How do the fair value and cost models differ under IAS 40?

Under IAS 40, an entity must choose either the fair value model or the cost model as its accounting policy for investment property and apply that policy consistently across its entire portfolio (IAS 40.30). The two models produce fundamentally different balance sheet values and P&L effects. Under the fair value model, every change in property value flows through profit or loss. Under the cost model, the asset is depreciated and tested for impairment — but fair value must still be disclosed. - Policy election is entity-wide (IAS 40.30): The chosen model applies to all investment property. IAS 40.31 confirms that a voluntary change in accounting policy is only permitted when it produces more reliable and relevant information — in practice, switching away from fair value is extremely rare and requires strong justification. - Initial measurement for both models: All investment property is initially measured at cost, including transaction costs (IAS 40.20). This is the common starting point before the two models diverge. - Fair value model — ongoing measurement (IAS 40.33): After initial recognition, the entity remeasures all investment property to fair value at each reporting date. No depreciation is charged. Any gain or loss from a change in fair value is recognised immediately in profit or loss for the period in which it arises (IAS 40.35).

Under IAS 40, how should an entity account for a transfer of a property from inventory to investment property under the fair value model, and what P&L impact arises at the transfer date?

- What fair value reflects (IAS 40.40): When measuring fair value under IFRS 13, the entity must ensure the figure reflects rental income from current leases and other assumptions that market participants would use under current market conditions. This means location, condition, lease terms, and market rents all feed into the valuation. - Cost model: The asset is carried at cost less accumulated depreciation and accumulated impairment losses, applying the same principles as IAS 16 (IAS 16.5). Component depreciation must be identified and impairment testing under IAS 36 applies whenever indicators exist (IAS 40.33 references IAS 16 and IAS 36 for cost model application). - Fair value disclosure is mandatory under the cost model (IAS 40.32): Even entities that choose the cost model are required to measure the fair value of their investment property — either for measurement or for disclosure purposes. Fair value cannot simply be ignored because the cost model was elected. - Mixing models within a portfolio: Entities sometimes attempt to apply different models to different properties. IAS 40.30 does not permit this as a general rule — the election is portfolio-wide, with limited exceptions under IAS 40.32A for properties backing linked liabilities.

If an investment property's fair value cannot be reliably measured on an ongoing basis under IAS 40.53, what are the specific conditions and consequences, including whether the cost model then applies permanently?

- Forgetting fair value disclosure under the cost model: Choosing the cost model does not eliminate the fair value obligation. IAS 40.32 requires all entities to measure fair value for disclosure purposes even when they carry property at depreciated cost. - Treating fair value changes as OCI: Under the fair value model, movements go directly to profit or loss under IAS 40.35 — not to other comprehensive income. This is a key difference from the IAS 16 revaluation model, where surpluses go to OCI. - No depreciation under fair value model: Entities sometimes inadvertently charge depreciation alongside fair value remeasurement. Once the fair value model is adopted, depreciation ceases entirely — the full fair value movement replaces it. - Assuming cost approximates fair value without evidence: IAS 40.48 acknowledges that in exceptional cases fair value may not be reliably measurable on initial acquisition, but this is a narrow exception and does not justify using cost as a proxy on an ongoing basis without clear evidence.

How does IAS 40 interact with IFRS 13 when determining Level 3 fair value for an investment property in an inactive market — what valuation techniques and disclosures are required?

- IAS 40.30 — Requires an entity to elect either the fair value model or cost model and apply it to all investment property. - IAS 40.31 — Restricts voluntary changes in accounting policy to situations where the new policy produces more reliable and relevant information. - IAS 40.33 — Requires entities adopting the fair value model to remeasure all investment property to fair value after initial recognition. - IAS 40.35 — Gains and losses from fair value changes must be recognised in profit or loss in the period they arise. - IAS 40.40 — Fair value must reflect rental income from current leases and market participant assumptions under current conditions. - IAS 40.32 — All entities, including cost model users, must measure fair value of investment property for measurement or disclosure purposes.

