IAS 40 - Investment Property

Overview
IAS 40 Investment Property applies to the accounting for property (land and/or
buildings) held to earn rentals or for capital appreciation (or both). Investment
properties are initially measured at cost and, with some exceptions. may be
subsequently measured using a cost model or fair value model, with changes in the
fair value under the fair value model being recognised in profit or loss.
IAS 40 was reissued in December 2003 and applies to annual periods beginning on
or after 1 January 2005.
Investment property is property (land or a building or part of a building or both)
held (by the owner or by the lessee under a finance lease) to earn rentals or for
capital appreciation or both. [IAS 40.5]
Examples of investment property: [IAS 40.8]

land held for long-term capital appreciation

land held for a currently undetermined future use
building leased out under an operating lease
vacant building held to be leased out under an operating lease
property that is being constructed or developed for future use as investment
property

The following are not investment property and, therefore, are outside the scope of
IAS 40: [IAS 40.5 and 40.9]

property held for use in the production or supply of goods or services or for
administrative purposes
property held for sale in the ordinary course of business or in the process of
construction of development for such sale (IAS 2 Inventories)
property being constructed or developed on behalf of third parties (IAS 11
Construction Contracts)
owner-occupied property (IAS 16 Property, Plant and Equipment), including
property held for future use as owner-occupied property, property held for
future development and subsequent use as owner-occupied property,
property occupied by employees and owner-occupied property awaiting
disposal
property leased to another entity under a finance lease

In May 2008, as part of its Annual improvements project, the IASB expanded the
scope of IAS 40 to include property under construction or development for future
use as an investment property. Such property previously fell within the scope of IAS
16.
Other classification issues
Property held under an operating lease. A property interest that is held by a
lessee under an operating lease may be classified and accounted for as investment
property provided that: [IAS 40.6]

the rest of the definition of investment property is met

the operating lease is accounted for as if it were a finance lease in
accordance with IAS 17 Leases
the lessee uses the fair value model set out in this Standard for the asset
recognised

An entity may make the foregoing classification on a property-by-property basis.

Partial own use. If the owner uses part of the property for its own use, and part to
earn rentals or for capital appreciation, and the portions can be sold or leased out

separately, they are accounted for separately. Therefore the part that is rented out
is investment property. If the portions cannot be sold or leased out separately, the
property is investment property only if the owner-occupied portion is insignificant.
[IAS 40.10]
Ancillary services. If the entity provides ancillary services to the occupants of a
property held by the entity, the appropriateness of classification as investment
property is determined by the significance of the services provided. If those services
are a relatively insignificant component of the arrangement as a whole (for
instance, the building owner supplies security and maintenance services to the
lessees), then the entity may treat the property as investment property. Where the
services provided are more significant (such as in the case of an owner-managed
hotel), the property should be classified as owner-occupied. [IAS 40.13]
Intracompany rentals. Property rented to a parent, subsidiary, or fellow
subsidiary is not investment property in consolidated financial statements that
include both the lessor and the lessee, because the property is owner-occupied from
the perspective of the group. However, such property could qualify as investment
property in the separate financial statements of the lessor, if the definition of
investment property is otherwise met. [IAS 40.15]
Recognition
Investment property should be recognised as an asset when it is probable that the
future economic benefits that are associated with the property will flow to the
entity, and the cost of the property can be reliably measured. [IAS 40.16]
Initial measurement
Investment property is initially measured at cost, including transaction costs. Such
cost should not include start-up costs, abnormal waste, or initial operating losses
incurred before the investment property achieves the planned level of occupancy.
[IAS 40.20 and 40.23]
Measurement subsequent to initial recognition
IAS 40 permits entities to choose between: [IAS 40.30]

a fair value model, and

a cost model.

One method must be adopted for all of an entity's investment property. Change is
permitted only if this results in a more appropriate presentation. IAS 40 notes that
this is highly unlikely for a change from a fair value model to a cost model.
Fair value model
Investment property is remeasured at fair value, which is the amount for which the
property could be exchanged between knowledgeable, willing parties in an arm's
length transaction. [IAS 40.5] Gains or losses arising from changes in the fair value
of investment property must be included in net profit or loss for the period in which
it arises. [IAS 40.35]
Fair value should reflect the actual market state and circumstances as of the
balance sheet date. [IAS 40.38] The best evidence of fair value is normally given by
current prices on an active market for similar property in the same location and
condition and subject to similar lease and other contracts. [IAS 40.45] In the
absence of such information, the entity may consider current prices for properties of
a different nature or subject to different conditions, recent prices on less active
markets with adjustments to reflect changes in economic conditions, and
discounted cash flow projections based on reliable estimates of future cash flows.
[IAS 40.46]

There is a rebuttable presumption that the entity will be able to determine the fair
value of an investment property reliably on a continuing basis. However: [IAS 40.53]

If an entity determines that the fair value of an investment property under

construction is not reliably determinable but expects the fair value of the
property to be reliably determinable when construction is complete, it
measures that investment property under construction at cost until either its
fair value becomes reliably determinable or construction is completed.
If an entity determines that the fair value of an investment property (other
than an investment property under construction) is not reliably determinable
on a continuing basis, the entity shall measure that investment property
using the cost model in IAS 16. The residual value of the investment property
shall be assumed to be zero. The entity shall apply IAS 16 until disposal of the
investment property.

