Real estate accounting: the key IFRS issues

Why is real estate accounting different?

A property company's results depend on the value of a few large assets and on long contracts, leases and sales agreements, which run for years. The same building can be inventory, investment property or property, plant and equipment depending on what the company intends to do with it, and each category is measured differently. Fair value gains on investment property can dwarf rental profit, so how values are set and presented is central.

Which IFRS issues matter most in real estate accounting?

How is a property classified?

By its use: held for sale in the ordinary course of business, inventory; held for rent or capital appreciation, investment property; used in supplying goods or services or for administration, property, plant and equipment. Land held for an undetermined future use is investment property. Changes in classification need evidence of a change in use. See property inventory or investment property.

Fair value or cost for investment property?

IAS 40 lets companies choose, for all investment property: the fair value model, with gains and losses in profit and no depreciation, or the cost model, with depreciation and fair value disclosed. Most listed property investors use fair value. See investment property: fair value or cost.

How is development revenue recognised?

Developers selling homes or offices recognise revenue under IFRS 15 over time if the buyer controls the work as it is built or the developer has an enforceable right to payment for work done on a unit with no alternative use; otherwise on completion. The answer often depends on local law and the sale contracts. See property development revenue and off-plan sales.

How is rental income recognised?

Landlords are lessors under IFRS 16. Most property leases are operating leases, so rental income is recognised on a straight-line basis over the lease term, spreading rent-free periods and stepped rents. Lease incentives given to tenants are spread in the same way. Service charges recovered from tenants are a separate question: the landlord decides whether it is principal or agent for the services.

How are properties valued?

At fair value under IFRS 13, usually by external valuers using income approaches, discounted cash flows or capitalised rents, with significant unobservable inputs such as yields and estimated rents, so most valuations are Level 3. Disclosures of the key inputs and their sensitivity are among the most read in property company accounts.

Why is deferred tax significant?

Fair value gains on investment property create temporary differences. IAS 12 presumes that investment property at fair value is recovered through sale, which affects the tax rate used, unless the presumption is rebutted because the property is held to consume its value over time. Many jurisdictions tax property gains differently from rent, so this choice matters.

What other issues arise?

• Joint ventures: developments and portfolios are often held with partners, under IFRS 11.
• Borrowing costs: capitalised on qualifying assets such as developments sold on completion; see borrowing costs on construction projects.
• REITs: tax-transparent structures with distribution requirements and their own performance measures.
• Acquisitions: buying a company that owns a property may be an asset acquisition rather than a business combination, which changes the accounting.

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. Revenue from property sales follows ASC 606 and ASC 610-20. Comparing IFRS and US property companies requires care. See lessor accounting.

Which real estate guides come next?

Further guides cover straight-line rental income, lease incentives for landlords, service charges, property valuations under IFRS 13, REIT accounting, transfers between property categories, real estate joint ventures and deferred tax on investment property.

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