Overview

Investment property is property held to earn rentals or for capital appreciation or

both.
Investment property accounting is required for all investment property.
A portion of a dual-use property is classified as investment property only if the
portion could be sold or leased out under a finance lease. Otherwise the entire
property is classified as property, plant and equipment, unless the portion of the
property used for own-use is insignificant.
When ancillary services are provided, a property is classified as investment property
if such services are a relatively insignificant component of the arrangement as a
whole.
When a property is managed by a third party, criteria should be developed in order to
classify such property as either investment property or property, plant and
equipment on a consistent basis.
Investment property is recognized initially at cost.
Subsequent to initial recognition, all investment property should be measured either
by using the fair value model (subject to limited exceptions) or by using a cost model.
Disclosure of the fair value of all investment properties is required, regardless of the
measurement model used.
Subsequent expenditure is capitalized only when it is probable that it will give rise to
future economic benefits in excess of the originally assessed standard of
performance of the asset.
Transfers to or from investment property can only be made when there has been a
change in the use of the property.
The gain or loss on disposal is the difference between the net disposal proceeds and
the carrying amount of the property.
1. Definition
IAS 40 is not a specialized industry standard. Therefore, determining whether a property is
investment property depends upon the use of the property rather than the type of entity
that holds the property.
Investment property is property held to earn rental income or for capital appreciation or
both, rather than for:
use in the production or supply of goods or services or for administrative purposes; or
sale in the ordinary course of business.
For example, a retail site owned by entity A, but leased out to third parties in return for
rental income, is an investment property; however, a factory owned and used by entity B is
not an investment property because it is used in the production of goods.
Although the above definition appears relatively straightforward, determining what is or is
not an investment property raises some difficult practical issues. Some of these problem
areas are discussed below.
Buildings
An investment property may comprise:
land;
a building or part of a building; or
both.
Equipment and furnishings

Equipment and furnishings physically attached to a building are considered to be part of the
investment property. So, for example, lifts, escalators, air conditioning units, decorations and
installed furniture such as built-in cabinetry would be included as part of the cost and fair
value of the investment property and would not be classified separately, as property, plant
and equipment.
Leased property
IAS 17 (lease accounting), rather than IAS 40 applies to:
property held under an operating lease in a lessees financial statements; and
property leased out under a finance lease in a lessors financial statements.
Forthcoming requirements
Revised IAS 17 clarifies that a lease of land and buildings should be treated as separate
leases of the land and of the building. As a result the leases may be classified differently
(e.g., the land as an operating lease and the building as a finance lease).
Forthcoming requirements
The revised standard permits property held by a lessee under an operating lease to be
classified as investment property if the rest of the definition of investment property is met
and the lessee measures the property at fair value. In such cases the leasehold interest
would be accounted for as if it were a finance lease. The use of the fair value model for
property held by a lessee under an operating lease (by classifying the property interest as
an investment property) can be elected on an asset-by-asset basis. However, if the fair value
model is used for one such asset, all owned investment properties also must be measured
using the fair value model.
Inventory versus investment property
Property that is held for sale in the ordinary course of business, or which is in the process of
construction or development for such sale, is classified as inventory (see 3.7) rather than as
investment property.
Property as collateral
Often financial institutions take possession of property that was originally pledged as
security for loans. Such property should be classified as either investment property or
property, plant and equipment in the normal way.
Consolidated versus entity financial statements
In determining the classification of a property in consolidated financial statements, the
definition is assessed from the point of view of the group as a single entity. While this is
consistent with the requirement for the consolidated financial statements to be presented as
those of a single entity, it means that a property might be classified differently in separate
entity and consolidated financial statements.
Dual-use property
Property often has dual purposes whereby part of the property is used for own-use
activities that fall within the scope of IAS 16, the standard on property, plant and equipment
and part of the property is used for activities that fall within the scope of IAS 40. A portion of
a dual-use property is classified as an investment property only if the portion could be sold
or leased out separately under a finance lease; in some countries the ability to sell a portion
of a property is referred to as strata title or condominiumization.
Ancillary services
In many cases the owner of a property provides ancillary services to tenants. In such cases
the key to identifying investment property is to decide whether the services provided are a

relatively insignificant component of the arrangement as a whole. The standard gives two
examples of properties where ancillary services are provided:
an owner-managed hotel is not an investment property because ancillary services provided
are a
significant component of the arrangement; and
an office building where security and maintenance services are provided by the owner is an
investment property because these ancillary services are an insignificant component of
the arrangement.
Properties managed by others
When a property is operated by a third party under a management contract, it is necessary
to apply judgment in assessing whether the definition of investment property is met. The
standard acknowledges that the terms of management contracts vary widely, and requires
an entity to develop criteria that are applied consistently in making an assessment.
2. Recognition
If an entity acquires a piece of land with the intention of constructing an investment
property on it, in our view, during the construction phase only the building should be
accounted for as property, plant and equipment in accordance with IAS 16. The land
component of the property should be classified as investment property immediately.
Investment property is recognized as an asset when:
it is probable that the future economic benefits that are associated with the investment
property will flow to this entity; and
the cost of the investment property can be measured reliably.
3. Initial measurement
Investment property is measured initially at cost except when the asset is transferred from
another balance sheet category.
The cost of investment property includes transaction costs and directly attributable
expenditure on preparing the asset for its intended use. The principles discussed in respect
of attributing cost to property, plant and equipment apply equally to the recognition of
investment property. In addition, clearly identified inefficiencies and initial operating losses
should be expensed as incurred, which also is similar to property, plant and equipment.
4. Subsequent measurement
Subsequent to initial recognition an entity must make an accounting policy election, which
should be applied consistently, to either:
measure all investment property based on the fair value model, subject to limited
exceptions that are discussed below; or
measure all investment property based on the cost model.
Fair value model
General requirements
If an entity chooses to measure investment property using the fair value model, it must
measure the property at fair value at each balance sheet date, with changes in fair value
recognized in the income statement. Considerable guidance is provided on determining the
fair value of investment property, which generally involves consideration of:
the actual current market for that type of property in that type of location at a specific date
(i.e., the balance sheet date) and current market expectations;
rental income from current leases and market expectations regarding possible future lease
terms;

hypothetical sellers and buyers, who are reasonably informed about the current market and
who are motivated, but not compelled, to transact in that market on an arms length basis;
and
investor expectations, for example, when valuation has been done by independent valuer
in the past.

Exemption from fair value

In exceptional cases there will be clear evidence on initial recognition of a particular
investment property that its fair value cannot be determined reliably on a continuing basis.
In such cases the property in question is measured using the cost model in accordance with
IAS 16 (see 3.2), except that the residual value is deemed to be zero in all cases. The
exemption applies only when comparable market transactions are infrequent and alternative
estimates of fair value (e.g., based on discounted cash flow projections) are not available.
Cost model
If an entity chooses to measure investment property using the cost model, the property is
accounted for in accordance with the cost model for property, plant and equipment in IAS 16
(i.e., at cost less accumulated depreciation (see 3.2) and less any accumulated impairment
losses). However, the property continues to be classified as investment property in the
balance sheet.