Summary of IAS 40 Investment Property
Last update: July 2023
Many accountants falsely believe that there’s only one standard that deals with long-term tangible assets: IAS 16 Property, Plant and Equipment.
While it’s true that you need to apply IAS 16 for most of your long-term tangible assets, it’s not the one ruling all. I tried to falsify this myth some time ago here.
Except for IAS 16, we have a few other standards arranging the long term assets. IAS 40 Investment Property is one of them.
In today’s article, you’ll learn:
- What the investment property is,
- How you should account for it initially and subsequently,
- You’ll also learn that the fair value model is NOT the same as the revaluation model, and
- The video is waiting for you in the end.
Here’s a little bonus for you:
Before we dive in IAS 40, my good friend Professor Robin Joyce wrote a wonderful piece that teaches you accounting for IAS 40 in 40 seconds. Hope you’ll enjoy!
Accounting for IAS 40 in 40 seconds
Ready? Go!The accounting for IAS 40 Investment Property is identical to that of IAS 16 (Property, Plant and Equipment),
EXCEPT
that IAS 40 revaluations (both positive and negative) go to the income statement (not revaluation reserve)
AND
there is no depreciation if revaluations are carried out every year.
DONE!
Any remaining seconds should be spent on learning the classifications and rules of IAS 40 Investment Property.
Now, let’s take Robin’s advice and spend the remaining seconds for learning the rest.
Objective of IAS 40
IAS 40 Investment Property prescribes the accounting treatment and disclosure with respect to investment property.
But, what is investment property?
The investment property is a land, a building (or a part of it), or both, held for the following specific purposes:
- To earn rentals;
- For capital appreciation; or
- Both. (IAS 40.5)
Here, the strong impact in on purpose. If you hold a building or a land for any of the following purposes, then it cannot be classified as investment property:
- For production or supply of goods or services,
- For administrative purposes, or
- For sale in ordinary course of business.
If you’re using your building or land for the first 2 purposes, then you should apply IAS 16; and the standard IAS 2 Inventories fits when you use them for the sale in ordinary course of business.
Examples of investment property
What specifically can be classified as investment property?
Here is a couple of examples (refer to IAS 40.8):
- Land held as an investment for long-term capital appreciation, or for future undetermined use (i.e. you don’t know yet what you’ll use it for).
However, if you buy a land and you intend to build some production hall for your own purposes sometime in the future, then this land is NOT an investment property. - A building owned by the entity and leased out under one or more operating leases. This includes a building that is still vacant, but you plan to lease it out.
- Any property that you actually construct or develop for future use as investment property.
Be careful here again, because when you construct a building for some third party, this is NOT an investment property, but you should apply IFRS 15 Revenue from Contracts with Customers.
When to Recognize investment property
The rules for recognition of investment property are essentially the same as stated in IAS 16 for property, plant and equipment, i.e. you recognize an investment property as an asset only if 2 conditions are met:
- It is probable that future economic benefits associated with the item will flow to the entity; and
- The cost of the item can be measured reliably.
How to measure investment property initially
Investment property shall be initially measured at cost, including the transaction cost.
The cost of investment property includes:
- Its purchase price and
- Any directly attributable expenditure, such as legal fees or professional fees, property taxes, etc.
You should NOT include:
- Start-up expenses whatsoever.
However, if these start-up expenses are directly attributable to the item of investment property, then you can include them. But do NOT include any general start-up expenses. - Operating losses that you incur before planned occupancy level is achieved, and
- Abnormal waste of material, labor or other resources incurred at construction.
When payment for investment property is deferred, then you need to discount it to its present value in order to set the cash price equivalent.
Let me just mention that actually, you can classify assets held under the lease as investment property and in this case, it’s initial cost is calculated in line with IFRS 16 Leases.
Subsequent measurement of investment property
After initial recognition, you have 2 choices for measuring your investment property (IAS 40.30 and following).
Once you make your choice, you should stick to it and measure all of your investment property using the same model (there are actually exceptions from that rule).
Option 1: Fair value model
Under fair value model, an investment property is carried at fair value at the reporting date. (IAS 40.33)
The fair value is determined in line with the standard IFRS 13 Fair Value Measurement.
A gain or loss from re-measurement to fair value shall be recognized in profit or loss.
Sometimes, the fair value cannot be reliably measurable after initial recognition. This can happen in absolutely rare circumstances (e.g. active marked ceased existing) and in this case, IAS 40 prescribes (IAS 40.53):
- To measure your investment property at cost, if it’s not yet completed and is under construction; or
- To measure your investment property using cost model, if it’s completed.
