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Assets · IAS 40

IAS 40 Investment Property

Summary, key points, exam traps and a worked example — written for ICAP, ACCA, ICAI, CIMA and ICAEW students.

On this page
  1. Objective
  2. Scope
  3. Key definitions
  4. Recognition & measurement
  5. Key disclosures
  6. Common exam traps
  7. Worked example
  8. Related standards
  9. Practise MCQs

Objective

Prescribes how to recognise, measure and disclose property held to earn rentals or for capital appreciation.

Scope

  • Land and buildings (or parts) held by an owner, or by a lessee as a right-of-use asset, to earn rentals or for capital appreciation, including property being built for future use as investment property.
  • Excludes owner-occupied property (IAS 16), property held for sale in the ordinary course of business (IAS 2), and property leased to others under a finance lease.

Key definitions

Investment property
Property held to earn rentals, capital appreciation or both, rather than for use in production, supply of goods or services, administration, or sale in the ordinary course of business.
Owner-occupied property
Property held for use in production or supply of goods or services, or for administrative purposes.

Recognition & measurement

Recognition and initial measurement

  • Recognise when future economic benefits are probable and cost can be measured reliably.
  • Initially measure at cost including transaction costs (e.g. legal fees, property transfer taxes).
  • If part is owner-occupied and the parts could be sold separately, account for them separately; otherwise it is investment property only if the owner-occupied part is insignificant.
  • If significant ancillary services are provided (e.g. a hotel), the property is owner-occupied.

Subsequent measurement

  • Choose the fair value model or the cost model for all investment property.
  • Fair value model: remeasure at fair value at each reporting date; changes go to profit or loss; no depreciation.
  • Cost model: follow IAS 16 (depreciate), but disclose fair value.
  • A change from cost to fair value model is permitted only if it gives more relevant information; the reverse is highly unlikely to qualify.

Transfers

  • Transfer into or out of investment property only when there is a change in use supported by evidence; a change in management's intentions alone is not enough.
  • Owner-occupied → investment property at fair value: apply IAS 16 up to the date of change; any difference to fair value at that date is treated like an IAS 16 revaluation (gains to OCI).
  • Inventory → investment property at fair value: the difference goes to profit or loss.
  • Investment property at fair value → owner-occupied or inventory: fair value at the date of change becomes deemed cost.

Key disclosures

  • Model used, and criteria to distinguish investment property where classification is difficult.
  • Methods and significant assumptions in determining fair value, and whether an independent valuer was used.
  • Rental income and direct operating expenses.
  • Reconciliation of carrying amounts; under the cost model, the fair value.

Common exam traps

  • No depreciation under the fair value model.
  • Fair value gains on investment property go to profit or loss — not OCI like IAS 16 revaluations.
  • Property let to a subsidiary is investment property in the parent's own accounts but owner-occupied PPE in the group accounts.
  • Property held for sale in the ordinary course of business is inventory, not investment property.

Worked example: Fair value model

Scenario. On 1 January a company buys an office block to rent out for $2,000,000 plus legal fees of $50,000. At 31 December the fair value is $2,300,000. It uses the fair value model.

  1. Initial cost = 2,000,000 + 50,000 = $2,050,000.
  2. Fair value gain = 2,300,000 − 2,050,000 = $250,000 to profit or loss.
  3. No depreciation charged.

Answer: Carrying amount $2,300,000; gain $250,000 in profit or loss.

Practise MCQs on this standard

Test your understanding of IAS 40 with free chapter-wise MCQs and explanations in these question banks.

CAF-1 Financial Accounting and ReportingICAP CAFACCA FA Financial AccountingACCAACCA FR Financial ReportingACCACAF-6 Corporate ReportingICAP CAFCIMA BA3 Fundamentals of Financial AccountingCIMA Certificate in Business AccountingICAEW AF Accounting FundamentalsICAEW ACA Certificate LevelCA Inter P1 Advanced AccountingICAI CA Intermediate

ICAI CA Intermediate examines Indian Accounting Standards, which are based on but can differ from IFRS. Check your syllabus.

Read the official IAS 40 text on ifrs.org