Ind AS 40 – Investment Property Interview Q&A
A. Foundations & Recognition
Q1: What is the objective of Ind AS 40, and how is “investment property” defined?
What the interviewer tests: The interviewer is assessing your understanding of Ind AS 40 and the concept of investment property.
- Objective of Ind AS 40
- Definition of investment property
- Differences from other asset classes
The objective of Ind AS 40 is to prescribe the accounting treatment for investment properties, which are defined as properties held to earn rentals or for capital appreciation. This standard differentiates investment property from owner-occupied property and ensures that such assets are measured using either the cost model or fair value model.
Q2: What distinguishes investment property from owner-occupied property and property held for sale?
What the interviewer tests: The interviewer is evaluating your understanding of property classifications and their accounting implications.
- Definition of investment property
- Owner-occupied property characteristics
- Accounting treatment differences
Investment property is held to earn rentals or for capital appreciation, while owner-occupied property is used for the owner’s business operations. Property held for sale is intended for sale in the ordinary course of business. The accounting treatment varies significantly, impacting valuation and financial reporting.
Q3: When should an entity recognize investment property on its balance sheet?
What the interviewer tests: The interviewer is assessing your understanding of accounting principles related to investment property recognition.
- Definition of investment property
- Recognition criteria
- Impact on financial statements
An entity should recognize investment property on its balance sheet when it is held to earn rentals or for capital appreciation, and it is probable that future economic benefits will flow to the entity. This typically occurs at the point of acquisition or construction completion.
Q4: Which costs are eligible for inclusion in the initial measurement of investment property?
What the interviewer tests: The interviewer is checking your understanding of accounting principles related to investment properties.
- Acquisition costs
- Directly attributable costs
- Initial measurement standards
Eligible costs for the initial measurement of investment property include acquisition costs, such as purchase price and transaction fees, as well as directly attributable costs like legal fees and property transfer taxes. These costs are capitalized to reflect the true investment made in the property.
Q5: How should deferred payment acquisitions of investment property be initially measured?
What the interviewer tests: The interviewer is assessing your understanding of accounting principles related to investment property and deferred payments.
- Initial measurement
- Deferred payment considerations
- Relevant accounting standards
Deferred payment acquisitions of investment property should be initially measured at the present value of the future payments, discounted using an appropriate interest rate. This ensures that the asset reflects its economic reality and aligns with accounting standards such as IFRS or GAAP.
B. Subsequent Measurement & Use of Cost Model
Q6: What measurement model does an entity adopt after initial recognition of investment property?
What the interviewer tests: The interviewer is testing your knowledge of accounting standards related to investment properties.
- Cost model
- Fair value model
- Compliance with IAS 40
After initial recognition, an entity can adopt either the cost model or the fair value model for measuring investment property, in compliance with IAS 40. The cost model involves carrying the asset at cost less accumulated depreciation, while the fair value model requires periodic revaluation to reflect market conditions.
Q7: What are the requirements for fair value measurement disclosures, even when using the cost model?
What the interviewer tests: The interviewer is assessing your understanding of fair value measurement and the related disclosure requirements.
- Understanding of fair value measurement
- Knowledge of cost model implications
- Awareness of disclosure standards
Fair value measurement disclosures require entities to provide information on the valuation techniques and inputs used for fair value assessments, even when applying the cost model. This includes details on the hierarchy of inputs, any changes in valuation techniques, and the rationale for such changes, ensuring transparency and comparability.
Q8: When may management determine that fair value cannot be reliably measured, and what disclosures are required in such cases?
What the interviewer tests: The interviewer is testing your understanding of fair value measurement criteria and disclosure requirements in financial reporting.
- Lack of market activity
- Valuation techniques
- Disclosure of uncertainty
Management may determine fair value cannot be reliably measured when there is a lack of active market transactions or observable inputs. In such cases, disclosures must include the reasons for the inability to measure fair value and the methods used to estimate it, as well as the uncertainty associated with those estimates.
Q9: If fair value was previously measured, is an entity required to continue measuring it even if market comparables diminish?
What the interviewer tests: The interviewer is evaluating your understanding of fair value measurement principles and the implications of market conditions.
- Fair value measurement standards
- Impact of market comparables
- Consistency in accounting practices
An entity is not required to continue measuring fair value if market comparables diminish, but it should assess whether alternative valuation techniques can provide a reliable estimate. If the fair value measurement becomes unreliable, the entity may need to revert to historical cost or consider impairment testing.
Q10: How are costs of replacing parts of an investment property handled under Ind AS 40?
What the interviewer tests: The interviewer is assessing your understanding of accounting standards related to investment properties.
- Recognition of replacement costs
- Impact on financial statements
- Compliance with Ind AS 40
Under Ind AS 40, costs incurred to replace parts of an investment property are recognized as an asset if they enhance the future economic benefits of the property. Costs that do not enhance the property’s value or extend its useful life are expensed. This ensures that the financial statements accurately reflect the property's value and condition.
C. Transfers & Reclassification
Q11: Under what conditions can a property be transferred into or out of investment property?
What the interviewer tests: The interviewer is evaluating your knowledge of investment property classification and the relevant accounting standards.
- Change in use
- Intent for property
- Accounting standards
A property can be transferred into or out of investment property when there is a change in its use, such as when it is no longer held for rental income or capital appreciation, and this change must be supported by evidence of intent.
Q12: Why is a mere change in management intention not sufficient to reclassify a property?
What the interviewer tests: The interviewer is testing your knowledge of accounting principles and the criteria for property classification.