Option 2: Cost model
The second choice for subsequent measurement of investment property is a cost model.
Here, IAS 40 does not describe it in details, but refers to the standard IAS 16 Property, Plant and Equipment. It means you need to take the same methodology as in IAS 16.
Switching the models
Can you actually switch from cost model to fair value model or vice versa from fair value model to cost model?
The answer is YES, but only if the change results in the financial statements providing better, more reliable information about company’s financial position, results and other events.
What does it mean in practice?
Switching from cost model to fair value model would probably meet the condition and therefore, you can do it whenever you’re sure that you’ll be able to determine the fair value regularly and the fair value model fits better.
However, the opposite change – switch from fair value model to cost model – is highly unlikely to result in more reliable presentation. Therefore, you should not really do it, and if – rarely and for good reasons.
Transfers from and to investment property
When we speak about transfers related to investment property, we mean the change of classification, for example, you classify a building previously held as property, plant and equipment under IAS 16 to investment property under IAS 40.
The transfers are possible, but only when there’s a change in use or asset’s purpose, for example (refer to IAS 40.57):
- You start renting out the property that you previously used as your headquarters (transfer to investment property from owner-occupied property under IAS 16)
- You stop renting out the building and start using it for yourself
- You held a land for undefined purpose and recently, you decided to construct an apartment house to sell apartments when they are built (transfer from investment property to inventories).
What’s the accounting treatment in this case?
It depends on the type of a transfer and the accounting choice for your investment property.
If you opted to account for your investment property at cost model, then there’s no problem with the transfers, you simply continue with what you did.
However, if you picked up a fair value model, then it’s a bit more complicated:
- When you transfer to investment property, then the deemed cost is a fair value at the date of transfer. Difference between asset’s carrying amount and its fair value is treated in the same way as revaluations under IAS 16.
- When you transfer from investment property, then the deemed cost is also fair value at the date of transfer.
Derecognition of investment property
The derecognition rules (=when you can remove your investment property from your books) in IAS 40 are similar to the rules in IAS 16.
You can derecognize your investment property in two circumstances (IAS 40.66):
- On disposal, or
- When the investment property is permanently withdrawn from use and no future economic benefits are expected.
You need to calculate gain or loss on disposal (IAS 40.69) as a difference between:
- Net disposal proceeds, and
- Asset’s carrying amount.
Gain or loss on disposal is recognized in profit or loss.
Disclosures
IAS 40 Investment property prescribes a lot of disclosures to be presented in the financial statements, including the description of selected model, how the fair value was derived, what the classification criteria for investment property are, movements in investment property during the reporting period (please refer to IAS 40.74 and following for more information).
Please watch the following video with a summary of IAS 40 Investment property:
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How often should an investment property be revalued? Annually?
Is there another method of depreciating an investment property aside from the straight-line method.
Yes, annually. You can select the appropriate depreciation method if you do apply cost model instead of FV model.
Hi
How frequently we should do the valuation of properties if we follow the cost model? Will it be fine if we do every three years?
This is very valid question. Appreciate if SIlvia can reply this. Because Companies find it very difficult to get valuation every year just for disclosure purpose.
Hi Silvia,
Can you please answer to one issue about non-current asset.
For example if entity has only one building “business center” and all of the business offices in the “business center” are for rent, as this is the business model of the entity. Normally i should use IAS 40 rules(because the intention is earn rental and this is building, but if the entity manages and servicing the offices(For example: Cleaning, repair services) does it mean that there is significant part of services as Ancillary services and i shoud account as IAS16?
Hi Silvia,
May I know why do we need to use subsequent measurement? Struggling with my assignment.
Thank you.
Excellent presentation! The topic has never been made simple like this before, the summary covers the Subject matter and makes you become an experts.
My question is; under this topics both IAS 40 and 16, which items belong to Other Comprehensive Income (OCI)?
Appreciate your effort, I have one query…In case of IAS 40, we are trying to switch from cost model to fair value model in FY 2019 for our Investment properties – Land.
We have opening value of land at cost less Accumulated impairment done in past.
My question is…when we switch from cost model to fair value model, should we adjust all difference in retained earnings as this consider to be change in accounting policy or first impairment should be adjusted and routed through PL before transferring to retained earnings because in past impairment loss debited to PL so ideally the same should be reversed in PL only.
Excellent presentation. Thank you very much for your efforts.
