Intricacies of Identifying an Investment Property under IFRS & Ind AS

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Investment property as per Ind AS 40 & IAS 40:

It is a property (land or a building—or part of a building— or both) held (by the owner or by the lessee as a right-of-use asset) to earn rentals or for capital appreciation or both, rather than for:

(a)  use in the production or supply of goods or services or for administrative purposes;

(b) sale in the ordinary course of business.

Owner-occupied property is property held (by the owner or by the lessee as a right-of-use asset) for use in the production or supply of goods or services or for administrative purposes.

An investment property generates cashflow independent of other assets owned by the entity. Whereas, an owner-occupied property does not. The production or supply of goods or services or administrative purposes, generates cash flows that are attributable not only to property, but also to other assets used in the production or supply process.

Standards applicable in different situations:

A property will be under purview of different standards depending on the facts of the case of its use.

S#	Particulars	Under purview of
1	Complies with definition of investment property	IAS 40 / Ind AS 40 - Investment Property
2	A property which is "owner occupied"	IAS 16 / Ind AS 16 - Property Plant & Equipment
3	Property provided to employees to use.	IAS 16 / Ind AS 16 - Property Plant & Equipment
4	Property sold in the ordinary course of the business.	IAS 2 / Ind AS 2 - Inventory
5	Land held for currently undetermined future use.	IAS 40 / Ind AS 40 - Investment Property
6	Building which is vacant but held to let it out in future.	IAS 40 / Ind AS 40 - Investment Property

Property which is put into dual use:

There can be situations in which a property can be put in to dual use, for example, certain portion of it is let out to others for rentals and the other portion of it is “owner occupied” (i.e. that is held for use in the production or supply of goods or services or for administrative purposes).

If these portions could be sold separately (or leased out separately under a finance lease), an entity accounts for the portions separately i.e. the let-out portion will be accounted under IAS 40 / Ind AS 40 and the owner-occupied potion will be accounted under IAS 16 / Ind AS 16.

If the portions could not be sold separately, the property is investment property only if an insignificant portion is held for use in the production or supply of goods or services or for administrative purposes. There is no quantitative guidance given for “insignificant portion” in the standard, but it can be loosely interpreted as less than 10% or 5%, management and auditors judgement will be involved in determining what is an “insignificant portion” of a property.

Ancillary Services provided to the occupants of the property:

In certain cases, an entity which has let out its property, also provides ancillary services to its occupants. IAS 40 & Ind AS 40 states that if the ancillary services are insignificant to the arrangement as a whole then that property will be under the purview of IAS 40 / Ind AS 40.

In the case where the ancillary services are not insignificant to the arrangement as a whole, then the accounting for that property will be under the purview of IAS 16 / Ind AS 16 – Property Plant & Equipment.

There is no quantitative guidance given for “insignificant portion” in the standard. Management and auditors’ judgement will be involved in determining what is an “insignificant portion” of a total arrangement.

The standard provides two examples:

• A property is let out for commercial use and the entity provides security and maintenance services. The charges for the maintenance and security services can potentially be “insignificant” when compared to the total rentals collected.
  

• The other example is when an entity owns and manages a hotel, services provided to guests are significant to the arrangement as a whole. Therefore, an owner-managed hotel is owner-occupied property, rather than investment property.
  

 This article is published in the Chartered Accountant Study Circle Bulletin May 2024 Edition.