- Intent vs. action
- Accounting standards
- Consistency in reporting
A mere change in management intention does not suffice to reclassify a property because accounting standards require actual changes in use or circumstances to justify reclassification. Consistency in reporting and adherence to established criteria are essential for accurate financial statements.
Q13: How is the carrying amount treated when a reclassification occurs between PPE, inventory, or investment property?
What the interviewer tests: The interviewer is testing your understanding of asset reclassification and its accounting implications.
- Carrying amount adjustment
- Fair value measurement
- Impact on financial statements
When reclassification occurs between PPE, inventory, or investment property, the carrying amount is adjusted to reflect its fair value at the date of reclassification. This adjustment impacts the financial statements and must be disclosed appropriately.
Q14: What is the treatment of investment property that is under redevelopment for continued rental use?
What the interviewer tests: The interviewer is checking your understanding of investment property accounting and the implications of redevelopment on asset classification.
- Classification of investment property
- Impact of redevelopment on valuation
- Compliance with IAS 40
Investment property under redevelopment for continued rental use remains classified as investment property according to IAS 40. During redevelopment, it should be measured at fair value, with any changes recognized in profit or loss. Careful monitoring of costs incurred during redevelopment is essential to ensure accurate financial reporting and valuation adjustments.
D. Derecognition & Income Effects
Q15: When should an investment property be derecognized?
What the interviewer tests: The interviewer is assessing your knowledge of accounting standards and the criteria for asset recognition.
- Criteria for derecognition
- Impact on financial statements
- Relevant accounting standards
An investment property should be derecognized when it is sold or when it is permanently withdrawn from use and no future economic benefits are expected from its disposal.
Q16: How is gain or loss on disposal calculated, and where is it recognized?
What the interviewer tests: The interviewer is assessing your understanding of asset disposal accounting and recognition principles.
- Calculation of gain/loss
- Recognition in financial statements
- Relevant accounting standards
Gain or loss on disposal is calculated by subtracting the carrying amount of the asset from the proceeds received on disposal. This gain or loss is recognized in the income statement at the time of disposal, in accordance with applicable accounting standards such as IFRS or GAAP.
Q17: How are disposals via sale or finance leases treated differently under Ind AS 40?
What the interviewer tests: The interviewer is assessing your understanding of the accounting treatment of asset disposals under Ind AS 40.
- Disposal via sale
- Disposal via finance lease
- Recognizing gain or loss
Under Ind AS 40, disposals via sale are recognized as a transfer of ownership, where the asset is derecognized and any gain or loss is recognized in profit or loss. In contrast, disposals via finance leases involve recognizing the asset until the lease term ends, with lease payments treated as income, and the asset remains on the balance sheet until the lease is terminated.
Q18: How should compensation from third parties for lost or impaired investment property be recognized?
What the interviewer tests: The interviewer is assessing your understanding of accounting standards related to asset impairment and recognition of revenue.
- Recognition criteria
- Accounting standards
- Impact on financial statements
Compensation from third parties for lost or impaired investment property should be recognized as income when it is probable that the economic benefits will flow to the entity and can be reliably measured. This is typically in accordance with relevant accounting standards, such as IFRS or GAAP, which guide the recognition of gains or losses on such compensations. It is important to reflect this in the financial statements to provide a true and fair view of the entity's financial position.
E. Disclosures & Ethical Judgments
Q19: What disclosures must be made regarding the entity’s accounting policy for investment property measurement?
What the interviewer tests: The interviewer is evaluating your knowledge of accounting standards and disclosure requirements related to investment properties.
- Measurement basis
- Valuation methods
- Impact on financial statements
Disclosures should include the measurement basis for investment properties, whether using fair value or cost model, the valuation methods employed, and how these choices impact the financial statements and performance metrics.
Q20: How should judgment in classifying challenging cases (e.g. mixed-use properties) be disclosed?
What the interviewer tests: The interviewer is evaluating your ability to apply accounting principles and transparency in financial reporting.
- Disclosure requirements
- Judgment criteria
- Impact on financial statements
In classifying challenging cases like mixed-use properties, it is essential to disclose the judgment applied in determining the classification. This includes outlining the criteria used, the rationale for the decision, and how it affects the financial statements. Transparency in this process ensures stakeholders understand the complexities involved and the potential impacts on financial performance.
Q23: What information must be disclosed about restrictions on the realisability of investment property or income remittances?
What the interviewer tests: The interviewer is checking your grasp of disclosure requirements related to investment properties and associated risks.
- Disclosure requirements
- Investment property
- Realisability restrictions
Entities must disclose the nature and extent of restrictions on the realisability of investment property, including legal or contractual restrictions, and any limitations on income remittances. This information helps stakeholders assess the liquidity and risk associated with the investment properties.
Q24: How should different categories of investment property holdings (e.g., retail, commercial, development projects) be presented?
What the interviewer tests: The interviewer is looking for your knowledge on the classification and presentation of investment properties in financial statements according to relevant accounting standards.
- Classification of investment properties
- Presentation in financial statements
- Accounting standards compliance
Different categories of investment properties should be presented separately in financial statements based on their nature and use. Retail properties, commercial properties, and development projects may have different valuation methods and disclosures, ensuring compliance with accounting standards such as IAS 40 for investment properties.
Q25: What governance or control mechanisms should be in place to ensure consistent classification and measurement of investment property?
What the interviewer tests: The interviewer is looking for your knowledge of regulatory compliance and internal control frameworks.
- Clear accounting policies
- Regular internal audits
- Compliance with IFRS
To ensure consistent classification and measurement of investment property, there should be clear accounting policies in line with IFRS, regular internal audits to verify compliance, and a governance structure that includes oversight from management and the audit committee.