Page 9 - 5. COMPILER QB - INDAS 40

QUESTIONS FROM PAST EXAM PAPERS

Q5 (Jan 21 – 5 Marks) (Mixed of IndAS 16 & IndAS 40)

On 1st April 2019, an entity purchased a building for Rs. 50,00,000 and paid a non-refundable property transfer
tax and direct legal cost of Rs. 2,50,000 and Rs. 50,000 respectively while acquiring the building.
During 2019, the entity redeveloped the building into a two-storey building. Expenditures on re-development
were:
● Rs. 1,00,000 Building plan approval;

● Rs. 10,00,000 construction costs (including Rs. 60,000 refundable purchase taxes); and
● Rs. 40,000 due to abnormal wastage of material and labour.
When the re-development of the building was completed on 1st October 2019, the entity rented out Ground
Floor of the building to its subsidiary under an operating lease in return for rental payment. The subsidiary
uses the building as a retail outlet for its products. The entity kept the first floor for its own administration

and maintenance staff usage. Equal value can be attributed to each floor.
How will the entity account for all the above-mentioned expenses in the books of account?
Also, discuss how the above building will be shown in the Consolidated financial statement of the entity as a

group and in its separate financial statements as per relevant Ind AS.
SOLUTION

In accordance with Ind AS 16, all costs required to bring an asset to its present location and condition for its
intended use should be capitalised. Therefore, the initial purchase price of the building would be:

Particulars Amount Rs.
Purchase amount 50,00,000
Non-refundable property tax 2,50,000
Direct legal cost 50,000
53,00,000
Expenditures on redevelopment:
Building plan approval 1,00,000
Construction costs (10,00,000 – 60,000) 9,40,000
Total amount to be capitalised at 1st October 2019 63,40,000

Treatment of abnormal wastage of material and labour:
As per Ind AS 16, the cost of abnormal amounts of wasted material, labour, or other resources incurred in
self-constructing an asset is not included in the cost of the asset.
It will be charged to Profit and Loss in the year it is incurred.

Hence, abnormal wastage of Rs. 40,000 will be expensed off in Profit & Loss in the financial year 2019-2020.

Accounting of property- Building
When the property is used as an administrative centre, it is not an investment property, rather it is an ‘owner

occupied property’. Hence, Ind AS 16 will be applicable.
When the property (land and/or buildings) is held to earn rentals or for capital appreciation (or both), it is an
Investment property. Ind AS 40 prescribes the cost model for accounting of such investment property.
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