I have question on valuation of investment properties. Is it compulsory to go for independent valuation under cost model as it gives only disclosure in the FS or management valuation is acceptable?
Dear Silvia,
I have a question in regards to evidence of transfer from/to investment property IAS40.57.
We have a property (a sportsground) that is used as owner occupied and classified as PPE, now the Board of Directors (BOD) of the company have made a decision to develop this property into a much bigger property so to lease it out tenants to generate more revenue.
Now the question is can this decision by the BOD be considered as evidence for the transfer of the property from PPE to Investment Property?
Thank you
Dear Silvia,
Your style of presentation and clarification is amazing, its very easy to understanding.
Thank you
What if the company’s main activity is to earn rental income. while the company is having a lease land and on that land company constructed a building and rented that building. in this particular case is the building is a classified under investment property or under PPE
Hi Silvia,
Many thanks. I have a small query
When there is a transfer from inventories to investment property carried at fair value ,how to treat the difference between the cost of the inventories and its fair value?
In profit or loss. Please see paragraph IAS 40.63.
Hello Silvia
Where I am a lessee in an operating lease for a property and I also lease out the property. I understand that I have the option of accounting for it under IAS 40. However, a significant portion of my lease payments are contingent on revenue (3.5% of revenue generated). Do I still have the option of using IAS 40?
hi silvia
how it is differing from IAS 16 ?
We are an infrastructure business that has both investment property and property for the production of goods or services. We have some that is a little clouded and unclear though. We have an airport that we run and rent out hangars to rescue helicopter and other such related services. We currently do not treat these as investment property. We also have a port within which we have marshalling and scaling sheds that are rented to contractors. We also do not treat these as investment property. Reading the guidance I think that their nature is more of a service as they are not held for capital appreciation but they do derive a rental. What are your thoughts? Thanks
Please, can repair cost be added to Investment Property that has been revalued in the previous year? The Property is being used for Rental.
Thanks,
A company has a a four similar office blocks. it has decided to house all the staff in one block and renting out the vacant blocks (3 blocks). How can we treat the office block? as owner occupied or the 3 blocks as investment property and the 1 block owner occupied? The fair value less costs to sell the blocks is a single amount. Thanks
You should apportion it and treat 3/4 as investment property and 1/4 as a property, plant and equipment, regardless of the fact that it is one amount.
excellence good sumary i uderestand it
Hi – Thank you for the wonderful insight on the standard. Just one question please, from where does ‘there is no depreciation if revaluations are carried out every year’ stem from please?
Thank you 🙂
It wants to say that if you apply the fair value model (“revaluations are carried out every year”), then you do not depreciate. Please revise par. 33 and following of IAS 40 – there’s no mention about depreciation.
Thanks for replying.. unfortunately I couldn’t find the mention that revaluations need to be carried out every year. I looked from par. 33 to 35 of IAS 40.
I know that the revaluation model under IAS 16 requires one to carry out a revaluation of property frequently so that the revalued amount is not materially different from the carrying amount. I am interested to see if the fair value method under IAS 40 requires something similar, i.e. if investment property needs to be revalued frequently, however I cannot find anything of the sort.
Vanessa,
sometimes you need to read between the lines. Paragraph 33 says: After initial recognition, an entity that chooses the fair value model shall measure all of its investment property at fair value, except in the cases described in paragraph 53.” Therefore, it implies that in every single financial statements you take in your hands, the investment property is measured at fair value at that date. Thus yes, you need to restate the investment property to its fair value at the end of each reporting period. Revaluation model under IAS 16 is different, because it says that PPE is carried at revalued amount – which is FV at the date of revaluation less subsequent depreciation and thus it means that you do not have to revalue each reporting period.
Hi Silvia, so parking lots and retail shops are considered as an investment property right?
It depends what services are attached to these properties, but in most cases yes. Please refer to this article for more information.
Hi, I would like to ask a few questions:
1) Let’s say a 15 storey building that was once use as a company’s headquarters and now it is redeveloped into a 30 storey building (and will be used for retail shops and parking lots) is this a change of usage from PPE to investment property? Must I state there is a change in initial cost of the building? What is the accounting treatment for this if the initial measurement is unidentified? Can I assume that the initial measurement is depreciated under cost model since the fair value of the building is not given….
2) Lets say an investment holding company owns an apartment building and some units are unsold, are these units under inventories and the accounting treatment must be in accordance to IAS 2?
3) A building was leased to another business company and now the leased is expired and now the owner wants to claim it back and use it for their own usage. Is this a transfer from investment property to PPE?