IAS 40 Fair Value vs Cost Model

IAS 40 Fair Value vs Cost Model — Core Rule

Under IAS 40, an entity must choose either the fair value model or the cost model as its accounting policy for investment property and apply that policy consistently across its entire portfolio (IAS 40.30). The two models produce fundamentally different balance sheet values and P&L effects. Under the fair value model, every change in property value flows through profit or loss. Under the cost model, the asset is depreciated and tested for impairment — but fair value must still be disclosed.

How IAS 40 Fair Value vs Cost Model Works

Policy election is entity-wide (IAS 40.30): The chosen model applies to all investment property. IAS 40.31 confirms that a voluntary change in accounting policy is only permitted when it produces more reliable and relevant information — in practice, switching away from fair value is extremely rare and requires strong justification.

Initial measurement for both models: All investment property is initially measured at cost, including transaction costs (IAS 40.20). This is the common starting point before the two models diverge.

Fair value model — ongoing measurement (IAS 40.33): After initial recognition, the entity remeasures all investment property to fair value at each reporting date. No depreciation is charged. Any gain or loss from a change in fair value is recognised immediately in profit or loss for the period in which it arises (IAS 40.35).

What fair value reflects (IAS 40.40): When measuring fair value under IFRS 13, the entity must ensure the figure reflects rental income from current leases and other assumptions that market participants would use under current market conditions. This means location, condition, lease terms, and market rents all feed into the valuation.

Cost model: The asset is carried at cost less accumulated depreciation and accumulated impairment losses, applying the same principles as IAS 16 (IAS 16.5). Component depreciation must be identified and impairment testing under IAS 36 applies whenever indicators exist (IAS 40.33 references IAS 16 and IAS 36 for cost model application).

Fair value disclosure is mandatory under the cost model (IAS 40.32): Even entities that choose the cost model are required to measure the fair value of their investment property — either for measurement or for disclosure purposes. Fair value cannot simply be ignored because the cost model was elected.

IAS 40 Fair Value vs Cost Model — Common Pitfalls

Mixing models within a portfolio: Entities sometimes attempt to apply different models to different properties. IAS 40.30 does not permit this as a general rule — the election is portfolio-wide, with limited exceptions under IAS 40.32A for properties backing linked liabilities.

Forgetting fair value disclosure under the cost model: Choosing the cost model does not eliminate the fair value obligation. IAS 40.32 requires all entities to measure fair value for disclosure purposes even when they carry property at depreciated cost.

Treating fair value changes as OCI: Under the fair value model, movements go directly to profit or loss under IAS 40.35 — not to other comprehensive income. This is a key difference from the IAS 16 revaluation model, where surpluses go to OCI.

No depreciation under fair value model: Entities sometimes inadvertently charge depreciation alongside fair value remeasurement. Once the fair value model is adopted, depreciation ceases entirely — the full fair value movement replaces it.

Assuming cost approximates fair value without evidence: IAS 40.48 acknowledges that in exceptional cases fair value may not be reliably measurable on initial acquisition, but this is a narrow exception and does not justify using cost as a proxy on an ongoing basis without clear evidence.

IAS 40 Fair Value vs Cost Model — Key Paragraphs

IAS 40.30 — Requires an entity to elect either the fair value model or cost model and apply it to all investment property.
IAS 40.31 — Restricts voluntary changes in accounting policy to situations where the new policy produces more reliable and relevant information.
IAS 40.33 — Requires entities adopting the fair value model to remeasure all investment property to fair value after initial recognition.
IAS 40.35 — Gains and losses from fair value changes must be recognised in profit or loss in the period they arise.
IAS 40.40 — Fair value must reflect rental income from current leases and market participant assumptions under current conditions.
IAS 40.32 — All entities, including cost model users, must measure fair value of investment property for measurement or disclosure purposes.