FUNDAMENTALS OF IFRS
CHAPTER
20
Investment Property
(IAS 40)
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INVESTMENT PROPERTY (IAS 40)
FUNDAMENTALS OF IFRS
20.1
INVESTMENT PROPERTY (IAS 40)
20.2
20.2
CHAPTER TWENTY
Investment Property (IAS 40)
20
Introduction
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 –

use in the production or supply of goods or services or for administrative purposes; or

sale in the ordinary course of business.
The following are examples of investment property –

land held for long-term capital appreciation rather than for short-term sale in the
ordinary course of business.

land held for currently undetermined future use. (If an entity has not determined that
it will use the land as owner-occupied property or for short-term sale in the ordinary
course of business, the land is regarded as held for capital appreciation.)

Owner-occupied property
Owner-occupied property is property held (by the owner or by the lessee as a rightof-use asset) for use in the production or supply of goods or services or for
administrative purposes.

a building owned by the entity (or held by the entity as a right-of-use asset) and leased
out under one or more leases.

a building that is vacant but is held to be leased out under one or more leases.

property that is being constructed or developed for future use as investment property.
The following are examples of items that are not investment property –

property intended for sale in the ordinary course of business or in the process of
construction or development for such sale, eg, property acquired exclusively with a
view to subsequent disposal in the near future or for development and resale.

owner-occupied property, including (among other things) property held for future use
as owner-occupied property, property held for future development and subsequent
use as owner-occupied property, property occupied by employees (whether or not the
employees pay rent at market rates) and owner-occupied property awaiting disposal.

property that is leased to another entity under a lease.
Some properties comprise a portion that is held to earn rentals or for capital appreciation and
another portion that is held for use in the production or supply of goods or services or for
administrative purposes. If these portions could be sold separately (or leased out separately), an
entity accounts for the portions separately. If the portions could not be sold separately, the property
is investment property only if an insignificant portion is held for use in the production or supply
of goods or services or for administrative purposes.
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20.3
FUNDAMENTALS OF IFRS 20.3
An entity owns a 10 floor building, in which it has given the first 3 floors on lease to some retailers and uses the rest of the building
for its own office use. The entity can easily sell off the retail space in the first 3 floors and, therefore, it can account for these 3 floors
as an investment property. The remaining 7 floors of the building are used by the entity for its own office use and, therefore, are
accounted for as owner-occupied property.
In some cases, an entity provides ancillary services to the occupants of a property it holds. An
entity treats such a property as investment property if the services are insignificant to the
arrangement as a whole.
Example 2
The owner of an office building provides security and maintenance services to the lessees who occupy the building. Since these
ancillary services are less significant, the property is accounted for as an investment property.
Example 3
An entity owns and manages a hotel. The services provided to the guests are an integral part of the whole arrangement. Therefore,
the hotel is an owner-occupied property, rather than an investment property.
It may be difficult to determine whether ancillary services are so significant that a property
does not qualify as investment property. Judgement is needed to determine whether a
property qualifies as investment property. An entity should, therefore, develop a set of
consistent criteria on the basis of which investment property classification can be determined
appropriately. An entity should also disclose these criteria.
Example 4
The owner of a hotel sometimes transfers some responsibilities to third parties under a management contract. The terms of such
contracts very widely. At one end of the spectrum, the owner’s position may, in substance, be that of a passive investor. At the other
end of the spectrum, the owner may simply have outsourced day-to-day functions while retaining significant exposure to variations
in the cash flows generated by the operations of the hotel.
Example 5
An entity purchases a farming land for its investment potential. Planning permission has not yet been obtained for building any kind
of construction. Though planning permission is not obtained, the land is still quite high on the scale as far as investment potential is
concerned. Therefore, the land should be classified as investment property for its long-term capital appreciation.
In some cases, entity owns property that is leased to, and occupied by, its parent or another
subsidiary. The property does not qualify as investment property in the consolidated financial
statements, because the property is owner-occupied from the perspective of the group. However,
from the perspective of the entity that owns it, the property is investment property if it meets
the definition. Therefore, the lessor treats the property as investment property in its individual
financial statements.
Example 6
ABC Ltd is the parent and XYZ Ltd is its subsidiary. XYZ has an office building whose rent as per market rate would be 10 per month,
But XYZ Ltd gives it on rent to ABC Ltd at 5 per month. In XYZ Ltd’s individual financial statements, this office building would be
accounted for as investment property, but in the group’s consolidated financial statements, the property would be accounted for as
owner-occupied property.
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INVESTMENT PROPERTY (IAS 40)
Example 1
INVESTMENT PROPERTY (IAS 40)
20.4
20.4 CHAPTER TWENTY
Recognition
Investment property shall be recognised as an asset when, and only when –

