A Comprehensive Guide to Ind AS 40: Understanding Investment Property Classification

Understanding Ind AS 40 – Investment Property

Ind AS 40 provides guidelines for classifying properties owned by an entity, specifically into investment property, inventories, and property, plant, and equipment (PPE).

Definition of Investment Property

According to Ind AS 40, investment property is defined as property (land or a building, or both) held by the owner or by a lessee under a finance lease for the purpose of earning rentals, capital appreciation, or both. This classification excludes properties used for:

(a) Production or supply of goods or services and administrative purposes; or
(b) Sale in the usual course of business.

As stated in Paragraph 7, investment properties generate cash flows independently from an entity's other assets, differentiating them from owner-occupied properties.

Example Scenario

Consider Company A, which owns agricultural land in various regions leased out to farmers under an operating lease for a period of ten years. Company A does not participate in the farming operations or receive earnings from the produce. This allows Company A to maintain its retail business independently.

In addition, Company A has acquired industrial land held solely for capital appreciation.

Given that Company A’s agricultural land is leased for rental income without providing additional services, this classification positions the company as a passive investor. Therefore, the agricultural land will be categorized as investment property and measured using the cost model.
The industrial land, acquired solely for capital appreciation, is also classified as investment property.

Changes in Use and Classification

As per Paragraph 57, a property may be transferred to, or from, investment property only upon a change in use. This change in use occurs when the property meets or ceases to meet the investment property definition. Merely shifting management intentions does not signify a change in use.

Paragraph 58 states that if an entity opts to dispose of investment property without further development, the property will maintain its investment property classification until derecognized. The property is not reclassified as inventory. If an entity begins to redevelop an investment property for ongoing use as investment property, it remains classified as such during the redevelopment phase.

According to Paragraph 59, transfers between investment property, owner-occupied property, and inventories do not alter the carrying amount or cost of the property for measurement or disclosure.

Disposal of Investment Property

Paragraph 67 discusses disposal methods for investment property, either through sale or finance lease. The date of disposal corresponds to when the recipient gains control, as specified in Ind AS 115. Ind AS 116 applies if a finance lease is employed in the transaction.

Continuing Scenario with Company A

a. Upon completing the ten-year lease of agricultural land, Company A decides not to renew the lease but to sell the property. Since there will be no property development prior to the sale, it retains its status as investment property until the sale is completed and is not reclassified as owner-occupied property or inventory.

b. Company A has initiated contracts to develop a theme park on its industrial land for business use. This intent necessitates reclassifying the property to property, plant, and equipment. Importantly, this reclassification will not affect the carrying amount for measurement or disclosure purposes.

Classification Summary

The following table provides clarifications regarding the classification of various property types:

S No	Nature of Property	Classification
1	Building rented under finance lease	Accounting as per Ind AS 116
2	Building rented under operating lease	Investment Property
3	Real estate company trading in land and buildings	Inventories
4	Building for administrative activities	Property, Plant & Equipment
5	Retail outlets for selling garments	Property, Plant & Equipment
6	Factory for manufacturing finished goods	Property, Plant & Equipment
7	Factory building under lease	Lease rentals as per Ind AS 116
8	Unutilized land	Investment Property (assumed for capital appreciation)
9	35-storey building; 20 floors self-occupied, 15 leased	20 floors - PPE, 15 floors - Investment Property
10	Floor leased out as co-working space	Investment Property
11	Property leased with catering services	Investment Property (catering is minor)
12	Developed hotel with outsourced management (fixed price)	Property, Plant & Equipment
13	Developed hotel with outsourced management (variable price, limited rights)	Investment Property
14	Acquired building yet to lease out	Investment Property

This structured guidance assists entities in accurately classifying their properties as per Ind AS 40, ensuring compliance and clarity in financial reporting.