IAS 40 Investment Property - Summary

IAS 40 Investment Property

IFRS Summaries by Imad Uddin, FRM

Objective

Prescribe the accounting treatment for investment property.

Specify related disclosure requirements.

Ensure financial statements provide relevant information about investment property held, enabling users to understand its financial impact.

Scope

Applies to the recognition, measurement, and disclosure of investment property.

Does NOT apply to:

Owner-occupied property (accounted for under IAS 16 Property, Plant and Equipment or IFRS 16 Leases).

Property held for sale in the ordinary course of business or in the process of construction/development for such sale (IAS 2 Inventories).

Biological assets related to agricultural activity (IAS 41 Agriculture).

Mineral rights and mineral reserves (IFRS 6 Exploration for and Evaluation of Mineral Resources).

Property being constructed or developed on behalf of third parties (IFRS 15 Revenue).

Property leased to another entity under a finance lease.

Key Definitions

Term	Meaning
Investment Property	Property (land or a building—or part of a building—or both) held by the owner or by the lessee as a right-of-use asset 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.
Owner-Occupied Property	Property held (by the owner or lessee as a right-of-use asset) for use in the production or supply of goods or services or for administrative purposes (Scope of IAS 16 or IFRS 16).
Fair Value	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 (Definition from IFRS 13).

Property held under an operating lease by a lessee may qualify as investment property if it meets the definition and the lessee uses the fair value model.

Recognition Criteria

Recognize expenditure on investment property as an asset if, and only if:

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.

This applies to initial costs and subsequent expenditures. Day-to-day servicing costs are expensed.

Measurement

Initial Measurement:

Investment property is initially measured at cost.

Transaction costs are included in the initial measurement.

Cost includes purchase price and any directly attributable expenditure (e.g., legal fees, property transfer taxes, professional fees for property services).

Cost of self-constructed investment property is cost at date construction/development is complete (apply IAS 16 principles). Start-up costs are excluded.

Subsequent Measurement:

After initial recognition, an entity must choose as its accounting policy either the fair value model or the cost model and apply that policy to all of its investment property.

Fair Value Model:

Measure investment property at fair value at the end of each reporting period.

Gains or losses arising from changes in fair value are recognized in profit or loss for the period in which they arise.

Assets measured under fair value model are not depreciated.

Fair value should reflect market conditions at reporting date. IFRS 13 provides guidance. If fair value cannot be reliably determined continuously (rare), must use cost model for that specific property (but continue FV for others).

Cost Model:

Measure investment property at cost less accumulated depreciation and accumulated impairment losses, in accordance with IAS 16 principles (or IFRS 16 for right-of-use assets).

Entities choosing the cost model must still disclose the fair value of the investment property in the notes.

Transfers

Transfers to or from the investment property classification should be made when, and only when, there is a change in use.

A change in use is evidenced by:

Commencement of owner-occupation: Transfer from Investment Property (IAS 40) to Owner-Occupied Property (IAS 16 / IFRS 16).

Commencement of development with a view to sale: Transfer from Investment Property (IAS 40) to Inventories (IAS 2).

End of owner-occupation: Transfer from Owner-Occupied Property (IAS 16 / IFRS 16) to Investment Property (IAS 40).

Commencement of an operating lease to another party: Transfer from Inventories (IAS 2) to Investment Property (IAS 40).

End of construction/development: Transfer from Property under Construction (IAS 16) to Investment Property (IAS 40).

A change in management's intentions for the use of a property alone does not provide evidence of a change in use.

Accounting for transfers depends on the measurement model used and the direction of transfer (e.g., for transfer from IP under FV model to owner-occupied/inventory, fair value at date of change becomes deemed cost).

Derecognition

When to Derecognize:

On disposal (e.g., through sale or entering into a finance lease); OR

When the investment property is permanently withdrawn from use and no future economic benefits are expected from its disposal.

Gain or Loss Recognition:

Gain or loss = Net disposal proceeds - Carrying amount of the asset.

Recognized in profit or loss in the period of derecognition (unless IFRS 16 requires different treatment for sale & leaseback).

Disclosures

An entity shall disclose:

Whether it applies the fair value model or the cost model.

If fair value model applied: Methods and significant assumptions used; extent valuation based on independent valuer; existence/amounts of restrictions on realisability/remittance; contractual obligations to purchase/construct/develop/repair investment property.

Amounts recognized in P&L for: Rental income, Direct operating expenses (split between generating/not generating rental income).

Reconciliation of carrying amount (showing additions, disposals, fair value adjustments, net exchange differences, transfers, other movements).

If cost model applied: Depreciation methods, useful lives/rates, gross carrying amount & accumulated depreciation/impairment reconciliation (similar to IAS 16), AND the fair value of the investment property (or explanation if cannot be measured reliably).

Summary Table - Key Aspects

Aspect	Requirement
Recognition	Probable future economic benefits AND reliable cost measurement.
Initial Measurement	At cost, including transaction costs.
Subsequent Measurement	Choice (applied to ALL IP): 1. Fair Value Model: FV changes to P&L, no depreciation. 2. Cost Model: Cost less Acc Dep'n/Impairment (per IAS 16), disclose FV.
Transfers	Only when evidence of change in use exists (e.g., start/end owner-occupation, start development for sale).
Derecognition	On disposal or permanent withdrawal from use. Gain/loss to P&L.
Disclosures	Model choice; FV model details (methods, assumptions, P&L amounts); Cost model details (dep'n, reconciliation) + FV disclosure; Reconciliation of carrying amount movements.

Key Judgments and Estimates

Determining whether a property meets the definition of investment property vs. owner-occupied (IAS 16) or inventory (IAS 2), especially for mixed-use properties or properties under development.

Choosing between the fair value model and the cost model (policy choice).

Estimating the fair value of investment property, particularly if using Level 2 or Level 3 inputs (IFRS 13), selecting appropriate valuation techniques and inputs.

Assessing whether a change in use has occurred to warrant a transfer between categories.

Estimating useful lives and residual values for depreciation if using the cost model.

Assessing investment property under the cost model for impairment (IAS 36).

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