IAS 40
Investment Property
1Objective and scope
IAS 40 prescribes the accounting treatment for investment property, and the related disclosure requirements. It applies to land or a building (or part of a building) held (by the owner, or by a lessee as a right-of-use asset) to earn rentals, for capital appreciation, or both - as distinct from property used in the production or supply of goods/services or for administrative purposes (IAS 16), or held for sale in the ordinary course of business (IAS 2).
2Key definitions
3Measurement
Investment property is initially measured at cost. After initial recognition, an entity chooses either the fair value model or the cost model as its accounting policy, and applies it to ALL of its investment property (unlike IAS 16, this is an entity-wide policy choice, not a class-by-class one).
| Model | Subsequent treatment |
|---|---|
| Fair value model | Remeasured to fair value at each reporting date, with the gain or loss recognised directly in profit or loss (not OCI, unlike an IAS 16 revaluation). No depreciation is charged. |
| Cost model | Carried at cost less accumulated depreciation and impairment, exactly as under IAS 16's cost model. Fair value is still disclosed in the notes. |
Transfers to or from the investment property classification are made only when there is a genuine change in use, evidenced by the commencement of owner-occupation (transfer to IAS 16), the commencement of development with a view to sale (transfer to IAS 2), or the end of construction/development (transfer from property under construction). A dual-use property is split between the investment property and owner-occupied portions if the portions could be sold or leased out separately; if not, it is classified as investment property only if an insignificant portion is owner-occupied.
4Presentation and disclosure
- Whether the fair value model or the cost model is applied
- The criteria used to distinguish investment property from owner-occupied property and from property held for sale, where classification is difficult
- Under the fair value model, a reconciliation of the carrying amount at the start and end of the period, including net gains or losses from fair value adjustments
- Rental income and direct operating expenses arising from investment property
5Examinable focus
What KASNEB tests
Classifying a property from scenario facts as investment property, owner-occupied property, or inventory is a recurring written question. Numerically, the fair value model gain or loss going straight to profit or loss (not OCI, and with no depreciation charge) is the detail candidates most often get wrong by confusing it with the IAS 16 revaluation model.