it is probable that the future economic benefits that are associated with the investment
property will flow to the entity; and

the cost of the investment property can be measured reliably.
An entity evaluates all investment property cost at the time they are incurred. These costs
include costs incurred initially to acquire an investment property and costs incurred
subsequently to add to, replace part of, or service a property.
An entity does not recognise in the carrying amount of an investment property the costs of the
day-to-day servicing of such a property. Rather, these costs are recognised in profit or loss as
incurred. Costs of day-to-day servicing are primarily the costs of labour and consumables, and
may include the costs of minor parts. The purpose of these expenditures is often described as for
the “repairs and maintenance” of the property.
Parts of investment properties may have been acquired through replacement, eg, the interior
walls may be replacements of original walls. An entity recognises in the carrying amount of an
investment property the cost of replacing part of an existing investment property at the time
that cost is incurred. The carrying amount of those parts that are replaced is derecognised.
Example 7
ABC Ltd has a furnished office which it has given on rent to XYZ Ltd, with a clause that the interior walls of the office would be replaced
every 5 years. Thus, ABC Ltd recognises in the carrying amount of the investment property the cost of replacement (interior walls)
at the time the cost is incurred. The carrying amount of those parts that are replaced is derecognised first.
Example 8
ABC Ltd has an office building, which is given on rent to XYZ Ltd. The building has a central security system which needs
replacement after every 3 years. The replacement cost is 10. The carrying amount of the existing security system is 5. XYZ
needs to pass the following entries to –

derecognise the carrying amount of the investment property replaced :
Depreciation
5
Accumulated depreciation
5
and,

recognise the cost of replacement.
Building
10
Cash
10
Measurement at recognition
An investment property shall be measured initially at cost, which comprises its purchase price
and any directly attributable expenditure which includes, eg, professional fees for legal services,
property transfer taxes. Transaction costs shall be included in the initial measurement.
The cost of an investment property is not increased by –

start-up costs (unless they are necessary to bring the property to the condition necessary
for it to be capable of operating in the manner intended by management);
Example 9
ABC Ltd has built a commercial complex to be given on rent to retailers. The company advertises to attract tenants. Since this cost
cannot be capitalised, it should not be included in the cost of the investment property.
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20.5
FUNDAMENTALS OF IFRS 20.5
Operating losses incurred before the investment property achieves the planned level
of occupancy; or
Example 10
In continuation of the previous example, after advertising it was found out that only 25 office spaces were rented out of total 100 office
spaces. ABC Ltd has a huge interest payment obligation and, therefore, was incurring operating losses. These operating losses
cannot be included in the carrying amount of the building.

abnormal amounts of wasted material, labour and other resources incurred in
constructing or developing the property.
Example 11
A part of the construction site had to be demolished, because it was found out that it did not match specifications. In effect, a huge
amount of material, labour and other resources were wasted. This abnormal wastage cannot be included in the cost of the building.
If payment for an investment property is deferred, its cost is the cash price equivalent. The
difference between this amount and the total payments is recognised as interest payment over
the period of credit.
Example 12
An entity wants to purchase a machine on deferred payment option. The payment above the cash down price will be treated as interest
expense and is to be recognised in profit or loss. Therefore, the cost of the machine will be its cash down price.
Journal
Machinery
Interest expense
Liability for machinery
Investment property can also be acquired in exchange for non-monetary asset (s) or a
combination of monetary and non-monetary assets. The cost of such an investment property
is measured at fair value unless –

