Recognition and measurement – Ind AS 40

  • An owned investment property shall be recognized as an asset when, and only when:
  • it is probable that the future economic benefits that are associated with the investment property will flow to the entity; and
  • the cost of the investment property can be measured reliably
  • An entity evaluates under this recognition principle all its investment property costs at the time they are incurred
  • These costs include costs incurred initially to acquire an investment property and costs incurred subsequently (if the recognition criteria are met )to add to, replace part of, or service a property
  • Under the recognition principle, an entity does not recognize in the carrying amount of an investment property the costs of the day-to-day servicing of such a property
  • Rather, these costs are recognized in profit or loss as incurred
  • The purpose of these expenditures is often described as for the ‘repairs and maintenance’ of the property
  • Parts of investment properties may have been acquired through replacement
  • For example, the interior walls may be replacements of original walls
  • Under the recognition principle, an entity recognizes in the carrying amount of an investment property the cost of replacing part of an existing investment property at the time that cost is incurred if the recognition criteria are met
  • The carrying amount of those parts that are replaced is derecognized in accordance with the derecognition provisions of this Standard
  • An investment property held by a lessee as a right-of-use asset shall be recognized in accordance with Ind AS 116

Question:

An owned investment property shall be recognized as an asset when, and only when

  1. it is probable that the future economic benefits that are associated with the investment property will flow to the entity and cost of the investment property can be measured reliably
  2. it is probable that the future economic benefits that are associated with the investment property will flow to the entity
  3. cost of the investment property can be measured reliably
  4. it is probable that the future economic benefits that are associated with the investment property will flow to the entity but cost of the investment property can not be measured reliably.

Answer:

  1. An owned investment property shall be recognized as an asset when, and only when it is probable that the future economic benefits that are associated with the investment property will flow to the entity; and the cost of the investment property can be measured reliably and not when either of the conditions are fulfilled.

Measurement at Recognition

  • An owned investment property shall be measured initially at its cost. Transaction costs shall be included in the initial measurement
  • An investment property held by a lessee as a right-of-use asset shall be measured initially at its cost in accordance with Ind AS 116

Cost Inclusion

  • The cost of a purchased investment property comprises its purchase price and any directly attributable expenditure
    • Directly attributable expenditure includes, for example, professional fees for legal services, property transfer taxes and other transaction costs

Cost Exclusion

  • The cost of an investment property is not increased by
  • start-up costs (unless they are necessary to bring the property to the condition necessary for it to be capable of operating in the manner intended by management),
  • operating losses incurred before the investment property achieves the planned level of occupancy, or
  • abnormal amounts of wasted material, labour or other resources incurred in constructing or developing the property.

Cost when purchased on deferred/financing basis

  • If payment for an investment property is deferred, its cost is the cash price equivalent
  • The difference between this amount and the total payments is recognized as interest expense over the period of credit

Cost in an exchange transaction

  • One or more investment properties may be acquired in exchange for a non-monetary asset or assets, or a combination of monetary and nonmonetary assets.
  • The cost of such an investment property is measured at fair value unless
  • the exchange transaction lacks commercial substance or
  • the fair value of neither the asset received, nor the asset given up is reliably measurable.
  • The acquired asset is measured in this way even if an entity cannot immediately derecognize the asset given up
  • If the acquired asset is not measured at fair value, its cost is measured at the carrying amount of the asset given up
  • An entity determines whether an exchange transaction has commercial substance by considering the extent to which its future cash flows are expected to change as a result of the transaction
  • The fair value of an asset is reliably measurable if
  • the variability in the range of reasonable fair value measurements is not significant for that asset or
  • the probabilities of the various estimates within the range can be reasonably assessed and used when measuring fair value
  • If the entity is able to measure reliably the fair value of either the asset received or the asset given up, then the fair value of the asset given up is used to measure cost unless the fair value of the asset received is more clearly evident.

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