IAS 40: Investment Property

A professional-grade guide and calculator to master Investment Property accounting.

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About This Tool & IAS 40

This tool is a comprehensive educational resource designed to demystify IAS 40 Investment Property. It caters to accounting students, finance professionals, auditors, and real estate investors by combining detailed explanations with practical, interactive features.



IAS 40 prescribes the accounting treatment for investment property, which is property (land or a building) held to earn rentals or for capital appreciation or both. It introduces a key choice for subsequent measurement: the fair value model or the cost model. This standard aims to enhance the relevance and reliability of financial information related to an entity's investment properties.


  • Model Choice is Key: An entity must apply its chosen policy (Fair Value or Cost) to ALL of its investment properties. A change is only permitted if it results in a more relevant and reliable presentation.
  • Fair Value Disclosure: Even if you use the Cost Model, you MUST disclose the fair value of the investment property in the notes to the financial statements.
  • Ancillary Services: Be careful with properties where you provide services (e.g., a hotel). If services are significant, it's owner-occupied property under IAS 16, not investment property.

Latest News & Updates (Examples)

IASB Discusses Post-implementation Review of IFRS 13 Fair Value Measurement
The IASB is gathering feedback on the application of IFRS 13, which is integral to the Fair Value Model under IAS 40. Potential clarifications could impact how entities determine the fair value of investment properties in illiquid markets.

Sustainability Reporting to Impact Property Valuations
With the rise of ESRS and IFRS S1/S2, valuers are increasingly considering climate-related risks (e.g., flood risk, energy efficiency) when determining property fair values. This has a direct impact on IAS 40 fair value adjustments.


  • Land held for long-term capital appreciation rather than for short-term sale in the ordinary course of business.
  • Land held for a currently undetermined future use.
  • A building owned by the entity and leased out under one or more operating leases.
  • A vacant building held to be leased out under one or more operating leases.
  • Property that is being constructed or developed for future use as investment property.

IAS 40 vs. IAS 16: Key Differences

Understanding the distinction between Investment Property (IAS 40) and Property, Plant, and Equipment (IAS 16) is crucial. Here's a summary table:

Feature IAS 40: Investment Property IAS 16: Property, Plant & Equipment
Purpose Held for rental income, capital appreciation, or both. Held for use in production, supply of goods/services, or administration.
Subsequent Measurement Choice of Fair Value Model OR Cost Model. Choice of Cost Model OR Revaluation Model.
Fair Value / Revaluation Gains/Losses Fair Value Model: All changes in fair value go to Profit or Loss. Revaluation Model: Increases go to Other Comprehensive Income (OCI) via a revaluation surplus. Decreases first offset surplus in OCI, then go to Profit or Loss.
Depreciation Fair Value Model: No depreciation.
Cost Model: Depreciation is charged.		 Depreciation is charged under both Cost and Revaluation models.

Is it Investment Property? A Decision Guide

Use this simple guide to help classify a property. Ask the following questions in order:

  1. What is the primary purpose for holding the property?
    • If for sale in the ordinary course of business → IAS 2 Inventories.
    • If for use in production, admin, or providing services → IAS 16 PPE.
    • If for earning rent or for capital growth → Continue to question 2.
  2. Are significant ancillary services provided to occupants?
    • If YES (e.g., you operate it as a hotel) → It's considered owner-occupied → IAS 16 PPE.
    • If NO (e.g., providing basic security/maintenance) → It is likely IAS 40 Investment Property.

History

IAS 40 Investment Property was originally issued by the International Accounting Standards Committee (IASC) in April 2000. The International Accounting Standards Board (IASB) adopted this standard in April 2001.

The Board issued a revised IAS 40 in December 2003 as part of its initial agenda of technical projects.

Key amendments affecting the standard include:

  • May 2008 (Annual Improvements): Expanded the scope to include property under construction or development for future use as investment property.
  • May 2011 (IFRS 13 Fair Value Measurement): Amended the definition of fair value and related paragraphs.
  • December 2013 (Annual Improvements Cycle 2011–2013): Clarified the interrelationship between IFRS 3 Business Combinations and IAS 40.
  • January 2016 (IFRS 16 Leases): Expanded the scope to include investment property held by a lessee as a right-of-use asset.
  • December 2016 (Transfers of Investment Property Amendments): Clarified when there is a transfer to, or from, investment property.

Objective

The objective of IAS 40 is to prescribe the accounting treatment for investment property and related disclosure requirements.

Scope

IAS 40 shall be applied in the recognition, measurement, and disclosure of investment property.

