Advanced Financial Accounting

AQ054-3-2

IAS 40 Investment Property

 Learning outcomes

After you have studied this chapter, you

should be able to:
• define investment property
• identify the recognition criteria
• apply the accounting treatment of
investment property
• disclose the disclosure requirements as
per IAS 40

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 Definition

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, rather than for: 
a) Use in the production or supply of goods or
services or for administrative purposes, or 
b) Sale in the ordinary course of business

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 Examples of investment
property
1. Land held for long-term capital appreciation rather than for
short-term sale in the ordinary course of business
2. A building owned by the reporting entity (or held by the
entity under a finance lease) and leased out under an
operating lease
3. A building held by a parent and leased to a subsidiary.
Note, however, that while this is regarded as an investment
property in the individual parent company financial statements,
in the consolidated financial statements this property will be
regarded as owner-occupied (because it is occupied by the
group) and will therefore be treated in accordance with IAS 16.
4. Property that is being constructed or developed for future
use as an investment property

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 Illustration 1

Rich Co owns a piece of land. The directors

have not yet decided whether to build a
factory on it for use in its business or to keep
it and sell it when its value has risen.

Would this be classified as an investment

property under IAS 40?

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 Solution for Illustration 1

Yes. If an entity has not determined that it

will use the land either as an owner-
occupied property or for short-term sale in
the ordinary course of business, the land is
considered to be held for capital
appreciation.

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 Recognition

Investment property should be recognised as

an asset when two conditions are met:
1) It is probable that the future economic
benefits that are associated with the
investment property will flow to the entity.
2) The cost of the investment property can be
measured reliably.

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 Initial measurement

• An investment property should be measured

initially at its cost, including transaction costs.
• A property interest held under a lease and
classified as an investment property shall be
accounted for as if it were a finance lease. The
asset is recognised at the LOWER of the fair
value of the property and the present value of
the minimum lease payments. An equivalent
amount is recognised as a liability

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 Subsequent measurement

• Investment properties should initially be

measured at cost.
• IAS 40 then gives a choice for subsequent
measurement between the following:
a) Cost model
b) Fair value model
• Once the model is chosen it must be used
for all investment properties.

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 Cost model

• Under the cost model the asset should be

accounted for in line with the cost model
laid out in IAS 16.

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 Fair value model

Under the fair value model:

• the asset is revalued to fair value at the
end of each year
• the gain or loss is shown directly in the
statement of profit or loss (not other
comprehensive income)
• no depreciation is charged on the asset.

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 Fair value model
The standard elaborates on issues relating to fair value.
a) Fair value assumes that an orderly transaction has taken place
between market participants.
b) A buyer participating in an orderly transaction is motivated but
not compelled to buy. A seller participating in an orderly
transaction is neither an over-eager nor a forced seller, nor one
prepared to sell at any price or to hold out for a price not
considered reasonable in the current market.
c) Fair value is not the same as 'value in use' as defined in IAS 36
Impairment of assets.
d) In those rare cases where the entity cannot determine the fair
value of an investment property reliably, the cost model in IAS
16 must be applied until the investment property is disposed of.
The residual value must be assumed to be zero.
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 Fair value model

• This was the first time that the IASB has

allowed a fair value model for non-financial
assets.
• This is not the same as a revaluation,
where increases in carrying amount above a
cost-based measure are recognised as
revaluation surplus.
• Under the fair-value model all changes in
fair value are recognised in profit or loss.

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 Illustration 2
Celine, a manufacturing company, purchases a property for
RM1 million on 1 January 20X1 for its investment potential.
The land element of the cost is believed to be RM400,000,
and the buildings element is expected to have a useful life of
50 years. At 31 December 20X1, local property indices
suggest that the fair value of the property has risen to RM1.1
million.

Required:
Show how the property would be presented in the financial
statements as at 31 December 20X1 if Celine adopts:
(a) the cost model
(b) the fair value model.
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 Solution for Illustration 2

a) Cost model
Depreciation in the year is = RM12,000
Therefore:
 in the statement of profit or loss, there will
be a depreciation charge of RM12,000
 in the statement of financial position, the
property will be shown at a carrying
amount of RM1,000,000 – RM12,000 =
RM988,000

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 Solution for Illustration 2

b) Fair value model

 In the statement of financial position,
the property will be shown at its fair
value of RM1.1 million.
 In the statement of profit or loss, there
will be a gain of RM0.1 million
representing the fair value adjustment.
 No depreciation is charged.

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 Disclosures

1. Choice of fair value model or cost model

Whether property interests held as operating
leases are included in investment property
2. Criteria for classification as investment property
3. Assumptions in determining fair value
4. Use of independent professional valuer
(encouraged but not required)
5. Rental income and expenses
6. Any restrictions or obligations

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 Disclosures

9. Additional disclosures
a) Fair value model
An entity that adopts this must also disclose a
reconciliation of the carrying amount of the
investment property at the beginning and end
of the period.
b) Cost model
These relate mainly to the depreciation
method. In addition, an entity which adopts the
cost model must disclose the fair value of the
investment property.
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 References

• BPP Learning Media, 2016. Tangible non-

current assets. In: ACCA Approved Paper
F7 Financial Reporting. London: BPP
Learning Media Ltd, p. 47 to 50.
• The Board, 2017. IAS 40 Investment
Property. London: IFRS Foundation.

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