IAS 40 Investment Property: Complete Guide (Rules, Examples & Entries)
IAS 40 Investment Property: Complete Guide
- IAS 40 governs the recognition, measurement, and disclosure of investment property — property held for rental income, capital appreciation, or both.
- Investment property is measured initially at cost, then either using the fair value model (gains/losses in P&L) or the cost model (depreciated, per IAS 16).
- A property is not investment property if owner-occupied or held for sale in the ordinary course of business.
- Transfers between categories follow strict criteria and specific measurement rules.
- Disclosures differ depending on the measurement model chosen.
IAS 40 Investment Property is the IFRS standard that defines how entities should recognise, measure, and disclose property held to earn rental income or for capital appreciation — not for use in production, supply, or sale. Under IAS 40, companies choose between two subsequent measurement models — the fair value model and the cost model — and must apply that choice consistently across their entire investment property portfolio.
This guide covers everything you need to master IAS 40: the scope, recognition criteria, measurement models, transfers, disposals, disclosures, and a full worked example using Delta Properties Ltd. If you are preparing for the ACCA DipIFR or any IFRS-based professional qualification, this is the standard you cannot afford to skip.
What Is Investment Property Under IAS 40?
Investment property is land or a building — or part of a building — held by the owner (or by the lessee under a finance lease) for one or both of the following purposes:
- Earning rental income
- Achieving capital appreciation
The key distinguishing factor is that the property generates cash flows largely independently of other assets held by the entity. This separates investment property from owner-occupied property, where the property is used to produce or supply goods and services.
Examples of Investment Property
- Land held for long-term capital appreciation (not for short-term sale)
- Land whose future use has not yet been determined
- A building owned by the entity and leased out under operating leases
- A building that is vacant but held to be leased under an operating lease
- Property being constructed or developed for future use as investment property
What Does NOT Qualify as Investment Property?
- Owner-occupied property — used in production, supply of goods/services, or administration (governed by IAS 16)
- Property held for sale in the ordinary course of business (governed by IAS 2 or IFRS 5)
- Property being constructed for third parties (governed by IFRS 15)
- Property leased to another entity under a finance lease (treated as a receivable under IFRS 16)
Scope of IAS 40
IAS 40 applies to all entities that hold investment property, regardless of whether they use the fair value model or the cost model. The standard applies to:
- Recognition and measurement of investment property
- Transfers into and out of the investment property category
- Derecognition (disposal) of investment property
- Disclosure requirements for investment property
IAS 40 does not apply to biological assets related to agricultural activity (IAS 41) or mineral rights and mineral reserves (IFRS 6).
Mixed-Use Property
When a property is used partly for investment and partly for other purposes, each portion is accounted for separately where practicable. If an entity provides ancillary services to occupants — for example, security or maintenance — the property still qualifies as investment property provided the services are insignificant relative to the arrangement as a whole. A hotel managed by the entity itself typically does not qualify as investment property because the service component is significant.
Recognition Criteria Under IAS 40
An entity recognises an investment property as an asset only when both of the following conditions are met:
- It is probable that future economic benefits associated with the property will flow to the entity.
- The cost of the investment property can be measured reliably.
These criteria are consistent with the general asset recognition criteria in the IFRS Conceptual Framework. Subsequent expenditure on an investment property is capitalised only if it meets these same two conditions — routine repairs and maintenance are expensed as incurred.
Initial Measurement of Investment Property
An investment property is measured initially at cost. Cost includes:
- Purchase price
- Directly attributable transaction costs (legal fees, transfer taxes, professional fees)
Cost does not include start-up costs, initial operating losses, or abnormal waste during construction.
Delta Properties Ltd — Initial Recognition
Delta Properties Ltd purchases an office building for investment purposes.
| Purchase price | $800,000 |
| Transaction costs (legal fees, stamp duty) | $20,000 |
| Initial recognition (cost) | $820,000 |
Journal Entry:
Dr Investment Property    $820,000
   Cr Bank                        $820,000
Property Acquired Through Exchange
When investment property is acquired by exchanging a non-monetary asset, cost equals the fair value of the asset given up, unless the fair value of the asset received is more reliably measurable.
Subsequent Measurement Models
After initial recognition, an entity must choose either the fair value model or the cost model for its entire portfolio of investment property. This is a significant policy choice and must be applied consistently.
Fair Value Model
Under the fair value model, investment property is carried at fair value at each reporting date. Fair value is determined in accordance with IFRS 13 Fair Value Measurement. Gains and losses arising from changes in fair value are recognised in profit or loss in the period in which they arise. There is no depreciation under the fair value model.
