Ind AS 40, Investment Property, Important Questions with Solutions for CA Final Financial Reporting May & Nov 2021 Exams

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Question 1 –

X Ltd. is engaged in the construction industry and prepares its financial statements up to 31st March each year. On 1st April, 2013, X Ltd. purchased a large property (consisting of land) for Rs.2,00,00,000 and immediately began to lease the property to Y Ltd. on an operating lease. Annual rentals were Rs.20,00,000. On 31st March, 2017, the fair value of the property was Rs.2,60,00,000. Under the terms of the lease, Y Ltd. was able to cancel the lease by giving six months’ notice in writing to X Ltd. Y Ltd. gave this notice on 31st March, 2017 and vacated the property on 30th September, 2017. On 30th September, 2017, the fair value of the property was Rs.2,90,00,000. On 1st October, 2017, X Ltd. immediately began to convert the property into ten separate flats of equal size which X Ltd. intended to sell in the ordinary course of its business. X Ltd. spent a total of Rs.60,00,000 on this conversion project between 30th September, 2017 to 31st March, 2018. The project was incomplete at 31st March, 2018 and the directors of X Ltd. estimate that they need to spend a further Rs.40,00,000 to complete the project, after which each flat could be sold for Rs.50,00,000.

Examine and show how the three events would be reported in the financial statements of X Ltd. for the year ended 31st March, 2018. as per Ind AS

Solution –

1) From 1st April, 2013, the property would be regarded as an investment property since it is being held for its investment potential rather than being owner occupied or developed for sale.

The property would be measured under the cost model. This means it will be measured at Rs.2,00,00,000 at each year end.

2) On 30th September, 2017, the property ceases to be an investment property. X Ltd. begins to develop it for sale as flats. The increase in the fair value of the property from 31st March, 2017 to 30th September, 2017 of Rs. 30,00,000 (Rs. 29,00,000 – Rs. 26,00,000) would be recognised in P/L for the year ended 31st March, 2018.

Since the lease of the property is an operating lease, rental income of Rs. 10,00,000 (Rs. 20,00,000 x 6/12) would be recognised in P/L for the year ended 31st March, 2018.

When the property ceases to be an investment property, it is transferred into inventory at its then fair value of Rs.2,90,00,000. This becomes the initial ‘cost’ of the inventory.

3) The additional costs of Rs.60,00,000 for developing the flats which were incurred up to and including 31st March, 2018 would be added to the ‘cost’ of inventory to give a closing cost of Rs. 3,50,00,000.

The total selling price of the flats is expected to be Rs. 5,00,00,000 (10 x Rs. 50,00,000). Since the further costs to develop the flats total Rs.40,00,000, their net realisable value is Rs.4,60,00,000 (Rs. 5,00,00,000 – Rs. 40,00,000), so the flats will be measured at a cost of Rs.3,50,00,000.

The flats will be shown in inventory as a current asset.

Question 2 –

On 1st April, 20X1 an entity acquired an investment property (building) for Rs. 40,00,000. Management estimates the useful life of the building as 20 years measured from the date of acquisition. The residual value of the building is Rs. 2,00,000. Management believes that the straight-line depreciation method reflects the pattern in which it expects to consume the building’s  future  economic  benefits.  What  is  the   carrying   amount   of   the   building   on 31st March, 20X2?

Solution –

Cost of the asset is Rs. 40,00,000.

Depreciable amount = Cost less Residual value = Rs. (40,00,000 – 2,00,000) = Rs. 38,00,000

Depreciation for the year = Depreciable amount/useful life

= Rs. 38,00,000/20

= Rs. 1,90,000.

Carrying amount = Cost less accumulated depreciation

= Rs. (40,00,000 – 1,90,000) = Rs. 38,10,000.

Question 3 –

In financial year 20X1-20X2, X Limited incurred the following expenditure in acquiring property consisting of 6 identical houses each with separate legal title including the land on which it is built.

The expenditure incurred on various dates is given below:

On 1st April, 20X1 – Purchase cost of the property Rs. 1,80,00,000.

On 1st April, 20X1 – Non-refundable transfer taxes Rs. 20,00,000 (not included in the purchase cost).

On 2nd April, 20X1- Legal cost related to property  acquisition Rs. 5,00,000. On 6th April, 20X1- Advertisement campaign to attract tenants Rs. 3,00,000.

On 8th April, 20X1 – Opening ceremony function for starting business Rs. 1,50,000.

Throughout 20X1-20X2, incurred Rs. 1,00,000 towards day-to-day repair maintenance and other administrative expenses.

X Limited uses one of the six houses for office and accommodation of its few staffs. The other five houses are rented to various independent third parties.

How X Limited will account for all the above mentioned expenses in the books of account?

Solution –

The cost of the property = Rs. (1,80,00,000 + 20,00,000 + 5,00,000) = Rs. 2,05,00,000.

Since five houses out of six are being rented, so 5/6th of the property cost will be accounted for as an investment property and 1/6th of the property cost will be accounted for as owner occupied property.

Cost of the investment property = Rs. 2,05,00,000 x 5/6 = Rs. 1,70,83,333

Cost of the owner occupied property = Rs. (2,05,00,000 – 1,70,83,333) = Rs. 34,16,667.

All other costs, i.e., advertisement expenses, ceremony expenses  and  repair  maintenance  expenses will be expensed off as and when incurred.

Question 4 –

Moon Ltd has purchased a building on 1st April, 20X1 at a cost  of  Rs. 10 million. The building  was  used as a factory by the Moon Ltd and was measured under cost model. The expected useful life of the building is estimated to be 10 years. Due to decline in demand of  the  product,  the  Company does not need the factory anymore and has rented out the building to a third party from 1st April, 20X5.  On  this date the  fair value of  the building is  Rs. 8 million. Moon ltd  uses cost model   for accounting of its investment property.

Solution –

(Rs. Million)
Carrying amount of the building after depreciation of  4 years (10-10/10 x 4). 6
The company has applied cost model under Ind AS 16 till now.
There is no impairment as the fair value is greater than the carrying amount of building.
Revaluation Surplus  credited to Other Comprehensive Income (not applicable since cost model is used under Ind AS 16)
Building initially recognised as Investment Property (Cost model Ind AS 40) 6


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