Hope you answer soon!! I am struggling for my mid terms
Hi Miya, 1. yes, you might consider a change from PPE to investment property. 2. if the apartments are to be sold, they are inventories, not investment property; 3. yes.
Thanks Silvia, can I know the link to the article about inventories?
Here.
Hi Silvia
May I know what is the differences between “For rental to others” under IAS16 and “To earn rental” under IAS40?
Hi Liew,
IAS 40 relates to property (see the definition, but it is mostly land and buildings), IAS 16 to everything else (cars…) with respect to rentals.
Hi Silvia,
Assume I have three properties: P1, P2 and P2. If i measured P1 using fair value model, can I measured P2 and P3 at cost model? Thanks
Dear silvia,
Thank you so much for such a great summary.
But I still have one confusion and would really appreciate if you can take some time from your busy schedule to answer this….
I and still unable to understand that whether all the fixed assets in a building ( e.g. A furnished apartment which includes furniture and fixtures etc) which is classified under ias 40 should be depreciated or not, as these fixed assests will have wear and tear with the passage of time and have a limited useful life, unlike building itself.
So should all these be part of ias 40 or should these be treated separately under ias 16 and charge depreciation.
dear Silvia ,
you are the best
Oh, thank you 🙂
Dear Silvia,
one real estate company bought a plot of land in 2016 and build a condo for sale. The condo will complete in 2018 and hand over to the buyer. Do the land and condo account for Inventory under IAS 2 for initial recognition?
Yes, if it is for the resale right at the inception. S.
Hi silva thank you for your great explanation you are adding value to my skill
Thank you so much. When we rent an office from other can we consider this as investement property
If you are a lessee and you are using the office for your admin purposes – NO.
Thank you , then can we take it as a prepayment
Simple..specific..and to the point summary….thank you Silvia
Hi Silvia,
I was wondering the first time adoption of IAS 40. Let’s assume I have been measuring investment property from cost and I do not know their fair value for previous years. . I decided to use IFRSs and apply fair value model for investment property. I only know the fair value of the investment property for the current year. From which value wilI I present the investment property on the opening balance sheet, from cost? IFRS 1 seem to assume that I already have the fair value of the investment property for the sate of transition. I was confused because of the paragraph IFRS 1 IG 61 – “An entity that adopts the fair value model in IAS 40 measures its investment property at fair value at the date of transition to IFRSs. The transitional requirements of IAS 40 do not apply (paragraph 9 of the IFRS).”
Thank you.
Hi Sylvia,
My company owns a number of undeveloped plots of land recognised as Investment property (IAS40). We recently constructed wall fences around them. The question is how to treat the cost of the wall fences. Should we recognised them as a separate Non-current asset category (e.g Land Improvements), add the costs to the value of the land, or expense them?
Hi Silvia,may i know if the investment property is classified as held-for-sale, may i know which takes precedence? IAS40 or IFRS5
Hi Hc, if you hold your investment property at fair value model under IAS 40, then IFRS 5 does not apply – you continue to apply IAS 40. If your investment property is at cost model, then you apply IFRS 5.
Hi Silvia, is property acquired by an entity(financial institution) in settlement of loans through foreclosure be coincided as investment property? what is the proper classification of such asset?
kindly regards
Hi Bereket, it depends on what the financial institution wants to do with the property. In most cases, the banks simply sell the property to get cash and thus it is classified as held for sale under IFRS 5. In some cases banks decide to keep the property and earn rentals – then it’s investment property under IAS 40, but it’s not very typical.
Hi Silvia,
I work for a company (ABC Inc.) that owns a lot a buildings, it bought those buildings through the time (many year ago).
ABC applies IAS 40 Investment Property for tha accounting treatmen, due to the fact that these buildings and lands are hold for earning rentals and for capital appreciation.
Subsequent measurement is made using fair value model.
This year signed a lease agreement with other entity, in the following terms: 25 years duration, fix payments are slightly below rental market, there are not purchase option, there are not residual value guarantees.penalties for terminating are 2 moths of rent. (not much).
Does ABC company acount its lands and buildings in line with IAS 40 or IFRS 16?
thank you for your help.
IP accounting policy is cost model, my understanding is that it means you will have to account for for it as per ISA16 PPE. does this mean i can reevaluate the IP and recognize any revaluation as revaluation surplus, because ISA 16 does gives that option to reevaluate PPE.