Where a property has previously been measured at fair value, it should continue to
be measured at fair value until disposal, even if comparable market transactions
become less frequent or market prices become less readily available. [IAS 40.55]
Cost model
After initial recognition, investment property is accounted for in accordance with the
cost model as set out in IAS 16 Property, Plant and Equipment cost less
accumulated depreciation and less accumulated impairment losses. [IAS 40.56]
Transfers to or from investment property classification
Transfers to, or from, investment property should only be made when there is a
change in use, evidenced by one or more of the following: [IAS 40.57]

commencement of owner-occupation (transfer from investment property to

owner-occupied property)
commencement of development with a view to sale (transfer from investment
property to inventories)
end of owner-occupation (transfer from owner-occupied property to
investment property)
commencement of an operating lease to another party (transfer from
inventories to investment property)
end of construction or development (transfer from property in the course of
construction/development to investment property

When an entity decides to sell an investment property without development, the

property is not reclassified as inventory but is dealt with as investment property
until it is derecognised. [IAS 40.58]
The following rules apply for accounting for transfers between categories:

for a transfer from investment property carried at fair value to owneroccupied property or inventories, the fair value at the change of use is the
'cost' of the property under its new classification [IAS 40.60]
for a transfer from owner-occupied property to investment property carried at
fair value, IAS 16 should be applied up to the date of reclassification. Any
difference arising between the carrying amount under IAS 16 at that date and
the fair value is dealt with as a revaluation under IAS 16 [IAS 40.61]
for a transfer from inventories to investment property at fair value, any
difference between the fair value at the date of transfer and it previous
carrying amount should be recognised in profit or loss [IAS 40.63]
when an entity completes construction/development of an investment
property that will be carried at fair value, any difference between the fair
value at the date of transfer and the previous carrying amount should be
recognised in profit or loss. [IAS 40.65]

When an entity uses the cost model for investment property, transfers between
categories do not change the carrying amount of the property transferred, and they
do not change the cost of the property for measurement or disclosure purposes.
Disposal
An investment property should be derecognised on disposal or when the investment
property is permanently withdrawn from use and no future economic benefits are
expected from its disposal. The gain or loss on disposal should be calculated as the
difference between the net disposal proceeds and the carrying amount of the asset
and should be recognised as income or expense in the income statement. [IAS
40.66 and 40.69] Compensation from third parties is recognised when it becomes
receivable. [IAS 40.72]
Disclosure
Both Fair Value Model and Cost Model [IAS 40.75]

whether the fair value or the cost model is used

if the fair value model is used, whether property interests held under
operating leases are classified and accounted for as investment property
if classification is difficult, the criteria to distinguish investment property from
owner-occupied property and from property held for sale
the methods and significant assumptions applied in determining the fair
value of investment property
the extent to which the fair value of investment property is based on a
valuation by a qualified independent valuer; if there has been no such
valuation, that fact must be disclosed
the amounts recognised in profit or loss for:
rental income from investment property
direct operating expenses (including repairs and maintenance)
arising from investment property that generated rental income
during the period
direct operating expenses (including repairs and maintenance)
arising from investment property that did not generate rental
income during the period
the cumulative change in fair value recognised in profit or loss on a
sale from a pool of assets in which the cost model is used into a
pool in which the fair value model is used
restrictions on the realisability of investment property or the remittance of
income and proceeds of disposal
contractual obligations to purchase, construct, or develop investment
property or for repairs, maintenance or enhancements

Additional Disclosures for the Fair Value Model [IAS 40.76]

a reconciliation between the carrying amounts of investment property at the

beginning and end of the period, showing additions, disposals, fair value
adjustments, net foreign exchange differences, transfers to and from
inventories and owner-occupied property, and other changes [IAS 40.76]
significant adjustments to an outside valuation (if any) [IAS 40.77]
if an entity that otherwise uses the fair value model measures an item of
investment property using the cost model, certain additional disclosures are
required [IAS 40.78]

Additional Disclosures for the Cost Model [IAS 40.79]

the depreciation methods used

the useful lives or the depreciation rates used
the gross carrying amount and the accumulated depreciation (aggregated
with accumulated impairment losses) at the beginning and end of the period

a reconciliation of the carrying amount of investment property at the

beginning and end of the period, showing additions, disposals, depreciation,
impairment recognised or reversed, foreign exchange differences, transfers to
and from inventories and owner-occupied property, and other changes
the fair value of investment property. If the fair value of an item of
investment property cannot be measured reliably, additional disclosures are
required, including, if possible, the range of estimates within which fair value
is highly likely to lie