Measurement after Recognition – Ind AS 40

Accounting Policy

  • An entity shall adopt as its accounting policy the cost model per Ind AS 16to all of its investment property
  • This Standard requires all entities to measure the fair value of investment property, for the purpose of disclosure even though they are required to follow the cost model
  • An entity is encouraged, but not required, to measure the fair value of investment property on the basis of a valuation by an independent valuer who holds a recognized and relevant professional qualification and has recent experience in the location and category of the investment property being valued

Fair value Measurement

  • When measuring the fair value of investment property in accordance with Ind AS 113, an entity shall ensure that the fair value reflects, among other things, rental income from current leases and other assumptions that market participants would use when pricing investment property under current market conditions
  • When a lessee measures fair value of an investment property that is held as a right-of-use asset, it shall measure the right-of-asset, and not the underlying property at fair value

Inability to measure fair value reliably

  • There is a rebuttable presumption that an entity can reliably measure the fair value of an investment property on a continuing basis
  • However, in exceptional cases, there is clear evidence when an entity first acquires an investment property (or when an existing property first becomes investment property after a change in use) that the fair value of the investment property is not reliably measurable on a continuing basis
  • This arises when, and only when, the market for comparable properties is inactive.
  • For example: there are few recent transactions, price quotations are not current or observed transaction prices indicate that the seller was forced to sell) and alternative reliable measurements of fair value (for example, based on discounted cash flow projections) are not available
  • If an entity determines that the fair value of an investment property under construction is not reliably measurable but expects the fair value of the property to be reliably measurable when construction is complete, it shall measure the fair value of that investment property either when its fair value becomes reliably measurable or construction is completed (whichever is earlier).
  • If an entity determines that the fair value of an investment property (other than an investment property under construction) is not reliably measurable on acontinuing basis, the entity shall make the required disclosures
  • Once an entity becomes able to measure reliably the fair value of an investment property under construction for which the fair value was not previously measured, it shall measure the fair value of that property
  • Once construction of that property is complete, it is presumed that fair value can be measured reliably.
  • If this is not the case, in accordance with paragraph 53, the entity shall make the disclosures as required by Ind AS 40
  • An entity that has measured the fair value of an item of investment property under construction may not conclude that the fair value of the completed investment property cannot be measured reliably
  • If an entity has previously measured the fair value of an investment property, it shall continue to measure the fair value of that property until disposal (or until the property becomes owner occupied property or the entity begins to develop the property for subsequent sale in the ordinary course of business) even if comparable market transactions become less frequent or market prices become less readily available

Cost Model

After initial recognition, an entity shall measure investment property:

  • in accordance with Ind AS 105, Non-current Assets Held for Sale and Discontinued Operations, if it meets the criteria to be classified as held for sale (or is included in a disposal group that is classified as held for sale)
  • in accordance with Ind AS 116 if it is held by a lessee as a rightof- use asset and is not held for sale in accordance with Ind AS 105; and
  • in accordance with the requirements in Ind AS 16 for cost model in all other cases

Transfers

  • An entity shall transfer a property to, or from, investment property when, and only when, there is a change in use
  • A change in use occurs when the property meets, or ceases to meet, the definition of investment property and there is an evidence of the change in use
  • In isolation, a change in management’s intentions for the use of a property does not provide evidence of a change in use.

Examples of evidence of a change in use

  • commencement of owner-occupation, or of development with a view to owner-occupation, for a transfer from investment property to owner-occupied property
  • commencement of development with a view to sale, for a transfer from investment property to inventories
  • end of owner-occupation, for a transfer from owner occupied property to investment property; and
  • inception of an operating lease to another party, for a transfer from inventories to investment property
  • When an entity decides to dispose of an investment property without development, it continues to treat the property as an investment property until it is derecognized (eliminated from the balance sheet) and does not reclassify it as inventory
  • Similarly, if an entity begins to redevelop an existing investment property for continued future use as investment property, the property remains an investment property and is not reclassified as owner-occupied property during the redevelopment
  • Transfers between investment property, owner-occupied property and inventories do not change the carrying amount of the property transferred and they do not change the cost of that property for measurement or disclosure purposes

Disposals – Ind AS 40

Derecognition of investment property

  • An investment property shall be derecognized (eliminated from the balance sheet) on disposal or when the investment property is permanently withdrawn from use and no future economic benefits are expected from its disposal
  • The disposal of an investment property may be achieved by sale or by entering into a finance lease.
  • The date of disposal for investment property that is sold is the date the recipient obtains control of the investment property in accordance with the requirements for determining when a performance obligation is satisfied in Ind AS 115.
  • Ind AS 116 applies to a disposal effected by entering into a finance lease and to a sale and leaseback.
  • Gains or losses arising from the retirement or disposal of investment property shall be determined as the difference between the net disposal proceeds and the carrying amount of the asset and shall be recognized in profit or loss (unless Ind AS 116 requires otherwise on a sale and leaseback) in the period of the retirement or disposal
  • Compensation from third parties for investment property that was impaired, lost or given up shall be recognized in profit or loss when the compensation becomes receivable. Similarly, impairments of investment property are recognized in accordance with Ind AS 36

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