IAS 40 Investment Property — Core Rule

Investment property is land or a building—or part of a building—held to earn rentals or for capital appreciation, or both, rather than for use in production, administration, or sale in the ordinary course of business (IAS 40.7). After initial recognition, an entity must choose between two measurement models and apply that policy consistently to all investment property: the fair value model, under which changes flow through profit or loss, or the cost model (IAS 40.30).

How IAS 40 Investment Property Works

Recognition and initial classification

An investment property is recognised as an asset when it is probable that the future economic benefits associated with it will flow to the entity and its cost can be measured reliably (IAS 40.16). Classification depends on the substance of the arrangement. Key examples of investment property include:

• Land held for long-term capital appreciation rather than short-term sale
• Land held for a currently undetermined future use
• A building owned by the entity and leased out under one or more operating leases
• A building that is vacant but held to be leased out (IAS 40.8)

Properties that do not qualify—such as property held for sale in the ordinary course of business or property occupied by the entity for its own operations—fall under IAS 2 or IAS 16 instead (IAS 40.9). Where a building has both an investment portion and an owner-occupied portion, the portions are accounted for separately only if they could be sold or leased out separately (IAS 40.10). Judgement is required, and entities must develop and disclose consistent criteria for making this determination (IAS 40.14).

Initial measurement

An owned investment property is measured initially at cost, including transaction costs such as legal fees and property transfer taxes (IAS 40.20, IAS 40.21). Start-up costs, operating losses before the property achieves planned occupancy, and abnormal waste are excluded from cost (IAS 40.23).

Fair value model

After initial recognition, an entity choosing the fair value model measures all investment property at fair value, with any gain or loss recognised in profit or loss for the period in which it arises (IAS 40.33, IAS 40.35). Fair value under IFRS 13 is the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date (IFRS 13.9). When measuring fair value, the entity must ensure the figure reflects rental income from current leases and other assumptions that market participants would apply under current market conditions (IAS 40.40).

Cost model

An entity may instead apply the cost model, measuring investment property at cost less accumulated depreciation and impairment losses—following the same principles as IAS 16 (IAS 16.5). Even under this model, an entity is still required to measure fair value for disclosure purposes (IAS 40.32). Switching from the fair value model to the cost model is permitted only if it produces more relevant and reliable information, which is expected to be rare.

IAS 40 Investment Property — Common Pitfalls

• Misclassifying mixed-use property: Failing to separate the investment and owner-occupied portions when they could be sold independently leads to incorrect measurement.
• Ignoring lease income in fair value: Fair value must reflect current lease terms and market participant assumptions—using a valuation that ignores rental cash flows understates the property's value (IAS 40.40).
• Omitting fair value disclosure under the cost model: Entities using the cost model still have a mandatory fair value disclosure obligation (IAS 40.32).
• Capitalising day-to-day servicing costs: Routine maintenance and servicing costs must be expensed as incurred, not added to the carrying amount (IAS 40.18).
• Inconsistent policy application: The fair value or cost model must be applied to the entire investment property portfolio—cherry-picking is not permitted except in the limited circumstances of IAS 40.32A.

IAS 40 Investment Property — Key Paragraphs

• IAS 40.7 — Defines investment property as held to earn rentals or for capital appreciation, distinguishing it from owner-occupied property.
• IAS 40.16 — Sets out the two recognition criteria: probable future economic benefits and reliable cost measurement.
• IAS 40.20 — Requires initial measurement at cost, including directly attributable transaction costs.
• IAS 40.30 — Establishes the accounting policy choice between the fair value model and the cost model, applied consistently across all investment property.
• IAS 40.35 — Requires gains and losses from fair value changes to be recognised in profit or loss in the period they arise.
• IAS 40.40 — Specifies that fair value must reflect rental income from current leases and prevailing market participant assumptions.