The standard specifically does not apply to:

  • Biological assets related to agricultural activity (see IAS 41 and IAS 16).
  • Mineral rights and mineral reserves (such as oil, natural gas, and similar non-regenerative resources).

Additionally, the standard excludes:

  • Property held for sale in the ordinary course of business (IAS 2 applies).
  • Owner-occupied property (IAS 16 and IFRS 16 apply).
  • Property leased to another entity under a finance lease.
  • Property being constructed or developed on behalf of third parties (IFRS 15 applies).

Definitions

  • Investment Property (IP): 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. It is held rather than for use in production, supply of goods/services, administrative purposes, or for sale in the ordinary course of business.
  • Owner-occupied property: 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.
  • Fair value: The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
  • Carrying amount: The amount at which an asset is recognised in the statement of financial position.
  • Cost: The amount of cash or cash equivalents paid or the fair value of other consideration given to acquire an asset at the time of its acquisition or construction.

Classification of property as investment property or owner‑occupied property

Classification is a key decision to determine if IAS 40 or IAS 16 is applicable. Investment property generates cash flows largely independently of the entity's other assets, distinguishing it from owner-occupied property, where cash flows are attributable not only to the property but also to other assets used in the operations.

Examples classified as IP include:

  1. Land held for long-term capital appreciation.
  2. Land held for a currently undetermined future use.
  3. A building owned or held as a right-of-use asset and leased out under operating leases.
  4. A vacant building held to be leased out under operating leases.
  5. Property being constructed or developed for future use as investment property.

Handling complex classifications:

  • Partial Own Use (Dual Use): If parts held for rental/appreciation can be sold or leased out separately, the entity accounts for the portions separately. If the portions cannot be sold separately, the property is investment property only if the owner-occupied portion is insignificant.
  • Ancillary Services: If the entity provides ancillary services to occupants (e.g., security or maintenance), the property is treated as IP only if the services are insignificant to the arrangement as a whole. If the services are significant (like an owner-managed hotel), the property is classified as owner-occupied property.
  • Inter-company Rentals: Property leased to a parent or subsidiary is not IP in consolidated financial statements (it is owner-occupied from the group’s perspective). However, the lessor entity treats it as IP in its individual financial statements.

Recognition

An owned investment property is recognized as an asset when, and only when:

  1. It is probable that the future economic benefits associated with the IP will flow to the entity; and
  2. The cost of the IP can be measured reliably.

The costs of day-to-day servicing ("repairs and maintenance") are not recognized in the carrying amount of the IP; they are recognized in profit or loss as incurred. The cost of replacing part of an existing IP is recognized if the recognition criteria are met, and the carrying amount of the replaced part is derecognized.

Measurement at recognition

An owned investment property shall be measured initially at its cost, which includes transaction costs. Directly attributable expenditure includes professional fees for legal services, property transfer taxes, and other transaction costs.

Costs that are excluded from the initial measurement include:

  • Start-up costs (unless necessary to bring the property to the condition intended by management).
  • Operating losses incurred before the IP achieves the planned level of occupancy.
  • Abnormal amounts of wasted material, labour, or other resources.

If IP is acquired in exchange for a non-monetary asset, the cost is measured at fair value unless the transaction lacks commercial substance or the fair value cannot be reliably measured.

An IP interest held by a lessee as a right-of-use asset shall be measured initially at its cost in accordance with IFRS 16 [17, 206, 29A, 483, 510, 515].

Measurement after recognition

An entity shall choose one of two models as its accounting policy and shall apply that policy to all of its investment property, with a limited exception for properties backing liabilities linked directly to the fair value of specified assets.

Fair Value Model

  • Investment properties are measured at fair value at each reporting date.
  • Any gain or loss arising from a change in fair value shall be recognized in profit or loss for the period in which it arises.
  • No depreciation is recognized.
  • The entity must ensure the fair value reflects rental income from current leases and other assumptions used by market participants.

Cost Model

  • Investment property is measured in accordance with the requirements in IAS 16 for that model.
  • This entails measuring at cost less accumulated depreciation and any accumulated impairment losses.
  • The fair value must be disclosed in the notes, even if the cost model is used for measurement.

Switching Models

A voluntary change in accounting policy is allowed only if it results in the financial statements providing more reliable and relevant information. It is highly unlikely that a change from the fair value model to the cost model will result in a more relevant presentation.

Transfers

Transfers to or from investment property are permitted only when there is a change in use, evidenced by specific examples. A change in management's intention alone is not sufficient evidence.

