IAS – 40:

INVESTMENT PROPERTY

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Nature of investment properties
An investment property is land or buildings, or both, that is held by an
entity to earn rentals and/or for its capital appreciation potential.
In summary, an investment property generates cash flows largely
independent of the other assets held by an entity. This distinguishes
investment property from owner-occupied property, which is held by
the owner for use in the production or supply of goods or services, for
administrative purposes or for sale in the ordinary course of business.

The definition of an investment property includes a building that is

currently vacant but is held with a view to it being let out and an existing
investment property that is being redeveloped with a view to its
continued use as an investment property.
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Nature of investment properties
IAS 40 makes it clear that where a property is being
constructed for future use as an investment property it does
not meet the investment property definition until the
construction or development is complete. During
construction the property should be recognised in accordance
with IAS 16 Property, plant and equipment.

A property held under an operating lease may be

classified by the lessee as an investment property if
certain conditions are met.
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Scope
IAS 40 applies to the recognition, measurement and
disclosure of investment properties. It does not deal with
areas that are more specifically dealt with in other
international standards.
For example, the recognition of rental income is
accounted for under IAS 18 Revenue.

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Scope
Illustration 1
Which of the following should be treated as an investment property
according to IAS 40?
1. An entity has a factory which due to a decline in activity is no
longer required and is now being held for sale.
This is a property held for sale in the ordinary course of business and is not an
investment property.
2. Farming land is purchased for its investment potential. Planning
permission has not been obtained for building constructions of any kind.
This is land held for long-term capital appreciation and therefore is an
investment property. The lack of planning permission is not relevant as values
can appreciate in the absence of permission to build. 5
Scope
Illustration 1
3. A factory is in the process of being constructed on behalf of
the government.
This is property being constructed for a third party and would
therefore be dealt with under IAS 11 Construction contracts.
4. A new office building used by an insurance entity as its
head office which was purchased specifically in the centre
of a major City in order to exploit its capital gains potential.
This building generates cash flows as part of a larger organisation.
This is therefore an owner-occupied property dealt with under IAS 16
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rather than IAS 40.
Initial recognition
An investment property should be recognised when the normal
conditions for asset recognition are satisfied. These are when:
 it is probable that the future economic benefits associated with
the investment property will flow to the entity; and
 the cost of the investment property can be measured reliably.

An investment property should initially be measured at its cost. Cost

includes transaction costs; these are expenses that are directly
attributable to the investment property, for example professional
fees and property transfer taxes.

Cost does not include activities that, whilst related to the investment
property, are not directly attributable to it, for example start up costs,
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relocation costs and the normal servicing of the property.
Initial recognition

Self-constructed investment properties should be held at

the cost recognised in accordance with IAS 16 at the date
when the construction or development is completed. Only on
completion can the property be recognised as an
investment property in accordance with IAS 40.
Where a property held under a lease is classified as an
investment property, IAS 17 Leases requires the property to be
recognised at the lower of fair value and the present value of
the minimum lease payments under the lease.
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Measurement after recognition
Following initial measurement at cost, investment
properties are either held at cost less accumulated
depreciation (the cost model) or measured at fair value
(the fair value model). Where the cost model is chosen,
the property should be recognised in accordance with IAS
16.
The chosen accounting policy should generally be
consistently applied to all of the entity’s investment
properties (i.e. it is not permitted to measure one property at
cost and another at fair value). 9
The Fair Value Model
Where the fair value model is adopted following the initial recognition of
investment properties, the properties should be valued at fair value at the end of
each reporting period. Changes in the fair value of investment properties should
be recognised directly as part of profit or loss for the period in which the
measurement occurred.
The fair value of an investment property is the price at which the property
could be exchanged between knowledgeable and willing parties in an arm's
length transaction.
Fair value should reflect the market conditions at the end of the reporting
period. The best evidence of fair value is given by current prices in an active
market for similar properties in the same location and condition. It is important
to appreciate that fair value is time specific (since market conditions change), so
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the valuation should take place at the end of each reporting period.
Disposal of Investment Properties
An investment property should be eliminated from the statement of
financial position when it is disposed of. An investment property which is
permanently withdrawn from use and will not generate any future
economic benefits, even on its ultimate disposal, should be eliminated
from the statement of financial position.
When an investment property is disposed of or permanently withdrawn
from use and no future benefit will accrue to the entity, a gain or loss
should be calculated and recognised directly as part of profit or loss for
the period in which the disposal or ‘retirement’ takes place. The gain or
loss should normally be determined as the difference between the net
disposal proceeds and the carrying amount of the asset.
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Disclosure
The disclosures required in relation to investment properties are in three broad
groups:
 those applicable to both the fair value model and the cost model;
 those applicable only to the fair value model; and
 those applicable only to the cost model.

7.1 Applicable to both the fair value model and the cost model
An entity should disclose which measurement basis it uses for its
investment properties, so whether it uses the cost model or fair value
model. When it has been particularly difficult to establish whether the
property is an investment property or an owner-occupied property, the
entity should set out the criteria that it considered in making its decision.
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Disclosure
Applicable to both the fair value model and the cost model

An entity should separately identify the amount of rental

income recognised in the period along with any related
operating expenses attributable to the rentals.

If restrictions exist on the realization of income, either

through rentals or sale proceeds, or if the entity has a
contractual obligation to purchase or construct an investment
property, these facts should be disclosed.

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Disclosure
The Fair Value Model
Where an entity applies the fair value model it should
present a detailed reconciliation, showing all movements,
between the carrying amount of investment property at the
beginning and the end of the period.
An entity should disclose the methods and significant
assumptions made, including whether there was market
evidence or not, in determining the fair value of investment
property, and whether the valuation was carried out by an
independent qualified valuer. 14
Disclosure
The cost model
An entity that applies the cost model should disclose the
depreciation methods and rates, or useful life, used.
A detailed reconciliation should be presented for the gross cost of
investment properties and the related accumulated depreciation showing
all movements during the year. The carrying amount (i.e. the cost less the
accumulated depreciation) should be clearly disclosed for both the
beginning and end of the period.

In addition an entity is required to disclose the fair value of investment

properties where possible. If it is not possible, this fact should be
explained and a range of estimates should be provided instead.
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Thank You

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