What is an investment property?
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Investment property is land and or buildings (or part
thereof) an entity holds to earn rentals or for capital
appreciation . Investment property can be
distinguished from property, plant and equipment ,
which is held for the entity's own use. The entity can
own the investment property or hold it as lessee
under a finance or operating lease [IAS40R.5,6].
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Property held for sale in the ordinary course of business is not an investment property and should be accounted
for as inventory [IAS40R.9(a)]. Other assets excluded from the definition of investment property are biological
assets attached to land related to agricultural activity , mineral rights, the exploration for and extraction of
minerals, oil, natural gas and similar non-regenerative resources [IAS40R.4].
Where an entity is in the process of constructing an investment property, the asset under construction will be
accounted for as property, plant and equipment ("PPE") until it is completed [IAS40R.9(d)] . Property
developed on behalf of third parties will be accounted for as construction contract work in progress
[IAS40R.9(b)].
Multipurpose property
Separate accounting should be applied where a property is used for both investment purposes and
administrative or productive purposes. One portion should be accounted for as an investment property and the
other as PPE . Separate accounting can only be applied if it is possible for the portions to be sold separately (or
leased separately under a finance lease) [IAS40R.10]. The existence of a third party lessee indicates that a
separate sale or finance lease is possible.
The entire property is treated as investment property only if an insignificant portion is held for use in the
production or supply of goods or services or for administrative purposes [IAS40R.10].
Services provided to occupants of property
Services may be provided to a property's occupants. The property qualifies as investment property only if the
services provided are insignificant when compared with the total revenue expected from the property
[IAS40R.11].
Property occupied by an associated company or joint venture
Property that an entity owns or holds under a finance lease,and which its parent or a subsidiary occupies, cannot
be accounted for as investment property in the group's consolidated financial statements. Such property is
owner-occupied from the perspective of the group as a whole. The property should be classified as PPE in the
group financial statements, but as investment property in the entity's own financial statements [IAS40R.15] .
Property occupied by an associated company or joint venture accounted for using the equity method should be
accounted for as investment property in the consolidated financial statements. Associates and joint ventures
accounted for using the equity method are not considered part of the group for consolidation purposes, and
therefore the property is not owner-occupied from the group's perspective.
Property occupied by a joint venture accounted for using the proportionate consolidation method should be
classified as PPE in the consolidated financial statements.
Recognition of investment property
An investment property should only be recognised as an asset when the anticipated future flow of economic
benefits is probable and its cost can be measured reliably [IAS40R.16]. Recognition occurs when the risks and
rewards related to the property have passed to the entity.
Initial measurement
Investment property is initially measured at cost [IAS40R.20]. Cost is the fair value of the consideration given
to acquire the property [F100(a)]. Cost of a purchased property includes transaction costs such as legal fees and
taxes on the purchase of the property [IAS40R.21].
The cost of a self-constructed asset should include all directly attributable costs required to bring the property to
its required working condition. The criteria for initial measurement of investment property are consistent with
those for PPE .
Leased assets
Buildings held by a lessee under a finance lease or under operating lease (and then leased to a third party) may
be classified as investment property. Land which is normally classified as an operating lease [IAS17R.14] may
also be classified as investment property when it is subsequently leased to a third party. A property interest that
is held by a lessee under an operating lease may be classified as investment property only if the lessee uses the
fair value model for investment property (see 'Fair Value model - introduction') and the rest of the definition of
investment property is met [IAS40R.6] .
A lessee recognises investment property under a finance lease at the lower of the present value of the minimum
lease payments and the fair value of the asset [IAS17R.12]. A lessee that classifies a property interest held
under an operating lease as investment property shall account for that property interest as if it were a finance
lease [IAS40R.IN5].
Subsequent expenditure
The costs of the day-to-day servicing of the investment property are repairs and maintenance, and are expensed
[IAS40R.12].
The costs of parts of the investment property acquired through replacement shall be recognised in the carrying
amount of the investment property at the time those costs are incurred if the recognition criteria (discussed in
section 'Recognition of investment property') are met [IAS40R.19].
Measurement subsequent to initial recognition
Subsequent to initial recognition, an entity should either carry investment property at fair value or at depreciated
historical cost [IAS40R.30]. The choice of valuation model should be applied consistently to all of the entity's
investment property [IAS40R.30] . A change from one model to the other should only be made if it will result in
a more appropriate presentation. A change from fair value to historical cost is not likely to give a more
appropriate presentation [IAS8R.14] [IAS40R.31].
