Anand Ltd. owns a Building X which is specifically used for the purpose of earning rentals. The Company has not been using the Building X or any of…

CA Final · Financial Reporting · PYQS · November 2024
Anand Ltd. owns a Building X which is specifically used for the purpose of earning rentals. The Company has not been using the Building X or any of its facilities for its own use for a long time. The company is also exploring the opportunities to sell the building if it gets the reasonable amount in consideration. Following information is relevant for Building X for the year ending 31st March, 2024: Building X was initially purchased at the cost of 120 crores. At that time, the useful life of the building was estimated to be 10 years; out of which 5 years have been expired as on 1st April, 2023: The company follows straight line method for depreciation. During the year, the company has invested in another Building Y with the purpose to hold it for capital appreciation. The property was purchased on 1st April, 2023 at the cost of 20 crores. Expected life of the building is 20 years. As usual, the company follows straight line method of depreciation Further, during the year 2023-2024, the company earned/incurred the following, directly relating to Building X and Building Y: Rental income from Building X = 15 croresRental income from Building Y = 5 croresSales promotion expenses = 0.50 croresFees and Taxes = 0.10 croresGround Rent = 0.25 crores-Repairs and Maintenance = 0.15 croresLegal and Professional = 0.20 croresCommission and Brokerage = 0.10 crores The company does not have any restrictions and contractual obligations against Property X and Y. For complying with the requirements of Ind AS, the management sought an independent report from the specialists so as to ascertain the fair value of buildings X and Y. The independent valuer has valued the fair value of property as per the valuation model recommended by international valuation standards committee. Fair value has been computed by the method by streamlining present value of future cash flows namely, discounted cash flow method. The estimated rent per month per square feet for the period is expected to be in range of 50to 60. And it is further expected to grow at the rate of 10 percent per annum for each of 3 years. The weightage discount rate used is 12% to 13%. Assume that the fair value of properties based on discounted cash flow method is measured at 105 crores. The treatment of fair value of properties is to be given in the financials as per the requirements of Indian Accounting Standards. You are required to: (i) Show how the Building X and Building Y would be the treated in the Balance Sheet of Anand Ltd.? (ii) Provide detailed disclosures and computations in line with relevant Ind AS. (Treat it as if you are preparing a separate note or schedule of the given assets in the Balance Sheet.)

Suggested Answer and Working Notes:

Investment property is held to earn rentals or for capital appreciation or both. Ind AS 40 shall be applied in the recognition, measurement and disclosure of investment property. An investment property shall be measured initially at its cost. After initial recognition, an entity shall measure all of its investment properties in accordance with the requirements of Ind AS 16 for cost model. The measurement and disclosure of Investment property as per Ind AS 40 in the balance sheet would be as follows: Particulars INVESTMENT PROPERTIES: (₹ in crores) Property X Property Y Period ended 31st March, 2024 Gross Amount: Opening balance 120.00 120.00 Additions during the year 20.00 20.00 Closing balance (A) 120.00 20.00 140.00 Depreciation: Opening balance 60.00 60.00 Depreciation during the year (12 + 1) 12.00 1.00 13.00 Closing balance (B) 72.00 1.00 (73.00) Net balance (A-B) 48.00 19.00 67.00 The changes in the carrying value of investment properties for the year ended 31st March, 2024 are as follows: Amount recognized in Profit and Loss with respect to Investment Properties (₹ in crores) Particulars Period ending 31st March, 2024 Rental income from investment properties (15.00 + 5.00) 20.00 Less: Direct operating expenses generating rental income (0.50 + 0.10 + 0.25 + 0.15 + 0.20 + 0.10) (1.30) Profit from investment properties before depreciation and indirect expenses 18.70 Less: Depreciation (13.00) Profit from earnings from investment properties before indirect expenses 5.70 Disclosure Note on Investment Properties acquired by the entity The investment properties consist of Building X and Building Y. As at 31st March, 2024, the fair value of the properties is 105crores. The valuation is performed by independent valuers, who are specialists in valuing investment properties. A valuation model as recommended by International Valuation Standards Committee has been applied. The Company considers factors like management intention, terms of rental agreements, area leased out, life of the assets etc. to determine classification of assets as investment properties. The Company has no restrictions on the realisability of its investment properties and no contractual obligations to purchase, construct or develop investment properties or for repairs, maintenance and enhancements. Description of valuation techniques used and key inputs to valuation on investment properties: Valuation technique Significant inputs unobservable Range (Weighted average) Discounted cash flow (DCF) method - Estimated rental value per sq. ft. per month - Rent growth per annum - Discount rate -50 to 60 - 10% every 3 years - 12% to 13%

Topics: Ind AS 40, Ind AS 16

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