What is the definition of investment property under IAS 40.5?

Core rule Under IAS 40.5, investment property is land or a building—or part of a building—or both, held by the owner (or by a lessee as a right-of-use asset) to earn rentals, for capital appreciation, or for both, rather than for use in production or supply of goods/services, for administrative purposes, or for sale in the ordinary course of business. How it works - Held-for-rentals or capital appreciation test (IAS 40.5): The asset must be held primarily to generate rental income, capital gains, or both. If the entity occupies even a portion for its own operations, that portion is owner-occupied property under IAS 16 unless it is insignificant (IAS 40.10). The dual-use split is critical and often misjudged. - Right-of-use assets included (IAS 40.5, amended): Following the 2016 amendments aligned with IFRS 16, a lessee can classify a right-of-use asset arising from a lease as investment property if it meets the IAS 40.5 definition—e.g., a lessee sub-leases the building to third parties and earns rental income. - Exclusions from the definition (IAS 40.9): Property held for sale in the ordinary course of business (→ IAS 2 / IFRS 5), property being constructed for third parties (→ IFRS 15), owner-occupied property

How should a mixed-use property be split between IAS 40 investment property and IAS 16 owner-occupied property when the portions cannot be sold separately?

(→ IAS 16), and property leased to another entity under a finance lease (→ IFRS 16) are all explicitly excluded. - Initial recognition and measurement (IAS 40.20): Investment property is recognised when it is probable that future economic benefits will flow to the entity and the cost can be measured reliably. Initial measurement is always at cost, including transaction costs (IAS 40.21). - Subsequent measurement policy choice (IAS 40.30): After initial recognition, an entity chooses either the fair value model (gains/losses in P&L; IAS 40.35) or the cost model (depreciation and impairment under IAS 16 principles; IAS 40.56). The policy must be applied consistently to all investment property. - Transfers into/out of investment property (IAS 40.57–IAS 40.65): Reclassification is only permitted when there is a change in use evidenced by a specific event—e.g., commencement of owner-occupation triggers transfer to IAS 16; commencement of development with a view to sale triggers transfer to IAS 2/IFRS 5. Practical example Scenario: On 1 January 20X1, Meridian Holdings purchases a commercial office building for €5,000,000 (plus €150,000 transaction costs) and immediately leases 100% of it to an unrelated third party. M

When a lessee sub-leases a right-of-use asset and classifies it as investment property under IAS 40, how does the fair value model interact with the IFRS 16 lease liability measurement?

eridian adopts the fair value model. At 31 December 20X1, the independent valuer reports fair value of €5,400,000. Initial recognition (1 Jan 20X1): | Account | Dr (€) | Cr (€) | |---|---|---| | Investment Property | 5,150,000 | | | Cash / Payables | | 5,150,000 | (Cost = purchase price €5,000,000 + transaction costs €150,000 per IAS 40.21) Year-end fair value uplift (31 Dec 20X1): | Account | Dr (€) | Cr (€) | |---|---|---| | Investment Property | 250,000 | | | Fair Value Gain (P&L) | | 250,000 | (Fair value €5,400,000 less carrying amount €5,150,000 = €250,000 gain per IAS 40.35) No depreciation is charged under the fair value model (IAS 40.33). Common pitfalls - Mixed-use property not split correctly: Practitioners often classify the entire building as investment property when the entity occupies a material portion. IAS 40.10 requires each portion to be accounted for separately (investment property vs. IAS 16) unless the owner-occupied portion is insignificant. Auditors scrutinise floor-area allocations and internal recharge arrangements. - Treating the fair value model as "no disclosure": Entities using the cost model must still disclose the fair value of investment property in the notes (IAS 40.79(e)), and

What are the deferred tax implications under IAS 12 when an entity uses the fair value model for investment property located in a jurisdiction where the tax base is cost less capital allowances?

those using the fair value model must disclose the level of valuation inputs under IFRS 13. Omitting the IFRS 13 hierarchy disclosure is a frequent audit finding. - Incorrect transfer timing on change of use: IAS 40.65 is explicit—when fair value model is used and an investment property is transferred to owner-occupied, the IAS 16 deemed cost is the fair value at the date of change. Using the original cost instead of fair value at reclassification date is a common error that understates the IAS 16 asset. Key paragraphs to know - IAS 40.5 — Core definition of investment property (land, building, or ROU asset; held for rentals/capital appreciation). - IAS 40.9 — Explicit exclusions: property for sale (IAS 2/IFRS 5), owner-occupied (IAS 16), construction for third parties (IFRS 15). - IAS 40.10 — Guidance on mixed-use properties and the insignificance threshold for splitting components. - IAS 40.30–IAS 40.35 — Subsequent measurement: fair value model and recognition of gains/losses in P&L. - IAS 40.57–IAS 40.65 — Transfer rules: evidenced change of use and the fair value deemed-cost principle on reclassification. - IAS 40.79 — Disclosure requirements, including mandatory fair value disclosure even under cost model.

IAS 40.5 Definition of Investment Property

IAS 40.5 Definition — Core Rule

Under IAS 40.5, investment property is land or a building—or part of a building—or both, held by the owner (or by a lessee as a right-of-use asset) to earn rentals, for capital appreciation, or for both, rather than for use in production or supply of goods/services, for administrative purposes, or for sale in the ordinary course of business.

How IAS 40.5 Definition Works

Held-for-rentals or capital appreciation test (IAS 40.5): The asset must be held primarily to generate rental income, capital gains, or both. If the entity occupies even a portion for its own operations, that portion is owner-occupied property under IAS 16 unless it is insignificant (IAS 40.10). The dual-use split is critical and often misjudged.

Right-of-use assets included (IAS 40.5, amended): Following the 2016 amendments aligned with IFRS 16, a lessee can classify a right-of-use asset arising from a lease as investment property if it meets the IAS 40.5 definition—e.g., a lessee sub-leases the building to third parties and earns rental income.

Exclusions from the definition (IAS 40.9): Property held for sale in the ordinary course of business (→ IAS 2 / IFRS 5), property being constructed for third parties (→ IFRS 15), owner-occupied property (→ IAS 16), and property leased to another entity under a finance lease (→ IFRS 16) are all explicitly excluded.