Examples of changes in use:

  • Commencement of owner-occupation (IP to owner-occupied property).
  • Commencement of development with a view to sale (IP to inventories).
  • End of owner-occupation (owner-occupied property to IP).
  • Inception of an operating lease to another party (inventories to IP).

Accounting for transfers (Fair Value Model applied to IP):

  • From IP to Owner-occupied Property/Inventories: The property’s deemed cost for subsequent accounting is its fair value at the date of change in use.
  • From Owner-occupied Property to IP: The entity applies IAS 16 up to the date of change in use. Any difference between the carrying amount under IAS 16 and its fair value is treated as a revaluation under IAS 16.
  • From Inventories to IP: Any difference between the fair value at the date of transfer and its previous carrying amount is recognized in profit or loss.

Accounting for transfers (Cost Model applied to IP):

Transfers between categories using the cost model do not change the carrying amount of the property transferred.

Disposals

An investment property is derecognised (eliminated from the statement of financial position) on disposal or when it is permanently withdrawn from use and no future economic benefits are expected.

  • The gain or loss on disposal is calculated as the difference between the net disposal proceeds and the carrying amount of the asset.
  • The gain or loss shall be recognized in profit or loss in the period of retirement or disposal.
  • Compensation received from third parties for IP that was impaired, lost, or given up is recognized in profit or loss when it becomes receivable.

Disclosure

An entity must disclose information enabling users to evaluate the financial effects of IP held under either model.

Common Disclosures (Both Models):

  • Whether the fair value or the cost model is applied.
  • If classification is difficult, the criteria used to distinguish IP from owner-occupied property and property held for sale.
  • The extent to which fair value is based on a valuation by an independent qualified valuer.
  • Amounts recognized in profit or loss for: rental income; direct operating expenses (including repairs/maintenance) for IP that generated income; and direct operating expenses for IP that did not generate income.
  • Existence and amounts of restrictions on the realizability of IP.
  • Contractual obligations to purchase, construct, or develop IP.

Additional Disclosures for the Fair Value Model:

  • A reconciliation of the carrying amounts at the beginning and end of the period, showing additions, disposals, net gains or losses from fair value adjustments, transfers, etc..
  • If the cost model is used for a specific IP due to unreliable fair value, the entity must disclose a description of the property, why fair value cannot be measured reliably, and, if possible, the range of fair value estimates.

Additional Disclosures for the Cost Model:

  • The depreciation methods used, and the useful lives or depreciation rates.
  • A reconciliation of the carrying amount, showing additions, depreciation, impairment losses recognized or reversed, and transfers.
  • The fair value of the investment property (required even if the cost model is used for measurement).

Transitional provisions

When first applying IAS 40 (Revised 2003) and choosing the fair value model, the effect of classifying eligible property interests held under operating leases as IP is recognized as an adjustment to the opening balance of retained earnings.

If the cost model is chosen upon first application, IAS 8 applies to any change in accounting policies.

The amendment related to the acquisition of investment property through a business combination (added in 2013) is applied prospectively for acquisitions from the beginning of the first period of adoption.

The 2016 amendments regarding transfers are applied to changes in use that occur on or after the beginning of the annual reporting period in which the entity first applies the amendments (1 January 2018 or earlier).

Effective date

The revised IAS 40 (issued December 2003) shall be applied for annual periods beginning on or after 1 January 2005. Earlier application is encouraged.

Withdrawals

The current standard supersedes IAS 40 Investment Property (issued in 2000). The original standard (2000) had replaced parts of IAS 25 Accounting for Investments.

Summary and Conclusion

IAS 40 is a specific standard governing the recognition, measurement, and disclosure of investment property (IP), defined as property held primarily for rental income or capital appreciation. It dictates that IP be measured initially at cost.

For subsequent measurement, entities have a crucial accounting policy choice applied consistently across all IP:

  1. Fair Value Model: IP is remeasured annually, and all fair value gains/losses are recognized in profit or loss. This differs significantly from the IAS 16 revaluation model where gains usually go to Other Comprehensive Income (OCI).
  2. Cost Model: IP is measured at cost minus accumulated depreciation and impairment, requiring disclosure of the fair value.

The standard enforces strict rules for classifying dual-use properties and transfers, emphasizing that transfers only occur upon a demonstrable change in use. Derecognition occurs upon disposal, with gains/losses recognized in profit or loss. Empirical analysis shows that institutional context, high IP materiality, and lower leverage often favor the choice of the fair value model in the real estate industry, aligning book values closer to market expectations.


Interactive Understanding Tool

Use this tool to see how changes in fair value or depreciation affect the carrying amount of an investment property under both the Fair Value and Cost Models.


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