Page 7 - 5. COMPILER QB - INDAS 40
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MTPs QUESTIONS
Q4 (Aug.18 – 10 Marks)
UK Ltd. has purchased a new head office property for Rs. 10 crores. The new office building has 10 floors and
the organization structure of UK Ltd. is as follows:
Floor 1st 2nd 3rd 4th 5th 6th 7th 8th 9th 10th
Use Waiting Area Admin HR Accounts Inspection MD Office Canteen Vacant
Since UK Ltd. did not need the floors 8, 9 and 10 for its business needs, it has leased out the same to a
restaurant on a long-term lease basis. The terms of the lease agreement are as follows:
Tenure of Lease Agreement - 5 Years
Non-Cancellable Period - 3 years
Lease Rent - annual lease rent receivable from these floors are Rs. 10,00,000 per floor with an
escalation of 5% every year.
Based on the certificate from its architect, UK Ltd. has estimated the cost of the 3 top floors as
approximately Rs. 3 crores. The remaining cost of Rs. 7 crores can be allocated as 25% towards Land and
75% towards Building.
As on 31st March, 2018, UK Ltd. obtained a valuation report from an independent valuer who has estimated
the fair value of the property at Rs. 15 crores. UK Ltd. wishes to use the cost model for measuring Property,
Plant & Equipment and the fair value model for measuring the Investment Property. UK Ltd. depreciates the
building over an estimated useful life of 50 years, with no estimated residual value.
Advise UK Ltd. on the accounting and disclosures for the above as per the applicable Ind AS.
SOLUTION
(a) Ind AS 16 ‘Property, Plant and Equipment’ states that property, plant and equipment are tangible items
that are held for use in the production or supply of goods or services, for rental to others, or for
administrative purposes.
(b) As per Ind AS 40 ‘Investment property’, investment property is a property held to earn rentals or for
capital appreciation or both, rather than for use in the production or supply of goods or services or for
administrative purposes or sale in the ordinary course of business.
(c) Further, as per Ind AS 40, the building owned by the entity and leased out under one or more operating
leases will be classified as investment property. Here the top three floors have been leased out for 5 years
with a non-cancellable period of 3 years. The useful life of the building is 50 years. The lease period is far
less than the useful life of the building leased out. Further, the lease rentals of three years altogether do
not recover the fair value of the floors leased i.e. 15 crore x 30% = 4.50 crore. Hence the lease is an
operating lease. Therefore, the 3 floors leased out as operating lease will be classified as investment
property in the books of lessor ie. UK Ltd.
(d) However, for investment property, Ind AS 40 states that an entity shall adopt as its accounting policy the
cost model to all of its investment property. Ind AS 40 also requires that an entity shall disclose the fair
value of such investment property (ies).
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