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

Core rule Under IAS 40, an entity must choose either the fair value model or the cost model as its accounting policy for all investment property, applying it consistently across the entire portfolio — with fair value gains and losses taken to profit or loss under the fair value model, while the cost model mirrors IAS 16 depreciation but still requires fair value disclosure. How it works - Policy election is entity-wide (IAS 40.30): Once chosen, the model applies to all investment property. Switching from fair value to cost is only permitted in the rare circumstance that it results in more relevant information — in practice, regulators view a move away from fair value as almost never justified (IAS 40.31). - Fair value model — measurement (IAS 40.33–40.35): After initial recognition at cost (including transaction costs), the asset is remeasured to fair value at each reporting date. No depreciation is charged. The entire change in fair value — gain or loss — is recognised immediately in profit or loss for the period in which it arises. - Fair value determination (IAS 40.38–40.52): Fair value must reflect market conditions at the reporting date. IFRS 13 hierarchy applies: Level

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?

1 (quoted prices), Level 2 (observable inputs), or Level 3 (unobservable inputs, discounted cash flow models). Valuers must consider location, condition, lease terms, and market rents. If fair value cannot be reliably measured on an ongoing basis, the property must be measured using the cost model (IAS 40.53). - Cost model (IAS 40.56): The asset is carried at cost less accumulated depreciation and accumulated impairment losses, exactly as prescribed by IAS 16. Depreciation components must be identified. Impairment testing under IAS 36 applies annually or when indicators exist. - Mandatory fair value disclosure under cost model (IAS 40.79(e)): Even when applying the cost model, an entity must disclose the fair value of its investment property in the notes. This is one of IAS 40's most frequently overlooked requirements — you carry at depreciated cost but must still obtain a fair value estimate. - Transfers (IAS 40.57–IAS 40.65): Transfers to or from investment property are only permitted when there is a change in use evidenced by a specific event (e.g., commencement of owner-occupation, commencement of development for sale). Under the fair value model, any difference at transf

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?

er date between carrying amount and fair value is treated as a revaluation gain or loss. Practical example Scenario: Entity A acquires a commercial building for €5,000,000 on 1 January 20X1 as investment property. At 31 December 20X1, fair value is €5,350,000. Under the cost model, the building has a 40-year useful life (€125,000 annual depreciation, no residual value). Fair value model — year-end entry: | Account | Dr (€) | Cr (€) | |---|---|---| | Investment Property | 350,000 | | | Fair Value Gain (P&L) | | 350,000 | No depreciation is charged. Carrying amount: €5,350,000. Cost model — year-end entry: | Account | Dr (€) | Cr (€) | |---|---|---| | Depreciation Expense (P&L) | 125,000 | | | Accumulated Depreciation | | 125,000 | Carrying amount: €4,875,000. Fair value of €5,350,000 must still be disclosed in the notes per IAS 40.79(e). P&L impact difference in year 1: Fair value model shows a net gain of €350,000; cost model shows a net charge of €125,000 — a €475,000 swing in reported earnings. Common pitfalls - Mixing models within a portfolio: Some practitioners incorrectly apply the fair value model to prime assets and cost model to secondary assets. IAS 40.30 mandates a

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?

single policy for the entire class — the only permitted exception is where part of the portfolio backs insurance liabilities (IAS 40.32A). - Omitting the fair value note under the cost model: Entities adopting the cost model frequently fail to obtain or disclose current fair values (IAS 40.79(e)). Auditors should specifically test that an independent valuation or credible internal estimate supports this disclosure. - Treating fair value movements as OCI: IAS 40 fair value gains and losses go to profit or loss, not other comprehensive income. This contrasts sharply with IAS 16's revaluation model where surpluses go to OCI (revaluation reserve). Confusing the two is a common exam error and a real-world misclassification risk. Key paragraphs to know - IAS 40.30–31 — accounting policy election; restriction on switching from fair value to cost - IAS 40.33–35 — fair value model measurement and P&L recognition of gains/losses - IAS 40.53 — exception where fair value cannot be reliably measured - IAS 40.56 — cost model reference back to IAS 16 - IAS 40.79(e) — mandatory fair value disclosure even when cost model is applied - IAS 40.57–65 — transfer rules and accounting on change of

IAS 40 Fair Value vs Cost Model

IAS 40 Fair — Core Rule

Under IAS 40, an entity must choose either the fair value model or the cost model as its accounting policy for all investment property, applying it consistently across the entire portfolio — with fair value gains and losses taken to profit or loss under the fair value model, while the cost model mirrors IAS 16 depreciation but still requires fair value disclosure.

