How to approach it
- Draw a timeline for each property: date acquired, each change in use, the year-end. Mark which standard governs each stretch.
- Under IAS 16 (owner-occupied), charge depreciation right up to the transfer date before doing anything else.
- At the transfer to investment property (fair value model), restate to fair value and treat the difference as an IAS 16 revaluation.
- After the transfer, stop depreciating. Fair value changes go to profit or loss.
- For a property split into separately lettable units, account for each unit on its own; split owner-occupied units into land and building.
- If an investment property comes back into own use, its fair value at that date becomes deemed cost for IAS 16.
Key rules to apply
- IAS 40: transfers happen only when there is evidence of a change in use; intention alone is not enough.
- Owner-occupied → investment property at fair value: any increase up to that date is a revaluation surplus (OCI), any decrease goes to profit or loss unless reversing an earlier surplus.
- Investment property at fair value → owner-occupied: fair value at the date of change is the deemed cost; depreciate over the remaining life.
- Portions that could be sold or leased separately are accounted for separately.
- Land is not depreciated.
Answer layout
| Date | Debit | Credit | Rs m |
|---|---|---|---|
| Up to change of use | Depreciation expense | Accumulated depreciation | … |
| Change of use | Accumulated depreciation | Property, plant and equipment | … |
| Change of use | Investment property (fair value) | PPE / revaluation surplus (OCI) | … |
| Year-end | Fair value loss (P&L) | Investment property | … |
Common mistakes
Drawn from the examiners' comments for this sitting (summarised in our words) and from typical errors on this topic.
- Skipping depreciation for the months before the transfer (the examiners flagged this).
- Sending a fall in fair value after the transfer to revaluation surplus instead of profit or loss, or continuing to depreciate the investment property.
- Depreciating land, or using the full original life for a unit brought into own use part-way through.
Similar question with worked solution
Written by us with our own numbers; it tests the same skills as Q2 without copying it.
Original practice question
Building leased out, unit brought back into use
Saman Ltd bought an office building on 1 January 2021 for Rs 600m, depreciated straight-line over 20 years with nil residual value (cost model). On 1 October 2025 it was let to a third party; fair value that day was Rs 540m and at 31 December 2025 Rs 520m. Saman uses the fair value model for investment property.
Separately, a shop unit held as investment property (fair value Rs 290m at 1 January 2025) was taken into Saman's own use on 1 July 2025 when its fair value was Rs 300m. 30% of value is land; the building has 25 years of life left.
Required: Give the 2025 journal entries for both properties.
Worked solution
Office building: depreciation to 30 September 2025 = 600 ÷ 20 × 9/12 = Rs 22.5m. Accumulated depreciation at transfer = 600 ÷ 20 × 4.75 years = Rs 142.5m, so carrying amount = Rs 457.5m.
| Entry | Dr | Cr | Rs m |
|---|---|---|---|
| Depreciation Jan–Sep | Depreciation expense | Accumulated depreciation | 22.5 |
| Remove asset at transfer | Accumulated depreciation | PPE – building | 142.5 |
| Recognise investment property | Investment property | PPE – building | 457.5 |
| Uplift to fair value (IAS 16 revaluation) | Investment property | Revaluation surplus (OCI) | 82.5 |
| Year-end fall 540 → 520 | Fair value loss (P&L) | Investment property | 20.0 |
Shop unit: fair value gain up to the date of change goes to profit or loss (300 − 290 = Rs 10m). Deemed cost Rs 300m: land Rs 90m, building Rs 210m. Depreciation 1 July–31 December = 210 ÷ 25 × 6/12 = Rs 4.2m.
| Entry | Dr | Cr | Rs m |
|---|---|---|---|
| Gain to 1 July | Investment property | Fair value gain (P&L) | 10.0 |
| Transfer at deemed cost | PPE – land 90 / building 210 | Investment property | 300.0 |
| Depreciation Jul–Dec | Depreciation expense | Accumulated depreciation | 4.2 |
Answer: Office: depreciation Rs 22.5m, surplus Rs 82.5m in OCI, fair value loss Rs 20m in P&L. Shop: gain Rs 10m in P&L, then depreciation Rs 4.2m on the Rs 210m building.