Not at all. For investment property, you have the option to apply cost model as per IAS 16, not the full IAS 16 – so no revaluation model. S.
Hi Silvia
The earlier version of IAS 40, paragraph 38 provided that “The fair value of investment property shall reflect market conditions at the end of the reporting period”. This is to say that the investment property shall me remeasured at end of each reporting period, and the difference be taken up in the profit and loss account.
It is noted that the current IAS 40 had removed paragraph 38. Does it mean that a company do not need to remeasure the fair value of investment property at the end of each financial year? If so, can a company choose to adopt a policy of remeasurement (e.g. every 3 years) and ignore fluctuations in fair values between remeasurement periods?
Hi SIlvia
Upon disposal of an investment property say for $100 and closing costs of $5, do we journal $100 and take $ 5 to P&L or because the closing net receipt is $95 cash, that is the amount to journal.
I have been faced with a transaction recently where the net amt was taken to the books, hence the query. I thought i should be able to see a journal with the contract price. Many thanks.
Kind regards
Rajeev
Hi Silvia 🙂 Really appreciates your efforts..Can u please elaborate a little bit about subsequent treatment of “revaluation surplus” arising on transfer from IAS-16 (Cost Modal) to IAS-40(Fair Value Modal).. How such surplus shall be dealt with subsequently??? i.e can a subsequent fair value decrease be adjusted against such surplus???
Hi Silvia 😉 Would the transfers to and from investment property also be a change under IAS8? Or would it simply be a transfer of use?
Hi Sanam, it’s not the change in accounting policy. It is simply the transfer triggered by the change in use of the asset (not your accounting policy or estimates). S.
Thank you so much!
what should be the process of recording land that are purchased for constructing plot ( business- real estate) ?
1. Inventory or
2. investment property?
Hi Sahil,
it depends if you construct it for your own use or for your client within your operating cycle. S.
Dear silvia
If building is given on rent then whether it will be classified under IAS 40 or IAS 16 . As the defination of prorperty,plant and equipment under IAS 16 and defination of investment property under IAS 40 both covers building given on rentals.
Hie Silvia
We have constructed a building, used for both owner occupied and rentals. How do we show the investment property in year one, at cost or fair value? do we depreciate in year one
Hi Silvia,
Thanks for clear explanation.
I have a question, whether should company calculate depreciation for revalued investment property or not.
Thank you,
If you apply the fair value model, then no.
Hi Sylvia, even if the revaluations do not occur every year? Say for example they occur every 5 years.
I cannot find a reference in IAS 40 whether to depreciate in this instance or not.
Thanks,
Well, if you apply fair value model under IAS 40, it implies that you should revalue investment property at least once a year. It is said in IAS 40.33 – you should measure the property at fair value after initial recognition. The implication is that if you do not revalue at the end of each reporting period, your investment property would not be measured at fair value at that date. And of course, depreciation charge does not make any sense since you are recognizing fair value changes each year.
The things are different at revaluation model under IAS 16 – in this case, you can revalue every 5 years and charge depreciation.
Very well explained..! Excellent Silvia
Hi Silvia
If I have land and building classified as Investment Property under IAS 40 using cost model. Now we want to change the accounting policy from cost to fair value model.
Is there any restatement required in the prior periods or we can take the difference between cost and current fair value to P&L. May thanks
Hi Silvia,
If I have a building that I rent to customers usually, but at a specific moment I suspended the rent, and the customers left the building because of painting and decororating. From the period of suspension I must transfer the carrying amount from IAS 40 to IAS 16 PPE????
Thank you
Hi Silvia,
One of my client is leasing out a parcel of land to a foreign company and this foreign company constructed a building for manufacturing operations. then this foreign company rented to my client the office unit (part of the building constructed). In the book of my client the land is recognized as investment property measured at cost. my concern is do we need to separate the value of the land since part of it is rented to foreign company and part of it is leased back to my client?
Thanks
Hi Sylvia,
Is there a choice between IAS 16 and IAS 40 for accounting treatment of building held for rent purposes?
Further as per scope of IAS 16, the standard shall be applied in accounting for PPE except when another Standard requires or permits a different accounting treatment. Does it mean IAS 40 should be applied?
Regards,
Dipesh Shrestha
Hi Dipesh,
If you use the building to earn rentals, then you have to apply IAS 40 (cost or fair value model). S.
Hi,very helpful.!Could you also explain what’s the difference between fair value model and revaluation model? Thank you very much
Dear Silvia, Thanks a lot! This is really very helpful..
Regards Deepak