IAS 40

IAS 40 Investment Property is the standard in International Financial Reporting Standards that sets the accounting for property held as an investment. It defines investment property as land or a building, or part of a building, or both, held by the owner, or by a lessee as a right-of-use asset, to earn rentals or for capital appreciation or both. Property used in producing goods, supplying services or administration, and property held for sale in the ordinary course of business, is excluded.

The standard was issued in 2000 and applied from 2001. It was the first international standard to allow a fair value model for a non-financial asset, with changes in value reported in profit or loss. It matters most to property companies, real estate investment trusts, insurers and funds, but any entity that lets out surplus space or holds land for an undetermined future use may have investment property.

The distinguishing feature is that investment property generates cash flows largely independently of the entity's other assets. Examples are land held for long-term appreciation, land held for a currently undetermined use, a building leased out under operating leases, a vacant building held to be leased out, and property being constructed or developed for future use as investment property.

The following are not investment property: property being built or held for sale by a developer, which is inventory; owner-occupied property, including property occupied by employees, which is property, plant and equipment under IAS 16; and property leased to another party under a finance lease.

Some cases need judgement. Where a building is partly let and partly occupied by the owner, the two parts are accounted for separately if they could be sold or leased out separately. If not, the whole is investment property only if the owner-occupied part is insignificant. Where the owner provides services to occupants, the property is investment property only if those services are a minor part of the arrangement: an office building with security and maintenance qualifies, while an owner-managed hotel does not.

Investment property is recognised when it is probable that its future economic benefits will flow to the entity and its cost can be measured reliably. It is measured initially at cost, including transaction costs such as legal fees and property transfer taxes. Investment property held by a lessee as a right-of-use asset is measured initially under the leases standard.

After initial recognition the entity chooses one of two models as its accounting policy and, with limited exceptions, applies it to all of its investment property.

• Fair value model. The property is measured at fair value at each reporting date, and gains or losses from changes in fair value are recognised in profit or loss for the period. No depreciation is charged. Fair value is determined under IFRS 13 and usually falls in the lower levels of the fair value hierarchy, since it relies on valuation inputs such as rental yields and comparable sales.
• Cost model. The property is carried at cost less accumulated depreciation and impairment losses, as for other property under IAS 16. An entity using this model must still disclose the fair value of its investment property in the notes.

A change from one model to the other is allowed only if it results in more relevant information, and the standard states that this is highly unlikely for a change from fair value to cost.

The fair value model differs from the revaluation model available for owner-occupied property, under which increases in value are recognised in other comprehensive income and the asset continues to be depreciated.

Property is transferred into or out of the investment property category only when there is a change in use supported by evidence, such as the start or end of owner-occupation or the start of development with a view to sale. A change in management's intentions alone is not sufficient. When owner-occupied property becomes investment property carried at fair value, the difference between its carrying amount and fair value at that date is treated as a revaluation under IAS 16. When investment property at fair value becomes owner-occupied or inventory, its fair value at the date of change becomes its deemed cost.

An investment property is derecognised on disposal or when it is permanently withdrawn from use with no future benefits expected. The gain or loss is the difference between the net proceeds and the carrying amount and is recognised in profit or loss.

Under the fair value model, reported profit moves with the property market, so results can swing widely without any change in rental income; analysts therefore often look at earnings before valuation movements. Deferred tax on the valuation gains is measured on a presumption that the property will be recovered through sale. US accounting rules have no equivalent standard: most investment property held by US companies is carried at cost less depreciation, with fair value used mainly by investment companies. The standard is maintained by the International Accounting Standards Board, and valuations themselves are discussed under fair value accounting.

• IFRS Foundation