There is a rebuttable presumption that an entity will be able to determine the fair value of an investment
property reliably on a continuing basis. Management may rebut the presumption that reliable fair values are
available for an individual property in exceptional cases . Properties for which the presumption is rebutted
cannot be subsequently measured at fair value, even if a reliable measure of fair value later becomes available
[IAS40R.53].
Fair value model - introduction
All investment property is measured at fair value, with gains and losses arising from changes in the fair value
recognised in the income statement, as part of operating profit [IAS40R.33,35]. Fair value is defined as the
amount for which an asset could be exchanged between knowledgeable, willing parties in an arms' length
transaction [IAS40R.5].
There is no requirement for fair values to be determined by an external independent valuer. Independent
valuation, however, enhances the perceived reliability of the fair values reported [IAS40R.32]. The use of
external independent valuers is also encouraged by the International Standards on Auditing, which suggest that
the use of in-house experts increases the risk that objectivity is impaired [ISA620.10].
Fair value model - use basis for fair value
Fair value is the market value of the property where there is a market for the investment property
[IAS40R.36,45-46]. The preferred market value is "highest and best-use" value. Highest and best-use market
value is the highest value determined from market evidence, by considering any use that is financially feasible,
justifiable and reasonably probable [IAS40R.B43] .
The highest and best-use value may result in a property's fair value being determined on the basis of
redevelopment of the site. The fair value of the property should be attributed only to the land element if
redevelopment requires demolition of existing buildings .
Fair value model - valuation methods
Management should consider the guidance provided by International Valuation Standards (IVS) issued by the
International Valuation Standards Committee. The valuation methods recognised by IVS include the sales
comparison [IAS40R.B52] approach, the income capitalisation approach and the cost approach .
Fair value should be estimated as the present value of future cash flows to be generated from the property,
where there is no active market. Cash flows should be based on existing lease and other contracts and by
external evidence of market rents for similar properties [IAS40R.46] . Cash flow estimates should consider the
property in its current condition and should not include future expenditure or associated inflows [IAS40R.51].
The use of depreciated replacement cost to determine fair value is not appropriate for investment property. The
cash flows from an investment property are largely independent of the cost of the asset, as they arise from rental
income or capital appreciation [IAS40R.B44]. Movements in the property market directly influence the cash
flows an investment property generates, so fair value should be primarily determined by reference to the market.
Fair value model - frequency of valuations
An investment property's fair value should reflect the actual market state and circumstances at the balance sheet
date [IAS40R.38]. Annual revaluation, although not mandated, is likely because market and circumstances will
change from one year-end to the next.
Fair value model - valuation of a property portfolio
Some revenue-producing properties can achieve a higher or lower value when considered as a group, such as a
chain of fast-food restaurants, hotels or multiple retail outlets, rather than on an individual basis. The fair value
assessment should be performed on an individual basis and should not reflect additional value derived from the
creation of a portfolio of property in different locations [IAS40R.49(a)]. This is consistent with the guidance
provided by IVS, that revenue-producing properties are usually valued on the basis of individual asset
disposition pursuant to an orderly disposition plan.
Fair value model - transfers to investment property
An owner-occupied property may be re-classified as investment property. The gain or loss arising from
measuring the property at fair value should be accounted for as a revaluation under IAS 16 [IAS40R.61] . This
treatment prevents cumulative net increases in fair value that arose before the current period from being
reflected in the income statement. The revaluation surplus that results from such transfers remains in equity, and
is transferred to retained earnings only on subsequent disposal of the investment property [IAS16R.41].
However, fair value gains or losses arising from transfers of self-constructed property that has not been owneroccupied, or from transfers of inventories to investment property, should be recognised in the income statement.
This treatment provides a more relevant and transparent view of the property's financial performance
[IAS40R.63,65].
An investment property held for sale is transferred from inventories to investment property only when it is used
as investment property.
Fair value model - implications for deferred tax
The fair value adjustments are likely to generate a deferred tax asset or liability, resulting from the difference
between the property's carrying amount and its tax basis. SIC-21 applies to the land element of the investment
property, and requires that any deferred tax asset or liability should be calculated at the tax rate applicable to the
future sale of the land [SIC-21.5].
Cost model - introduction
Investment property is recognised at cost less depreciation less impairment losses under the cost model. Entities
using the cost model follow the principles set out in IAS 16 for assets carried at depreciated historical cost
[IAS40R.56]. The revaluation model under IAS 16 of recognising revaluation differences in equity is not
permitted. Entities adopting the cost model, however, are required to determine the fair value of all investment
property and disclose it in the financial statements.
Cost model - transfers to investment property
Transfers to investment property do not result in any gain or loss to be recognised in the financial statements if
the entity adopts the cost model. There is no change in the carrying amount or cost of the property for
measurement or disclosure purposes [IAS40R.59].
