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Accounting for Investment Property: IAS 40
IAS 40 Investment Property applies to the accounting for property (land and/or buildings) held to earn
rentals or for capital appreciation (or both). Investment properties are initially measured at cost and, with
some exceptions. may be subsequently measured using a cost model or fair value model, with changes in
the fair value under the fair value model being recognised in profit or loss.
Definition of investment property
Investment property is property (land or a building or part of a building or both) held (by the owner or
by the lessee under a finance lease) to earn rentals or for capital appreciation or both. [IAS 40.5]
Examples of investment property: [IAS 40.8]
land held for long-term capital appreciation
land held for a currently undetermined future use
building leased out under an operating lease
vacant building held to be leased out under an operating lease
property that is being constructed or developed for future use as investment property
The following are not investment property and, therefore, are outside the scope of IAS 40: [IAS 40.5 and
40.9]
property held for use in the production or supply of goods or services or for administrative
purposes
property held for sale in the ordinary course of business or in the process of construction of
development for such sale (IAS 2 Inventories)
property being constructed or developed on behalf of third parties (IAS 11 Construction
Contracts)
owner-occupied property (IAS 16 Property, Plant and Equipment), including property held for
future use as owner-occupied property, property held for future development and subsequent use
as owner-occupied property, property occupied by employees and owner-occupied property
awaiting disposal
property leased to another entity under a finance lease
Recognition
Investment property should be recognised as an asset when it is probable that the future economic benefits
that are associated with the property will flow to the entity, and the cost of the property can be reliably
measured. [IAS 40.16]
Initial measurement
Investment property is initially measured at cost, including transaction costs. Such cost should not include
start-up costs, abnormal waste, or initial operating losses incurred before the investment property achieves
the planned level of occupancy. [IAS 40.20 and 40.23]
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Measurement subsequent to initial recognition
IAS 40 permits entities to choose between: [IAS 40.30]
a fair value model, and
a cost model.
One method must be adopted for all of an entity's investment property. Change is permitted only if this
results in a more appropriate presentation. IAS 40 notes that this is highly unlikely for a change from a
fair value model to a cost model.
Fair value model
Investment property is remeasured at fair value, which is the amount for which the property could be
exchanged between knowledgeable, willing parties in an arm's length transaction. [IAS 40.5] Gains or
losses arising from changes in the fair value of investment property must be included in net profit or loss
for the period in which it arises. [IAS 40.35]
Fair value should reflect the actual market state and circumstances as of the balance sheet date. [IAS
40.38] The best evidence of fair value is normally given by current prices on an active market for similar
property in the same location and condition and subject to similar lease and other contracts. [IAS 40.45]
In the absence of such information, the entity may consider current prices for properties of a different
nature or subject to different conditions, recent prices on less active markets with adjustments to reflect
changes in economic conditions, and discounted cash flow projections based on reliable estimates of
future cash flows. [IAS 40.46]
There is a rebuttable presumption that the entity will be able to determine the fair value of an investment
property reliably on a continuing basis. However: [IAS 40.53]
Where a property has previously been measured at fair value, it should continue to be measured at fair
value until disposal, even if comparable market transactions become less frequent or market prices
become less readily available. [IAS 40.55]
Cost model
After initial recognition, investment property is accounted for in accordance with the cost model as set out
in IAS 16 Property, Plant and Equipment – cost less accumulated depreciation and less accumulated
impairment losses. [IAS 40.56]
Transfers to or from investment property classification
Transfers to, or from, investment property should only be made when there is a change in use, evidenced
by one or more of the following: [IAS 40.57]
commencement of owner-occupation (transfer from investment property to owner-occupied
property)
commencement of development with a view to sale (transfer from investment property to
inventories)
end of owner-occupation (transfer from owner-occupied property to investment property)
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commencement of an operating lease to another party (transfer from inventories to investment
property)
end of construction or development (transfer from property in the course of
construction/development to investment property
When an entity decides to sell an investment property without development, the property is not
reclassified as investment property but is dealt with as investment property until it is disposed of. [IAS
40.58]
When an entity uses the cost model for investment property, transfers between categories do not change
the carrying amount of the property transferred, and they do not change the cost of the property for
measurement or disclosure purposes.
Disposal
An investment property should be derecognised on disposal or when the investment property is
permanently withdrawn from use and no future economic benefits are expected from its disposal. The
gain or loss on disposal should be calculated as the difference between the net disposal proceeds and the
carrying amount of the asset and should be recognised as income or expense in the income statement.
[IAS 40.66 and 40.69] Compensation from third parties is recognised when it becomes receivable. [IAS
40.72]
Disclosure
Both Fair Value Model and Cost Model [IAS 40.75]
whether the fair value or the cost model is used
if the fair value model is used, whether property interests held under operating leases are
classified and accounted for as investment property
if classification is difficult, the criteria to distinguish investment property from owner-occupied
property and from property held for sale
the methods and significant assumptions applied in determining the fair value of investment
property
the extent to which the fair value of investment property is based on a valuation by a qualified
independent valuer; if there has been no such valuation, that fact must be disclosed
the amounts recognised in profit or loss for:
o rental income from investment property
o direct operating expenses (including repairs and maintenance) arising from investment
property that generated rental income during the period
o direct operating expenses (including repairs and maintenance) arising from investment
property that did not generate rental income during the period
o the cumulative change in fair value recognised in profit or loss on a sale from a pool of
assets in which the cost model is used into a pool in which the fair value model is used
restrictions on the realisability of investment property or the remittance of income and proceeds
of disposal
contractual obligations to purchase, construct, or develop investment property or for repairs,
maintenance or enhancements
