IAS 40 – Investment Property: Overview ( summary with examples )

Objective

IAS 40 prescribes the accounting treatment and disclosure for investment property — property held to earn rentals or for capital appreciation (or both) rather than:

• Use in production or supply of goods or services or for administrative purposes (IAS 16 – PPE), or

• Sale in the ordinary course of business (IAS 2 – Inventories).

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🧱 1. Definition

Investment property is:

Land or building (or part of a building, or both) held (by the owner or lessee under a finance lease) to earn rentals or for capital appreciation, or both.

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🏠 2. Examples of Investment Property

✅ Land held for long-term capital appreciation (not for owner-occupation).
✅ Land held for an undetermined future use.
✅ Building leased out to tenants under operating leases.
✅ Vacant building held to be leased out in the future.

❌ Not Investment Property (Examples):

• Owner-occupied property → IAS 16

• Property held for sale in the ordinary course of business → IAS 2

• Property being constructed for third parties → IFRS 15

• Property leased to another entity under a finance lease → derecognized by lessor

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📋 3. Recognition

An investment property shall be recognized as an asset when both conditions are met:

1. It is probable that future economic benefits will flow to the entity; and

2. The cost of the property can be measured reliably.

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💰 4. Measurement

Initial Measurement

• At cost, including:

  • Purchase price

  • Transaction costs (legal fees, duties, taxes, etc.)

Example:
A company buys a building for $1,000,000 and pays legal fees of $20,000.
👉 Initial cost = $1,020,000.

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Subsequent Measurement: Two Models

Entity chooses an accounting policy:

1. Fair Value Model

2. Cost Model

1️⃣ Fair Value Model

• Property is measured at fair value at each reporting date.

• Gains or losses from changes in fair value → recognized in profit or loss.

• No depreciation.

Example:

• Fair value at year-end = $1,200,000

• Carrying amount = $1,020,000
  → Gain = $180,000 (recognized in P&L).

2️⃣ Cost Model

• Property is carried at cost less accumulated depreciation and impairment losses, following IAS 16.

• Fair value must still be disclosed in the notes.

Example:

• Cost = $1,020,000

• Depreciation for the year = $20,400
  → Carrying amount = $999,600 (shown in balance sheet).

• Fair value (for note disclosure) = $1,200,000.

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🔄 5. Transfers

Transfers to or from investment property only when there is a change in use:

• Owner-occupied → Investment property (start using as rental)

• Inventory → Investment property (now held to earn rentals)

• Investment property → PPE (now owner-occupied)

Measurement at the date of transfer:

• At fair value (if moving to/from fair value model)

• Use cost model if chosen.

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🏗️ 6. Investment Property under Construction

• Previously, such property was accounted for under IAS 16 until completion.

• Now (since IAS 40 was amended), fair value model applies during construction if fair value can be measured reliably.

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📖 7. Disclosure Requirements

• Accounting policy used (fair value or cost)

• If fair value model: disclose changes in fair value recognized in profit or loss.

• If cost model: disclose depreciation, carrying amount, and fair value.

• Rental income and direct operating expenses from investment property.

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🧩 8. Simple Practical Example

Scenario:
ABC Ltd owns:

• Building A rented to tenants → Investment property

• Building B used as office → Owner-occupied (IAS 16)

• Building C held for sale → Inventory (IAS 2)

Accounting:

• Building A measured at fair value $3,000,000 → gain of $200,000 recognized in P&L.

• Building B depreciated under IAS 16.

• Building C measured at lower of cost and NRV under IAS 2.

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📘 Summary Table