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CA Final · Financial Reporting · Ind AS 116 Leases

Kaveri Logistics Ltd, which reports under Ind AS, owns a commercial complex and also holds a leasehold interest in a floor that it sub-leases to tenants to earn rentals. The floor's right-of-use asset meets the definition of investment property. The CFO, familiar with IFRS, suggests measuring this right-of-use asset at fair value in line with the fair value model. What is the correct position under Ind AS 116?

The fair value model cannot be used for the right-of-use asset. Ind AS 40 does not allow the fair value model for investment property, so the IFRS 16 provision permitting it was deleted in Ind AS 116, and the asset is measured under the cost-based approach.

  1. AFair value model may be applied to the right-of-use asset as an option, as under IFRS 16
  2. BFair value model must be applied to the right-of-use asset since it meets the definition of investment property
  3. CThe fair value model is not available because Ind AS 40 does not allow the fair value model; the paragraph of IFRS 16 permitting it has been deleted in Ind AS 116Correct
  4. DFair value model applies only if the lease term exceeds 12 months, otherwise cost model

Explanation

IFRS 16 paragraph 34 allows a lessee applying the fair value model of IAS 40 to apply it to right-of-use assets that are investment property. Since Ind AS 40 does not permit the fair value model, that paragraph is deleted in Ind AS 116, so the CFO's suggestion fails. The option citing a 12-month threshold is invented.

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