Classification of Subsidiary Property Leased to Parent Under Ind AS 40

1. Question

AlphaLimited, hereinafter referred to as “the company” is engaged in the business of mining. The company is a wholly owned subsidiary of Beta Automobiles Limited. Further, the company owns a commercial two storey property located in Mumbai. The property was originally acquired by Alpha Limited as a long-term investment for capital appreciation. Currently, the ground floor of the property is used by Alpha Limited for its own production operations, while the first floor is held for capital appreciation. However, in the year 2025 the company leased the remaining portion property held for capital appreciation to Beta Limited (the parent company), under a formal rental agreement.

The rental terms are at market rates and the company recognises rental income from this arrangement in its separate financial statements. Beta Limited, on the other hand, uses the property as its corporate head office and occupies it for administrative purposes.

While preparing its separate and consolidated financial statements, the management of the company faced a dilemma regarding the appropriate classification of a property leased to its parent company. From the company’s perspective, the property partly serves as an income-generating and investment purpose and partly as an owner-occupied operational purpose. However, from the group’s consolidated perspective, the property is primarily used for functional and administrative operations. This situation raised an important question, whether the property be classified as an investment property or as an owner-occupied property? State, what shall be the appropriate classification of property in both the separate and consolidated financial statements in accordance with Ind AS 40?

2. Relevant Provisions

Ind AS 40- Investment Property

Para 5 of Ind AS 40

Investment property is property (land or a building—or part of a building—or both) held (by the owner or by the lessee as a right-of-use asset) to earn rentals or for capital appreciation or both, rather than for:

(a) use in the production or supply of goods or services or for administrative purposes; or

(b) sale in the ordinary course of business.

Owner-occupied property is property held (by the owner or by the lessee as a right-of-use asset) for use in the production or supply of goods or services or for administrative purposes.

Para 7 of Ind AS 40

“Investment Property” is held to earn rentals or for capital appreciation or both. Therefore an investment property generates cash flows independently of the other assets held by an entity. This distinguishes investment property from owner occupied property.

Para 10 of Ind AS 40

Some properties comprises a portion that is held to earn rentals or for capital appreciation and another portion that is held for use in the production of supply of goods or services or for administrative purposes. If the portion could be sold separately or leased out separately under a finance lease, an entity accounts for the portion separately. If the portion could not be sold separately, the property is investment property only if an insignificant portion is held for used in the production or supply of goods or services or for administrative purposes.

Para 15 of Ind AS 40

In some cases, an entity owns property that is leased to, and occupied by, its parent or another subsidiary. The property does not qualify as investment property in the consolidated financial statements, because the property is owner-occupied from the perspective of the group. However, from the perspective of the entity that owns it, the property is investment property if it meets the definition in paragraph 5. Therefore, the lessor treats the property as investment property in its individual financial statements.

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