows only the cost model. The fair value model of IAS 40 is not available.
Fair value of investment property must still be disclosed. If it cannot be measured reliably, disclose that fact, the reason and a range if possible.
Mixed-use property: split it if the portions can be sold (or leased under a finance lease) separately. Otherwise it is investment property only if the own-use portion is insignificant.
If ancillary services to occupants are an insignificant part of the arrangement, the property stays investment property. If significant, as in an owner-managed hotel, it is owner-occupied.
Property let to a subsidiary or parent can be investment property in the lessor's separate statements, if it meets the definition from the lessor's own viewpoint, but is owner-occupied in the consolidated statements.
Initial cost is purchase price plus directly attributable transaction costs. Start-up costs, abnormal waste and pre-occupancy operating losses are excluded.
Day-to-day servicing costs go to profit or loss. Replacement parts are capitalised if recognition criteria are met, and the replaced part's carrying amount is derecognised.
Transfers need evidence of a change in use. Management's intention alone is not enough. Para 57 gives four examples of such evidence, and the list is not exhaustive: start of owner-occupation (investment property to owner-occupied), start of development with a view to sale (investment property to inventory), end of owner-occupation (owner-occupied to investment property), and start of an operating lease to another party (inventory to investment property).
A property being disposed of is not a transfer under para 57. If it meets the held-for-sale criteria, it moves to Ind AS 105 and follows that standard.
Under the cost model, a transfer does not change carrying amount.
Gain or loss on disposal is net disposal proceeds less carrying amount, recognised in profit or loss.

Common mistakes

Treating land held for an undetermined future use as owner-occupied or inventory. Fix: Land held for a currently undetermined future use is deemed held for capital appreciation, so it is investment property.
Classifying property leased to a parent, subsidiary or fellow subsidiary as investment property in the consolidated statements. Fix: For property leased to a parent, subsidiary or fellow subsidiary, the group uses the property for its own purposes. In the consolidated financial statements it is owner-occupied under Ind AS 16. In the owner's separate financial statements it is investment property, provided it meets the definition.
Treating any building that earns some rent as wholly investment property. Fix: Check the owner-used portion. If it is significant and cannot be sold or finance-leased separately, the whole property is owner-occupied.
Classifying an owner-managed hotel as investment property because guests pay for rooms. Fix: Guest services are a significant component, so the hotel is owner-occupied under Ind AS 16. Only a passive owner with a third-party operator may argue otherwise.
Capitalising initial operating losses or the cost of finding a tenant as part of cost. Fix: Only directly attributable acquisition costs are capitalised. Losses before the planned level of occupancy and general overheads go to profit or loss.
Capitalising the total deferred payment instead of the cash price equivalent. Fix: Take the present value as cost. Charge the difference as interest over the credit period.
Applying the fair value model and booking gains in profit or loss for an Ind AS company. Fix: Remember that Ind AS 40 allows only the cost model. Fair value is a disclosure item, not a measurement basis.
Saying that fair value need not be disclosed because the cost model is used. Fix: Disclose fair value of investment property in the notes. Only in the exceptional case where fair value cannot be measured reliably do you give the alternative disclosures.
Transferring a property to inventory just because management plans to sell it. Fix: Transfer to inventory only when development with a view to sale begins. A property held as investment property and sold without development stays investment property until disposal.
Recognising a gain or loss on transfer under the cost model. Fix: Under the cost model, the carrying amount does not change, so no gain or loss arises on transfer.

Exam tips

In case-scenario MCQs, find the sentence that states the purpose of holding. It almost always decides the answer.
Watch for distractor words such as 'temporarily let out' or 'insignificant services'. Each one points to a specific rule.
In written answers, name the exclusion and the Ind AS it points to: Ind AS 16 for own use, Ind AS 2 for sale in the ordinary course.
Check whether the question asks for separate or consolidated financial statements before classifying a property leased within a group.
Always give a one-line reason for your conclusion, because marks are linked to the reasoning.
In case-scenario MCQs, look for key facts: separately saleable, insignificant portion, security services, hotel managed by a third party, subsidiary as tenant. Each points to a specific rule.
In written answers, use provision-facts-conclusion: state the rule, apply it to the numbers or facts given, then conclude with the Ind AS reference.
If a group entity is the tenant, always give both the separate and the consolidated answer. Examiners often split marks on this.