Derecognition
Derecognition of an investment property will be triggered by a change in use [IAS40R.57] or by sale or disposal
[IAS40R.66] .
A property is transferred from investment property to PPE only when the entity occupies it [IAS40R.57].
A decision to sell a property is not enough to trigger a transfer from investment property to inventories. The
property is accounted for as an investment property up to the date of disposal or until the entity begins
redeveloping it with a view to selling it [IAS40R.58].
When an investment property is disposed of, it should be eliminated from the balance sheet. Disposal of an
investment property also occurs when it is leased under a finance lease to a third party. Derecognition is also
required when the property is permanently withdrawn from use and has no future economic value [IAS40R.66].
Redevelopment of investment property
When an existing investment property is redeveloped for continued future use as investment property, it is not
reclassified as owner-occupied property during the redevelopment period [IAS40R.58] .
Calculation of gain/loss on derecognition
The gain or loss arising on disposal is calculated as the difference between any disposal proceeds and the
carrying amount, and is recognised in the income statement [IAS40R.69]. Any existing revaluation surplus
related to the relevant property should be transferred to retained earnings without affecting the income
statement [IAS40R.62(b)].
Transfers from investment property to another balance sheet category do not result in a gain or loss if the entity
adopts the cost model. There is no change in the carrying amount or cost of the property for measurement or
disclosure purposes [IAS40R.59].
Impairment
An investment property carried at cost, less any accumulated depreciation and any accumulated impairment, is
impaired if its carrying amount exceeds its recoverable amount [IAS36.8]. The recoverable amount of an
investment property will often be the same as its fair value; however, there are some circumstances when this
will not be the case. This is because market values consider only external factors, whereas value in use also
takes account of entity-specific factors such as tax exemptions granted to the owner of the property.
Investment properties carried at cost, less any accumulated depreciation and any accumulated impairment,
should be assessed for impairment in accordance with the provisions of IAS 36, Impairment of assets .
Properties carried at fair value are excluded from the scope of IAS 36 [IAS36.2].
Where an impairment of an investment property is identified, the carrying value should be written down to the
recoverable amount [IAS36.59]. The impairment should be charged to the income statement.
Presentation and disclosure
The comprehensive disclosure requirements are set out in paragraphs 75 to 79 of IAS 40R. The disclosures
common to both the fair value and cost model include [IAS40R.75]:
a) whether the entity applies the fair value model or the cost model;
b) rental income generated from investment property;
c) direct operating expenses incurred on investment property that generated and that did not generate income,
separately; and
d) the methods and assumptions used in determining the property's fair value, including an indication of
whether fair value is directly supported by market evidence or, when comparable market data is unavailable,
other information such as future cash flows projections.
The additional disclosures required for assets accounted for under the fair value model include [IAS40R.75,76]:
a) in what circumstances property interest held under operating lease are classified and accounted for as
investment property;
b) a reconciliation of the carrying amount of investment property at the beginning and end of the period,
including fair value gains and losses [IAS40R.76]; and
c) whether or not (and to what extent) an external independent valuer is used [IAS40R.75].
For investment property not measured at fair value because the fair value is not reliable, extensive information
is required, including [IAS40R.78,79]:
a) a separate reconciliation of carrying amounts;
b) a description of the property and an explanation of why fair value cannot be determined; and
c) a range of fair value estimates within which fair value of the property is likely to lie.
The additional disclosures required under the cost model include [IAS40R.79]:
a) a reconciliation of the carrying amount of investment property at the beginning and end of the period (but
not for the previous period); and
b) the fair value of investment property [IAS40R.79(e)].
Additional disclosures for lessees required in respect of investment properties held under finance leases
A lessee of an investment property leased under a finance lease should provide additional disclosures, including
[IAS17R.31]:
a) the net carrying amount of investment properties held under finance lease;
b) a reconciliation between the total minimum lease payments at the balance sheet date and their present value;
c) the present value of minimum lease payments (in aggregate and analysed by maturity);
d) the contingent rents recognised in the period;
e) a general description of the entity's significant leasing arrangements; and
f) disclosure of any sub leases.
These disclosures would be in addition to the requirements of IAS 32R.
Additional disclosures for lessors in respect of owned investment properties leased out under operating
leases
A lessor of an investment property leased under an operating lease should provide additional disclosures,
including [IAS17R.56]:
a) the future minimum lease payments under non-cancellable operating leases (in aggregate and analysed by
maturity);
b) the total contingent rents recognised in income; and
c) a general description of significant leasing arrangements [IAS17R.56].
These disclosures would be in addition to the requirements of IAS 32R.