IAS 40 investment property: cost or fair value

What is investment property?

Land or buildings, or part of a building, held by the owner or by a lessee as a right-of-use asset to earn rentals, for capital appreciation, or both. Examples include office buildings let to tenants under operating leases, land held for an undetermined future use, vacant buildings held to be let, and property being built for future use as investment property. It excludes owner-occupied property, which is property, plant and equipment under IAS 16, and property held for sale in the ordinary course of business, which is inventory under IAS 2. Where part of a building is let and part used by the owner, the parts are accounted for separately if they could be sold separately; otherwise the whole is investment property only if the owner-occupied part is insignificant. A hotel, where the owner provides significant services, is owner-occupied. See property inventory or investment property.

How do the fair value and cost models compare?

The model is an accounting policy applied to all investment property, and a change from one to the other is allowed only if it gives more relevant information, which IAS 40 says is highly unlikely for a change from fair value to cost. Fair value is measured under IFRS 13, usually by an independent valuer. See IFRS 13 fair value and investment property: fair value or cost.

IAS 40 in practice: an office building under both models

A company buys an office building to let for CU 50,000 thousand on 1 January 2026, of which CU 10,000 thousand is land and CU 40,000 thousand the building, with a 40-year life. Its fair value is CU 54,000 thousand at the end of 2026 and CU 52,000 thousand at the end of 2027. All figures are in CU thousand.

The fair value model makes profit volatile but shows the balance sheet at current value; the cost model gives a steady charge and a lower carrying amount. Rental income is the same under both. Under the fair value model, deferred tax is usually measured on the presumption that the property will be recovered through sale; see deferred tax on investment property.

When is property transferred in or out?

Only when there is a change in use, supported by evidence, such as the owner starting to occupy the property, development starting with a view to sale, the owner ceasing to occupy it, or a lease to another party starting. A change in management's intentions alone is not enough. Under the fair value model, owner-occupied property moving to investment property is first revalued under IAS 16, with the surplus in other comprehensive income, and inventory moving in is remeasured with the difference in profit or loss. See the IAS 16 revaluation model.

What must be disclosed?

The model used, how fair value was determined and whether an independent valuer was involved, rental income and the direct operating costs of let and vacant property, restrictions on selling or remitting income, contractual obligations to buy, build or repair, and a reconciliation of the carrying amount from the start to the end of the year. Companies using the cost model also disclose the fair value, with its IFRS 13 hierarchy level. Borrowing costs on property under construction are capitalised under IAS 23; see IAS 23 borrowing costs.

How does US GAAP treat investment property?

US GAAP has no investment property standard: rental property is property, plant and equipment, carried at depreciated cost and tested for impairment under ASC 360, except for investment companies that measure their investments at fair value. Real estate companies that report fair values do so in supplementary information. See IAS 16 vs US GAAP.

This guide is general information. It is not tax or legal advice for your situation.