the exchange transaction lacks commercial substance; or

the fair value of neither the asset received nor the asset given up is reliably measurable.
The acquired asset is measured in this way even if an entity cannot immediately derecognise
the asset given up. If the acquired asset is not measured at fair value, its cost is measured at
the carrying amount of the asset given up.
Example 13
An entity would give up a warehouse whose fair value is 10 and pay 5 cash in exchange for a building. The building is to be given
on rent.
Building (Investment property)
15
Cash
5
Warehouse (Property, plant and equipment)
10
(Building received in exchange for a combination of monetary and non-monetary assets)
Example 14
An entity would give up a warehouse whose fair value is 10 and pay 5 cash, but the fair value of the building received is found to be
18. The building is to be given on rent.
Building (Investment property)
18
Cash
5
Warehouse (Property, plant and equipment)
10
Profit or loss (Gain on exchange)
3
(Building received in exchange for a combination of monetary and non-monetary assets)
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INVESTMENT PROPERTY (IAS 40)

INVESTMENT PROPERTY (IAS 40)
20.6
20.6 CHAPTER TWENTY
Measurement after recognition
Accounting policy
An entity shall choose as its accounting policy either the fair value model or the cost model
and shall apply that policy to all its investment property.
This Standard requires all entities to measure the fair value of investment property, for the
purpose of either measurement (if the entity uses the fair value model) or disclosure (if it
uses the cost model). An entity is encouraged, but not required to measure the fair value of
investment property on the basis of a valuation by an independent valuer who holds a
recognised and relevant professional quailification and has recent experience in the location
and category of the investment property being valued.
Fair value model
After initial recognition, an entity that chooses the fair value model shall measure all of its
investment property at fair value.
Exposure Draft on Leases amends the model in this Standard to replace the requirements
relating to lease accounting as follows :

After initial recognition, a lessor of investment property (whether freehold or leasehold)
chooses to account for investment property using a cost or fair value model.

A lessor that uses the cost model recognises lease income arising on investment
property in accordance with Exposure Draft on Leases.

A lessor that uses fair value model recognizes lease income arising on the investment
property (other than the fair value gains or losses) on a straight-line basis over the
lease term.

A right-of-use asset is within the scope of this Standard if it meets the definition of
investment property.

Any right-of-use asset is accounted for at initial recognition in accordance with Exposure
Draft on Leases. After initial recognition, a lessee chooses to account for the right-ofuse asset using a cost or fair value model.

A lessee that uses the cost model accounts for the right-of-use asset in accordance
with Exposure Draft on Leases.

A lessee that uses the fair value model accounts for the right-of-use asset in
accordance with this Standard and recognises any changes in the liability to make
lease payments in profit or loss.
When measuring the fair value of investment property in accordance with IFRS 13, an entity
shall ensure that the fair value reflects, among other things, rental income from current leases
and other assumptions that market participants would use when pricing investment property
under current market conditions.
In determining the carrying amount of investment property under the fair value model, an
entity does not double-count assets or liabilities that are recognised as separate assets or
liabilities.
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20.7
FUNDAMENTALS OF IFRS 20.7
The following are the examples –

Equipments such as lifts or air-conditioning are often an integral part of a building and is generally included in the fair value of the
investment property, rather than recognised separately as property, plant and equipment.

If an office is leased on a furnished basis, the fair value of the office generally includes the fair value of the furniture, because the
rental income relates to the furnished office. When furniture is included in the fair value of investment property, an entity does not
recognise that furniture as a separate asset.

