IAS 40

IAS 40, titled Investment Property, is an International Accounting Standard issued by the International Accounting Standards Board (IASB). It prescribes the accounting treatment for investment property and related disclosure requirements. ^[1]

Definition

Investment property is 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: ^[2]

• Use in the production or supply of goods or services or for administrative purposes; or
• Sale in the ordinary course of business.

Initial Measurement

Investment property is initially measured at its cost. Transaction costs must be included in this initial measurement. ^[3]

Subsequent Measurement

IAS 40 permits entities to choose between two models for all of its investment property: ^[4]

Fair Value Model

Under the fair value model, investment property is remeasured at the end of each reporting period. Unlike the revaluation model in IAS 16, changes in fair value are recognized in profit or loss rather than other comprehensive income. ^[5]

Fair Value Adjustment = Fair Value at Year End − Carrying Amount at Year Start

Cost Model

The cost model follows the requirements of IAS 16, where the property is carried at cost less accumulated depreciation and any accumulated impairment losses. ^[6]

Carrying Amount = Cost − Accumulated Depreciation − Accumulated Impairment Losses

Transfers

Transfers to, or from, investment property are made only when there is a change in use. The accounting for the transfer depends on the previous and new classification: ^[7]

• Investment Property to Owner-occupied (IAS 16): The property's "cost" for subsequent accounting is its fair value at the date of change in use.
• Inventory (IAS 2) to Investment Property: Any difference between the fair value at the date of transfer and its previous carrying amount is recognized in profit or loss.

Disclosure Requirements (IAS 40)

IAS 40 prescribes the disclosure requirements for property held to earn rentals or for capital appreciation. Transparency regarding the valuation model and the determination of fair value is the primary focus. ^[8]

Paragraph	Category	Disclosure Requirement	Description / Examples
IAS 40.75(a)	Measurement Model	Classification Policy	Disclosure of whether the entity applies the fair value model or the cost model.
IAS 40.75(e)	Valuation	Use of Independent Valuer	The extent to which the fair value of investment property is based on a valuation by an independent valuer who holds a recognized and relevant professional qualification.
IAS 40.75(f)	P&L Impact	Income and Expenses	Rental income from investment property and direct operating expenses (including repairs and maintenance) arising from the property.
IAS 40.75(h)		Contractual Obligations	Contractual obligations to purchase, construct or develop investment property or for repairs, maintenance, or enhancements.
IAS 40.76	Fair Value Model	Reconciliation of Movements	(If Fair Value Model): A reconciliation between the carrying amounts at the beginning and end of the period showing additions, net gains/losses from fair value adjustments, and transfers.
IAS 40.79	Cost Model	Depreciation and Lives	(If Cost Model): The depreciation methods used, the useful lives or the depreciation rates used, and a full reconciliation of the gross carrying amount.
IAS 40.79(e)		Fair Value Disclosure	Even if the cost model is used, the entity must disclose the fair value of the investment property in the notes to the financial statements.

References

1. IAS 40.1; IAS 40.BC1.
2. IAS 40.5; IAS 40.BC4.
3. IAS 40.20.
4. IAS 40.30; IAS 40.BC10.
5. IAS 40.33–35.
6. IAS 40.56.
7. IAS 40.57; IAS 40.60–65.
8. IASB. IAS 40, Paragraph 74-79.