IAS 40 Investment Property: Key Requirements and Examples

What investment property is

Investment property is land or a building (including part of a building) or both that meets four tests at once. A property being redeveloped can remain investment property.

• held to earn rentals, for capital appreciation or both;
• not owner-occupied;
• not used in the production or supply of goods and services, or for administration;
• not held for sale in the ordinary course of business.

Examples: where the line falls

• an office building let to third-party tenants — investment property;
• land bought in expectation of a price rise, with no decision on its use — usually investment property;
• a building the company itself operates from (office, warehouse, workshop) — property, plant and equipment under IAS 16, not IAS 40;
• apartments a developer builds for sale to buyers — inventories under IAS 2, not investment property;
• mixed use: if part of a building is let and part is owner-occupied, and the parts can be sold or let separately, they are accounted for separately; if not, classification depends on how significant the owner-occupied part is (record this judgement in the accounting policy);
• a property leased by the company and sublet: since IFRS 16, the scope of IAS 40 has been extended to include investment property held by a lessee as a right-of-use asset.

Initial measurement

Investment property is measured initially at cost — the purchase price plus directly attributable costs (legal fees, duties and so on). For a property the lessee holds as a right-of-use asset, initial cost follows the leases standard (IFRS 16), issued in 2016 to replace IAS 17.

Subsequent measurement: two options

For subsequent measurement the company chooses as its accounting policy either the fair value model or the cost model — and applies it to all its investment property. Whatever the choice, everyone must determine fair value: under the first model for measurement, under the second for disclosure.

• fair value model: the property is remeasured at the end of each reporting period and changes in fair value are recognised in profit or loss as they occur; no depreciation is charged;
• fair value is the price at which the property could be exchanged between knowledgeable, willing parties in an arm’s length transaction, without deducting transaction costs (see IFRS 13); it reflects market conditions at the end of the reporting period;
• cost model: the property is carried at cost less accumulated depreciation and accumulated impairment losses, and fair value is disclosed in the notes;
• gains and losses on disposal of investment property are recognised in profit or loss under both models.

How to choose a model

• the fair value model gives users an up-to-date market picture but makes profit volatile and requires annual valuation — often by an independent valuer;
• the cost model is easier to apply and closer to national accounting for fixed assets, but fair value still has to be determined and disclosed;
• in a property market with few comparable deals, plan the valuation method in advance (an income approach based on rental flows, a market approach based on similar transactions) and document the inputs;
• changing the model is a change in accounting policy, so make the choice deliberately on transition to IFRS rather than revisit it every year.

Transfers into and out of the category

In December 2016 the IASB issued Transfers of Investment Property (Amendments to IAS 40), clarifying when a property is transferred to or from investment property. In essence, a transfer is recognised when the actual use of the property changes, not merely when management’s intentions change.

• the company moved out of its office and let it — transfer from property, plant and equipment to investment property;
• the company started occupying a building it had let — the reverse transfer;
• the property began to be prepared for sale in the ordinary course of business — transfer to inventories;
• support the change in use with documents: leases, handover acts, orders relocating departments.

Common mistakes on first application

• a let building stays in fixed assets out of habit from national accounting;
• the chosen model is not applied to all properties — some buildings at fair value, some at cost;
• depreciation continues to be charged under the fair value model;
• fair value is not disclosed under the cost model;
• fair value changes are taken to equity, as with a revaluation of fixed assets, instead of to profit or loss.