X Ltd. is engaged in the construction industry and prepares its financial statements up to 31st March each year. On 1st April, 20X1, X Ltd.…
CA Final · Financial Reporting · MTP · January 2026
X Ltd. is engaged in the construction industry and prepares its financial statements up to 31st March each year. On 1st April, 20X1, X Ltd. purchased a large property (consisting of land) for 2,00,00,000 and immediately began to lease the property to Y Ltd. on an operating lease. Annual rentals were - 20,00,000. On 31st March, 20X5, the fair value of the property was - 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, 20X5 and vacated the property on 30th September, 20X5. On 30th September, 20X5, the fair value of the property was - 2,90,00,000. On 1st October, 20X5, 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 60,00,000 on this conversion project between 30th September, 20X5 to 31st March, 20X6. The project was incomplete at 31st March, 20X6 and the directors of X Ltd. estimate that they need to spend a further - 40,00,000 to complete the project, after which each flat could be sold for 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, 20X6 as per Ind AS.
Suggested Answer and Working Notes:
From 1st April, 20X1, 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 2,00,00,000 at each year end. On 30th September, 20X5, the property ceases to be an investment property. X Ltd. begins to develop it for sale as flats. As per para 59 of Ind AS 40, transfers between investment property, owner-occupied property and inventories do not change the carrying amount of the property transferred and they do not change the cost of that property for measurement or disclosure purposes. Hence, the carrying value of the reclassified property will be - 2,00,00,000. Since the lease of the property is an operating lease, rental income of 10,00,000 (₹ 20,00,000 x 6/12) would be recognized in P/L for the year ended 31st March, 20X6. The additional costs of 60,00,000 for developing the flats which were incurred up to and including 31st March, 20X6 would be added to the 'cost' of inventory to give a closing cost of 2,60,00,000. The total selling price of the flats is expected to be - 5,00,00,000 (10 x 50,00,000). Since the further costs to develop the flats total - 40,00,000, their net realisable value is 4,60,00,000 (₹ 5,00,00,000 - 40,00,000), so the flats will be measured at a cost of 2,60,00,000. The flats will be shown in inventory as a current asset.
Topics: Ind AS 40, Ind AS 16
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