IAS 40 — Investment Property

Overview
IAS 40 Investment Property applies to the accounting for property (land and/or buildings) held to
earn rentals or for capital appreciation (or both). Investment properties are initially measured at
cost and, with some exceptions. may be subsequently measured using a cost model or fair
value model, with changes in the fair value under the fair value model being recognised in profit
or loss.
IAS 40 was reissued in December 2003 and applies to annual periods beginning on or after 1
January 2005.

History of IAS 40

Date Development Comments

October 1984 Exposure Draft E26 Accounting for In-

vestments published

March 1986 IAS 25 Accounting for Investments issued Operative for financial
statements covering periods
beginning on or after 1
January 1987

July 1999 Exposure Draft E64 Investment Comment deadline 31

Property published October 1999

April 2000 IAS 40 Investment Property (2000) Operative for annual

issued financial statements
(Supersedes IAS 25 with respect to investment covering periods beginning
property)
on or after 1 January 2001

May 2002 Exposure Draft Improvements to Comment deadline 16

International Accounting September 2002
Standards (2000) published

18 December 2003 IAS 40 Investment Property (2003) Effective for annual periods
issued beginning on or after 1
January 2005

22 May 2008 Amended by Annual Improvements to Effective for annual periods

IFRSs 2007 (include property under con- beginning on or after 1
struction or development for future use January 2009
within scope)

12 December 2013 Amended by Annual Improvements to Effective for annual periods

IFRSs 2011–2013 Cycle (interrelation- beginning on or after 1 July
ship between IFRS 3 and IAS 40) 2014
 8 December 2016 Amended by Transfers of Investment Effective for annual periods
Property (Amendments to IAS 40) beginning on or after 1 July
2018

Related Interpretations

o None

Amendments under consideration by the IASB

o None

Summary of IAS 40

Definition of investment property

Investment property is property (land or a building or part of a building or both) held (by the
owner or by the lessee under a finance lease) to earn rentals or for capital appreciation or both.
[IAS 40.5]
Examples of investment property: [IAS 40.8]
o land held for long-term capital appreciation

o land held for a currently undetermined future use

o building leased out under an operating lease

o vacant building held to be leased out under an operating lease

o property that is being constructed or developed for future use as investment property
The following are not investment property and, therefore, are outside the scope of IAS 40: [IAS
40.5 and 40.9]
o property held for use in the production or supply of goods or services or for administra-
tive purposes
o property held for sale in the ordinary course of business or in the process of construc-
tion of development for such sale (IAS 2 Inventories)
o property being constructed or developed on behalf of third parties (IAS 11 Construc-
tion Contracts)
o owner-occupied property (IAS 16 Property, Plant and Equipment), including property
held for future use as owner-occupied property, property held for future development
and subsequent use as owner-occupied property, property occupied by employees
and owner-occupied property awaiting disposal
o property leased to another entity under a finance lease
In May 2008, as part of its Annual improvements project, the IASB expanded the scope of IAS
40 to include property under construction or development for future use as an investment
property. Such property previously fell within the scope of IAS 16.

Other classification issues

Property held under an operating lease. A property interest that is held by a lessee under an
operating lease may be classified and accounted for as investment property provided that: [IAS
40.6]
o the rest of the definition of investment property is met

o the operating lease is accounted for as if it were a finance lease in accordance with
IAS 17 Leases
o the lessee uses the fair value model set out in this Standard for the asset recognised
An entity may make the foregoing classification on a property-by-property basis.
Partial own use. If the owner uses part of the property for its own use, and part to earn rentals
or for capital appreciation, and the portions can be sold or leased out separately, they are
accounted for separately. Therefore the part that is rented out is investment property. If the
portions cannot be sold or leased out separately, the property is investment property only if the
owner-occupied portion is insignificant. [IAS 40.10]
Ancillary services. If the entity provides ancillary services to the occupants of a property held
by the entity, the appropriateness of classification as investment property is determined by the
significance of the services provided. If those services are a relatively insignificant component of
the arrangement as a whole (for instance, the building owner supplies security and maintenance
services to the lessees), then the entity may treat the property as investment property. Where
the services provided are more significant (such as in the case of an owner-managed hotel), the
property should be classified as owner-occupied. [IAS 40.13]
Intracompany rentals. Property rented to a parent, subsidiary, or fellow subsidiary is not in-
vestment property in consolidated financial statements that include both the lessor and the
lessee, because the property is owner-occupied from the perspective of the group. However,
such property could qualify as investment property in the separate financial statements of the
lessor, if the definition of investment property is otherwise met. [IAS 40.15]

Recognition
Investment property should be recognised as an asset when it is probable that the future
economic benefits that are associated with the property will flow to the entity, and the cost of the
property can be reliably measured. [IAS 40.16]

Initial measurement
Investment property is initially measured at cost, including transaction costs. Such cost should
not include start-up costs, abnormal waste, or initial operating losses incurred before the invest-
ment property achieves the planned level of occupancy. [IAS 40.20 and 40.23]

Measurement subsequent to initial recognition

IAS 40 permits entities to choose between: [IAS 40.30]
o a fair value model, and

o a cost model.
One method must be adopted for all of an entity's investment property. Change is permitted only
if this results in a more appropriate presentation. IAS 40 notes that this is highly unlikely for a
change from a fair value model to a cost model.