How IAS 40 Fair Works

Policy election is entity-wide (IAS 40.30): Once chosen, the model applies to all investment property. Switching from fair value to cost is only permitted in the rare circumstance that it results in more relevant information — in practice, regulators view a move away from fair value as almost never justified (IAS 40.31).

Fair value model — measurement (IAS 40.33–40.35): After initial recognition at cost (including transaction costs), the asset is remeasured to fair value at each reporting date. No depreciation is charged. The entire change in fair value — gain or loss — is recognised immediately in profit or loss for the period in which it arises.

Fair value determination (IAS 40.38–40.52): Fair value must reflect market conditions at the reporting date. IFRS 13 hierarchy applies: Level 1 (quoted prices), Level 2 (observable inputs), or Level 3 (unobservable inputs, discounted cash flow models). Valuers must consider location, condition, lease terms, and market rents. If fair value cannot be reliably measured on an ongoing basis, the property must be measured using the cost model (IAS 40.53).

Cost model (IAS 40.56): The asset is carried at cost less accumulated depreciation and accumulated impairment losses, exactly as prescribed by IAS 16. Depreciation components must be identified. Impairment testing under IAS 36 applies annually or when indicators exist.

Mandatory fair value disclosure under cost model (IAS 40.79(e)): Even when applying the cost model, an entity must disclose the fair value of its investment property in the notes. This is one of IAS 40's most frequently overlooked requirements — you carry at depreciated cost but must still obtain a fair value estimate.

Transfers (IAS 40.57–IAS 40.65): Transfers to or from investment property are only permitted when there is a change in use evidenced by a specific event (e.g., commencement of owner-occupation, commencement of development for sale). Under the fair value model, any difference at transfer date between carrying amount and fair value is treated as a revaluation gain or loss.

IAS 40 Fair — Practical Example

Scenario: Entity A acquires a commercial building for €5,000,000 on 1 January 20X1 as investment property. At 31 December 20X1, fair value is €5,350,000. Under the cost model, the building has a 40-year useful life (€125,000 annual depreciation, no residual value).

Fair value model — year-end entry

Account	Dr (€)	Cr (€)
Investment Property	350,000
Fair Value Gain (P&L)		350,000

No depreciation is charged. Carrying amount: €5,350,000.

Cost model — year-end entry

Account	Dr (€)	Cr (€)
Depreciation Expense (P&L)	125,000
Accumulated Depreciation		125,000

Carrying amount: €4,875,000. Fair value of €5,350,000 must still be disclosed in the notes per IAS 40.79(e).

P&L impact difference in year 1: Fair value model shows a net gain of €350,000; cost model shows a net charge of €125,000 — a €475,000 swing in reported earnings.

IAS 40 Fair — Common Pitfalls

Mixing models within a portfolio: Some practitioners incorrectly apply the fair value model to prime assets and cost model to secondary assets. IAS 40.30 mandates a single policy for the entire class — the only permitted exception is where part of the portfolio backs insurance liabilities (IAS 40.32A).

Omitting the fair value note under the cost model: Entities adopting the cost model frequently fail to obtain or disclose current fair values (IAS 40.79(e)). Auditors should specifically test that an independent valuation or credible internal estimate supports this disclosure.

Treating fair value movements as OCI: IAS 40 fair value gains and losses go to profit or loss, not other comprehensive income. This contrasts sharply with IAS 16's revaluation model where surpluses go to OCI (revaluation reserve). Confusing the two is a common exam error and a real-world misclassification risk.

IAS 40 Fair — Key Paragraphs

IAS 40.30–31 — accounting policy election; restriction on switching from fair value to cost
IAS 40.33–35 — fair value model measurement and P&L recognition of gains/losses
IAS 40.53 — exception where fair value cannot be reliably measured
IAS 40.56 — cost model reference back to IAS 16
IAS 40.79(e) — mandatory fair value disclosure even when cost model is applied
IAS 40.57–65 — transfer rules and accounting on change of use