The fair value of investment property held under a lease reflects expected cash flows (including contingent rent that is expected
to become payable). Accordingly, if a valuation obtained for a property is net of all payments expected to be made, it will be
necessary to add back any recognised lease liability, to arrive at the carrying amount of the investment property using the fair
value model.
In some cases, an entity expects that the present value of its payments relating to an investment
property (other than payments relating to recognised liabilities) will exceed the present value of
the related cash receipts. An entity applies IAS 37 to determine whether to recognise a liability
and, if so, how to measure it.
Inability to measure fair value reliably
If an entity determines that the fair value of an investment property under construction is not
reliably measureable but expects the fair value of the property to be reliably measurable when
construction is complete, it shall measure that investment property under construction at cost
until either its fair value becomes reliably measureable or construction is complete (whichever is
earlier). If an entity determines that the fair value of an investment property (other than an
investment property under construction) is not reliably measureable on a continuing basis, the
entity shall measure that investment property using the cost model in IAS 16. The residual value
of the investment property shall be assumed to be zero. The entity shall apply IAS 16 until disposal
of the investment property.
If an entity has previously measured an investment property at fair value, it shall continue to
measure the property at fair value, it shall continue to measure the property at fair value until
disposal (or until the property becomes owner-occupied property or the entity begins to develop
the property for subsequent sale in the ordinary course of business) even if comparable market
transactions become less frequent or market prices become less readily available.
A gain or loss arising from a change in the fair value of investment property shall be recognised in
profit or loss for the period in which it arises.
Income taxes
The tax law may specify a tax rate applicable to the taxable amount derived from the sale of an
asset that differs from the tax rate applicable to the taxable amount derived from using an asset.
Therefore, the manner in which an entity recovers the carrying amount of an asset either or both
of –

the tax rate applicable when the entity recovers the carrying amount of the asset; and

the tax base of the asset.
If a deferred tax liability or asset arises from investment property that is measured using the
fair value model of this Standard, there is a rebuttable presumption that the carrying amount
of the investment property will be recovered through sale. Accordingly, unless the presumption
is rebutted, the measurement of the deferred tax liability or asset shall reflect the tax
consequences of recovering the carrying amount of investment property entirely through
sale. This presumption is rebutted if the investment property is depreciable and is held within
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INVESTMENT PROPERTY (IAS 40)
Example 15
INVESTMENT PROPERTY (IAS 40)
20.8
20.8 CHAPTER TWENTY
a business model whose objective is to consume substantially all of the economic benefits
embodied in the investment property over time, rather than through sale. If the presumption
is rebutted, then the measurement of deferred tax liabilities and assets shall reflect the tax
consequences that would follow from the manner in which the entity expects, at the end of
reporting period, to recover the carrying amount of its assets.
Example 16
Profit (before fair value determination of investment property) 100 per year. Investment property acquired at the beginning of year 1
: 100. Year-end fair value of investment property : Year 1 – 110; 2 – 120; 3 – 130; 4 – 150. Disposal of investment property : Year
5 – 150. Depreciation rate for income tax (SLM) 25%. Unrealised changes in the fair value of investment property do not affect taxable
profit. If the investment property is sold for more than cost, the reversal of the accumulated tax depreciation will be included in taxable
profit and taxed at an ordinary tax rate of 30%. For sale proceeds in excess of cost, tax law specifies tax rate of 40% for assets held
for more than 3 years.
Fair Value Model
Statement of Profit or Loss
1
2
3
4
5
Profit
Fair value increase
Year
100
10
100
10
100
10
100
20
100
–
Accounting Profit
Tax expense –
Current tax
Deferred tax expense / (liability)
110
110
110
120
100
22.5
11.5
Profit for the Period
34
22.5
11.5
34
76
22.5
11.5
76
22.5
34 15.5
38
80
(50)
76
82
70
30
Cost Model
Statement of Profit or Loss
Year
1
2
3
4
5
Profit
Profit on disposal
100
–
100
–
100
–
100
–
100
50
Accounting Profit
Tax expense –
Current tax
Deferred tax expense / (liability)
100
100
100
100
150
Profit for the Period
22.5
7.5
30
22.5
7.5
30
70
22.5
7.5
30
70
22.5
7.5
70
30
80
(30)
70
50
100
Current Tax
1
2
3
4
5
Profit
Depreciation allowed
Year
100
25
100
25
100
25
100
25
100
–
Depreciation reversal
75
–
75
–
75
–
75
–
100
100
Profit on disposal
75
–
75
–
75
–
75
–
200
50
Taxable profit
75
75
75
75
250
22.5
22.5
22.5
22.5
80
Current tax
Cost Model
After initial recognition, an entity that chooses the cost model shall measure all if its investment
properties in accordance with IAS 16’s requirement for that model, other than those that meet
the criteria to be classified as held for sale (or are included on a disposal group that is classified as
held for sale) in accordance with IFRS 5. Investment properties that meet the criteria to be classified
as held for sale (or are included in a disposal group that is classified as held for sale) shall be
measured in accordance with IFRS 5.
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20.9
FUNDAMENTALS OF IFRS 20.9
Transfers to, or from, investment property shall be made when, and only when, there is a
change in use, evidenced by –

commencement of owner-occupation, for a transfer from investment property to owneroccupied property;
Example 17
An office space was previously rented to a third party. The entity would now use that for its own human resources department.
Therefore, change in use leading to a transfer from investment property to owner-occupied property.