Fair value model

Investment property is remeasured at fair value, which is the price that would be received to sell
an asset or paid to transfer a liability in an orderly transaction between market participants at the
measurement date. [IAS 40.5] Gains or losses arising from changes in the fair value of invest-
ment property must be included in net profit or loss for the period in which it arises. [IAS 40.35]
Fair value should reflect the actual market state and circumstances as of the balance sheet
date. [IAS 40.38] The best evidence of fair value is normally given by current prices on an active
market for similar property in the same location and condition and subject to similar lease and
other contracts. [IAS 40.45] In the absence of such information, the entity may consider current
prices for properties of a different nature or subject to different conditions, recent prices on less
active markets with adjustments to reflect changes in economic conditions, and discounted cash
flow projections based on reliable estimates of future cash flows. [IAS 40.46]
There is a rebuttable presumption that the entity will be able to determine the fair value of an in-
vestment property reliably on a continuing basis. However: [IAS 40.53]
o If an entity determines that the fair value of an investment property under construction
is not reliably determinable but expects the fair value of the property to be reliably
determinable when construction is complete, it measures that investment property
under construction at cost until either its fair value becomes reliably determinable or
construction is completed.
o If an entity determines that the fair value of an investment property (other than an in-
vestment property under construction) is not reliably determinable on a continuing
basis, the entity shall measure that investment property using the cost model in IAS
16. The residual value of the investment property shall be assumed to be zero. The
entity shall apply IAS 16 until disposal of the investment property.
Where a property has previously been measured at fair value, it should continue to be
measured at fair value until disposal, even if comparable market transactions become less
frequent or market prices become less readily available. [IAS 40.55]

Cost model
After initial recognition, investment property is accounted for in accordance with the cost model
as set out in IAS 16 Property, Plant and Equipment – cost less accumulated depreciation and
less accumulated impairment losses. [IAS 40.56]

Transfers to or from investment property classification

Transfers to, or from, investment property should only be made when there is a change in use,
evidenced by one or more of the following: [IAS 40.57 (note that this list was changed from an
exhaustive list to an non-exhaustive list of examples by Transfers of Investment Property in
December 2016 effective 1 January 2018) ]
o commencement of owner-occupation (transfer from investment property to owner-oc-
cupied property)
 o commencement of development with a view to sale (transfer from investment property
to inventories)
o end of owner-occupation (transfer from owner-occupied property to investment
property)
o commencement of an operating lease to another party (transfer from inventories to in-
vestment property)
o end of construction or development (transfer from property in the course of construc-
tion/development to investment property
When an entity decides to sell an investment property without development, the property is not
reclassified as inventory but is dealt with as investment property until it is derecognised. [IAS
40.58]
The following rules apply for accounting for transfers between categories:
o for a transfer from investment property carried at fair value to owner-occupied property
or inventories, the fair value at the change of use is the 'cost' of the property under
its new classification [IAS 40.60]
o for a transfer from owner-occupied property to investment property carried at fair
value, IAS 16 should be applied up to the date of reclassification. Any difference
arising between the carrying amount under IAS 16 at that date and the fair value is
dealt with as a revaluation under IAS 16 [IAS 40.61]
o for a transfer from inventories to investment property at fair value, any difference
between the fair value at the date of transfer and it previous carrying amount should
be recognised in profit or loss [IAS 40.63]
o when an entity completes construction/development of an investment property that will
be carried at fair value, any difference between the fair value at the date of transfer
and the previous carrying amount should be recognised in profit or loss. [IAS 40.65]
When an entity uses the cost model for investment property, transfers between categories do
not change the carrying amount of the property transferred, and they do not change the cost of
the property for measurement or disclosure purposes.

Disposal
An investment property should be derecognised on disposal or when the investment property is
permanently withdrawn from use and no future economic benefits are expected from its
disposal. The gain or loss on disposal should be calculated as the difference between the net
disposal proceeds and the carrying amount of the asset and should be recognised as income or
expense in the income statement. [IAS 40.66 and 40.69] Compensation from third parties is
recognised when it becomes receivable. [IAS 40.72]

Disclosure
Both Fair Value Model and Cost Model [IAS 40.75]
 o whether the fair value or the cost model is used

o if the fair value model is used, whether property interests held under operating leases
are classified and accounted for as investment property
o if classification is difficult, the criteria to distinguish investment property from owner-
occupied property and from property held for sale
o the extent to which the fair value of investment property is based on a valuation by a
qualified independent valuer; if there has been no such valuation, that fact must be
disclosed
o the amounts recognised in profit or loss for:

o rental income from investment property

o direct operating expenses (including repairs and maintenance) arising
from investment property that generated rental income during the period
o direct operating expenses (including repairs and maintenance) arising
from investment property that did not generate rental income during the
period
o the cumulative change in fair value recognised in profit or loss on a sale
from a pool of assets in which the cost model is used into a pool in which
the fair value model is used
o restrictions on the realisability of investment property or the remittance of income and
proceeds of disposal
o contractual obligations to purchase, construct, or develop investment property or for
repairs, maintenance or enhancements
Additional Disclosures for the Fair Value Model [IAS 40.76]
o a reconciliation between the carrying amounts of investment property at the beginning
and end of the period, showing additions, disposals, fair value adjustments, net
foreign exchange differences, transfers to and from inventories and owner-occupied
property, and other changes [IAS 40.76]
o significant adjustments to an outside valuation (if any) [IAS 40.77]

o if an entity that otherwise uses the fair value model measures an item of investment
property using the cost model, certain additional disclosures are required [IAS 40.78]
Additional Disclosures for the Cost Model [IAS 40.79]
o the depreciation methods used

o the useful lives or the depreciation rates used

o the gross carrying amount and the accumulated depreciation (aggregated with accu-
mulated impairment losses) at the beginning and end of the period
o a reconciliation of the carrying amount of investment property at the beginning and
end of the period, showing additions, disposals, depreciation, impairment recognised
or reversed, foreign exchange differences, transfers to and from inventories and
owner-occupied property, and other changes
o the fair value of investment property. If the fair value of an item of investment property
cannot be measured reliably, additional disclosures are required, including, if
possible, the range of estimates within which fair value is highly likely to lie