Understanding Investment Property: Definition, Classification, and Measurement

What is Investment Property?

Investment property refers to land and buildings (or parts thereof) held for specific purposes, which include:

• Earning rental income.
• Capital appreciation of property, or
• Both rental income and capital appreciation.

The primary focus of this definition is on the intended purpose of the property. A property cannot be classified as investment property if held for any of the following objectives:

1. Production or supply of goods or services as part of the business model.
2. Administrative purposes within office premises.
3. Sale in the ordinary course of business.

If a company utilizes its building or land for purposes outlined in points 1 and 2, it should apply IND AS 16. Alternatively, if the property is held for sale in the ordinary course of business, IND AS 2 Inventories applies.

Examples of Investment Property

1. Land held for potential long-term capital gain or an unspecified future use.
2. A company acquires land intending to build a cinema hall for its operations in the future. In this case, the property does not qualify as investment property.
3. A building owned and leased out under operating leases, including vacant buildings planned for lease.
4. Properties under construction or development for future use as investment property.

Instances Not Considered Investment Property

The following are explicitly excluded from being classified as investment property:

• Property intended for sale in the ordinary course of business or in the process of construction or development for sale.
• Owner-occupied properties, as detailed in IND AS 16, which includes properties held for future use as owner-occupied.
• Properties leased to another entity under a finance lease.

Entities may provide ancillary services to occupants of an investment property. Such properties are classified as investment property if these services are insignificant to the overall arrangement—for example, an office building offering security and maintenance.

Conversely, if the services provided are significant, such as in the case of an owner-managed hotel, the property is classified as owner-occupied rather than investment property.

In cases where a property is leased to and occupied by its parent or another subsidiary, the property does not qualify as investment property in consolidated financial statements due to being owner-occupied from the group’s perspective. However, if it meets the investment property definition in paragraph 5 from the perspective of the owning entity, it should still be treated as investment property in its individual financial statements.

Example Scenario

Company A, which operates retail outlets, derives revenue through independent businesses and assets. Additionally, Company A provides ancillary activities such as housekeeping and security. As a passive investor with no reporting exposure to changes in cash flows of these independent outlets, the company classifies the land and buildings leased to retail outlets as investment property. This would differ had Company A retained control over cash flows generated by those retail outlets, in which case, the property would be classified under Property, Plant, and Equipment.

Recognition of Investment Property

An investment property should be recognized as an asset only if two conditions are met:

1. It is highly probable that future economic benefits associated with the asset will flow to the entity.
2. The cost of the asset can be measured reliably.

Initial Measurement of Investment Property

As per IND AS 40, investment property is initially measured at cost, inclusive of transaction costs. The cost encompasses:

1. Purchase price.
2. Directly attributable expenditures, including legal and professional fees, property taxes, etc.

However, it does not include:

• Operating losses incurred before planned possession.
• Abnormal material, labor, or resource waste during construction.
• Deferred payments for investment property, recorded at present value equivalent to cash price.
• General start-up expenses, unless they are directly attributable to the investment property.

Subsequent Measurement of Investment Property

After recognition, two measurement options are available for investment property:

Option 1: Fair Value Model

Under the fair value model, the investment property is maintained at fair value at the reporting date, determined according to IND AS 113 Fair Value Measurement. Any gains or losses on re-measurement to fair value are recognized in the profit or loss statement.

Option 2: Cost Model

For subsequent measurement using the cost model, IND AS 40 refers to IND AS 16 Property, Plant, and Equipment, adopting a similar methodology.

Changing Measurement Models

A company may switch from the fair value model to the cost model or vice versa if the change provides more reliable information regarding the company’s financial position, results, and other relevant events.