commencement of development with a view to sale, for a transfer from investment
property to inventories;
Example 18
A real estate company had a building which it had given on rent for residential purpose. But, after 10 years, there was huge
development in that locality and, therefore, the company decides to build a commercial complex to sale. Thus, change in use,
evidenced by commencement of re-development with a view to sale in ordinary course of business leads to transfer from
investment property to inventories.

end of owner-occupation, for a transfer from owner-occupied to investment property;
Example 19
A building previously used as corporate office was vacated for an office in a better location. The previous building was given on rent
to another party. Thus, change in use leads to transfer from owner-occupied property to investment property.
Or,

commencement of a lease to another party, for a transfer from inventories to investment
property.
Example 20
A real estate company decides not to sell a building, and give it on a lease to a third party, thus transfer from inventories to investment
property.
However, if an investment property is re-developed for future use as investment property
only, then the property remains as an investment property only and not reclassified as owneroccupied property during re-development.
Example 21
An entity has a building which was given on a lease for 5 years. On the completion of 5 years, the entity decided to renovate the
building in order to charge higher rent. Thus, investment property re-development for future use as investment property remains
investment property during re-development period as well as in the later period.
When an entity uses the cost model, transfers between investment property, owner-occupied
property and inventories do not change the carrying amount of the property transferred and
they do not change the cost of that property for measurement or disclosure purposes.
For a transfer from investment property carried at fair value to owner-occupied property or
inventories, the property’s deemed cost for subsequent accounting in accordance with IAS 16 or
IAS 2 shall be its fair value at the date of change in use.
If an owner-occupied property becomes an investment property that will be carried at fair value,
an entity shall apply IAS 16 up to the date of change in use. The entity shall treat any difference at
that date between the carrying amount of the property in accordance with IAS 16 and its fair
value in the same way as a revaluation in accordance with IAS16.
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INVESTMENT PROPERTY (IAS 40)
Transfers
INVESTMENT PROPERTY (IAS 40)
20.10
20.10 CHAPTER TWENTY
For a transfer from inventories to investment property that will be carried at fair value, any
difference between the fair value of the property at that date and its previous carrying amount
shall be recognised in profit or loss.
When an entity completes the construction or development of a self-constructed investment
property that will be carried at fair value, any difference between the fair value of the property at
that date and its previous carrying amount shall be recognised in profit or loss.
Disposals
An investment property shall be derecognised (eliminated from the Statement of Financial
Position) on disposal or when the investment property is permanently withdrawn from use and
no future economic benefits are expected from its disposal.
The disposal of an investment property may be achieved by sale or by entering into a lease under
derecognition approach. The date of disposal for investment property is the date the recipient
obtains control of the investment property in accordance with the requirements for determining
when a performance obligation is satisfied in Revenue from Contracts with Customers.
Gains or losses arising from the retirement or disposal of an investment property shall be
determined as the net disposal proceeds and the carrying amount of the asset and shall be
recognised in profit or loss in the period of the retirement or disposal.
The amount of consideration to be included in the gain or loss arising from the derecognition of
an investment property is determined in accordance with the requirements for determining the
transaction price in Revenue from Contracts with Customers and shall not exceed the amount to
which the entity is reasonably assured to be entitled in accordance with Revenue from Contracts
with Customers. Subsequent changes to the estimated amount of the consideration that is
reasonably assured shall be recognised as a gain or loss in the period of the change in accordance
with Revenue from Contracts with Customers.
An entity applies IAS 37 or other standards, as appropriate, to any liabilities that it retains after
disposal of an investment property.
Compensation from third parties for investment property that was impaired, lost or given up
shall be recognised in profit or loss when the compensation becomes receivable.
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