Investment property: fair value or cost

The choice between fair value and cost is the biggest accounting decision a property investor makes. It decides whether profit swings with the property market, what the balance sheet shows, and how comparable the company is with its peers. This guide works through both models on the same building, and covers property under construction, changing the model, deferred tax and the US GAAP difference.

By Awais Jameel, Chartered Accountant. Reviewed by Muhammad Bilal, Chartered Accountant. 3 minute read.

Short answer

Investment property under IAS 40 is measured using either the fair value model or the cost model, chosen as a policy for all investment property. Under the fair value model, the property is remeasured to fair value at each reporting date, gains and losses go to profit or loss, and there is no depreciation. Under the cost model, it is depreciated like other property and its fair value is disclosed. In this guide's example, a CU 100 million office block shows a gain of 8 million then a loss of 4 million under fair value, against depreciation of 1.4 million a year under cost.

At a glance

Choice
Fair value or cost, for all investment property
Fair value model
Gains and losses in profit, no depreciation
Cost model
Depreciation, fair value disclosed
Under construction
Within IAS 40 since 2009
Changing model
Only if more relevant, rarely to cost
US GAAP
Cost only
Investment property: fair value or costChoice: Fair value or cost, for all investment property; Fair value model: Gains and losses in profit, no depreciation; Cost model: Depreciation, fair value disclosed; Under construction: Within IAS 40 since 2009; Changing model: Only if more relevant, rarely to cost; US GAAP: Cost only.KEY FACTS AT A GLANCEInvestment property: fair value or costChoiceFair value or cost, forall investment propertyFair value modelGains and losses inprofit, no depreciationCost modelDepreciation, fair valuedisclosedUnder constructionWithin IAS 40 since 2009Changing modelOnly if more relevant,rarely to costUS GAAPCost onlyTax BakersInvestment property: fair value or costChoice: Fair value or cost, for all investment property; Fair value model: Gains and losses in profit, no depreciation; Cost model: Depreciation, fair value disclosed; Under construction: Within IAS 40 since 2009; Changing model: Only if more relevant, rarely to cost; US GAAP: Cost only.KEY FACTS AT A GLANCEInvestment property: fair value orcostChoiceFair value or cost, for all investmentpropertyFair value modelGains and losses in profit, no depreciationCost modelDepreciation, fair value disclosedUnder constructionWithin IAS 40 since 2009Changing modelOnly if more relevant, rarely to costUS GAAPCost onlyTax Bakers
Key facts at a glance, as set out in this guide.

Investment property: fair value or cost on the same building

A company buys an office block to let for CU 100 million: land 30 million and building 70 million, with a 50-year useful life. Rent is 6 million a year. The block's fair value is 108 million after year 1 and 104 million after year 2.

Profit from the property under each model (CU million)Profit from the property under each model (CU million)145Year 125Year 2Fair value modelCost model
Fair value brings market swings into profit.
CU millionFair value: year 1Fair value: year 2Cost: year 1Cost: year 2
Rental income6.06.06.06.0
Fair value gain or loss+8.0-4.0NoneNone
DepreciationNoneNone(1.4)(1.4)
Profit from the property14.02.04.64.6
Carrying amount at year end108.0104.098.697.2

The fair value model reports profit that swings with the market, from 14.0 million to 2.0 million, and a balance sheet at current value. The cost model reports steady profit and a balance sheet at depreciated cost, 6.8 million below fair value by year 2, with the fair value in a note. Many property companies therefore report a performance measure that excludes valuation movements, such as EPRA earnings; see REIT accounting. How the fair values themselves are set is covered in property valuations under IFRS 13.

Which model do companies choose?

Most listed property investors in IFRS countries use fair value, because investors value them on net asset value and expect the balance sheet to show it. Companies with property as a side holding often prefer cost. The choice applies to all investment property, with one exception: property backing liabilities that pay a return linked to its value, such as in some insurance funds, can be measured on a different model from the rest.

What about property under construction?

Property being built or developed for future use as investment property is within IAS 40. Under the fair value model, it is measured at fair value if that can be measured reliably during construction; if not, at cost until it can be, or until construction is complete.

Can a company change model?

Only if the change gives more relevant and reliable information, under IAS 8. IAS 40 notes that this is highly unlikely for a move from fair value to cost. A move from cost to fair value is applied retrospectively. Moving an individual property into or out of investment property is a different matter, governed by its use; see property transfers.

What about leased property that meets the definition?

A right-of-use asset that a lessee sublets, and that meets the definition of investment property, is presented as investment property. If the company uses the fair value model, the right-of-use asset is also measured at fair value.

How does deferred tax apply?

Fair value gains create temporary differences. IAS 12 presumes that investment property at fair value is recovered entirely through sale, so deferred tax is measured at the rate that applies on sale, unless the property is held in a business model that consumes its economic benefits over time. See deferred tax on investment property and deferred tax under IAS 12.

How does US GAAP differ?

US GAAP has no fair value model for investment property outside investment companies: real estate is held at depreciated cost and tested for impairment. See property inventory or investment property and real estate accounting.

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Questions people ask

What is the difference between the fair value and cost models under IAS 40?

The fair value model remeasures investment property each period with gains and losses in profit and no depreciation; the cost model depreciates it and discloses fair value.

Can a company use fair value for some investment properties and cost for others?

No, the chosen model applies to all investment property, except property backing liabilities linked to its returns.

Is investment property under construction within IAS 40?

Yes. Under the fair value model it is measured at fair value if reliably measurable, otherwise at cost until it can be or construction is complete.

Can investment property be measured at fair value under US GAAP?

Not outside investment companies; US GAAP uses depreciated cost with impairment testing.

Sources

Every fee, date and rule on this page was taken from these official and primary sources.

  1. IFRS Foundation: IAS 40 Investment Property

Rules and fees change. If you are reading this long after October 7, 2026, confirm the figures with the source before you rely on them.

Real estateReal estate accounting: the key IFRS issuesReal estateInventory or investment property: classifying propertyIAS 12Deferred tax liabilities and assets with examples

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