Fair value at year-end: $870,000
Carrying amount at acquisition: $820,000
Fair value gain: $50,000
Dr Investment Property    $50,000
   Cr Fair Value Gain (P&L)  $50,000
Cost Model
Under the cost model, investment property is measured at cost less accumulated depreciation and impairment losses, exactly as per IAS 16 Property, Plant and Equipment. Depreciation is charged systematically over the asset's useful life.
Cost: $820,000 | Useful life: 50 years | Straight-line depreciation
Annual depreciation: $820,000 ÷ 50 = $16,400
Carrying amount after Year 1: $820,000 − $16,400 = $803,600
Dr Depreciation Expense           $16,400
   Cr Accumulated Depreciation  $16,400
Model Comparison at a Glance
| Feature | Fair Value Model | Cost Model |
|---|---|---|
| Carrying Amount | Fair value (updated each period) | Cost less depreciation & impairment |
| Depreciation | Not charged | Charged over useful life |
| Fair value gain/loss | Recognised in P&L | Not recognised (disclosed) |
| Impairment testing | Not applicable (carried at FV) | Required per IAS 36 |
| P&L volatility | Higher (market-driven) | Lower (predictable depreciation) |
| Balance sheet | Reflects current market value | Historical cost-based |
For a deeper comparison, see our dedicated guide: IAS 40 Fair Value Model vs Cost Model.
Transfers Between Categories
IAS 40 permits transfers between investment property and other categories — but only when there is evidence of a change in use. The standard lists specific circumstances that justify a transfer:
Transfers Into Investment Property
- From owner-occupied property (IAS 16): When the entity ceases to occupy the property and begins leasing it out. Measurement at the date of transfer: if using the fair value model, any difference between carrying amount and fair value is treated as a revaluation under IAS 16.
- From inventory (IAS 2): When the entity begins leasing the property rather than selling it. Any difference between fair value at the date of transfer and its previous carrying amount is recognised in P&L.
Transfers Out of Investment Property
- To owner-occupied property (IAS 16): When the entity itself begins to occupy the property. Deemed cost for subsequent accounting is fair value at the date of transfer.
- To inventory (IAS 2): When the entity begins to develop the property for sale. Deemed cost for inventory purposes is fair value at the date of transfer.
Disposals of Investment Property
Investment property is derecognised when it is disposed of, or when it is permanently withdrawn from use and no future economic benefits are expected from its disposal. The gain or loss on disposal is recognised in profit or loss as the difference between:
- Net disposal proceeds (sale price less costs to sell)
- The carrying amount at the date of disposal
Delta Properties — Disposal Example
Gain on disposal = $900,000 − $870,000 = $30,000
Dr Bank                                $900,000
   Cr Investment Property          $870,000
   Cr Gain on Disposal (P&L)    $30,000
Disclosure Requirements Under IAS 40
IAS 40 requires substantial disclosures. All entities must disclose:
- Whether the fair value model or cost model is applied
- The criteria used to distinguish investment property from owner-occupied property and property held for sale
- The methods and significant assumptions applied in determining fair value
- Rental income from investment property and direct operating expenses
- Restrictions on the realizability of investment property or remittance of proceeds
- Contractual obligations to purchase, construct, or develop investment property
Additional model-specific disclosures apply. For the complete disclosure checklist, see our guide: IAS 40 Disclosure Requirements.
IAS 40 vs US GAAP
| Aspect | IAS 40 (IFRS) | US GAAP (ASC 360) |
|---|---|---|
| Investment property category | Separate standard (IAS 40) | No separate category — all property under ASC 360 |
| Fair value model | Permitted; gains/losses in P&L | Not permitted for real estate; cost model only |
| Depreciation | Not required under fair value model | Always required |
| Impairment | IAS 36 (cost model only) | Two-step test under ASC 360-10 |
This is a critical distinction for candidates sitting the ACCA DipIFR exam — US GAAP does not offer a fair value model for investment property, making IAS 40 unique to IFRS reporters.
Full Worked Example — Delta Properties Ltd
Let's consolidate everything using Delta Properties Ltd as a consistent example across both measurement models.
Facts
- Delta Properties Ltd acquires an office building purely for rental purposes.
- Purchase price: $800,000 | Transaction costs: $20,000 | Initial recognition: $820,000
- Useful life: 50 years | No residual value assumed
- Annual rental income: $60,000
- Fair value at end of Year 1: $870,000
Year 1 — Fair Value Model
| Item | Amount | P&L Impact |
|---|---|---|
| Rental income | $60,000 | +$60,000 revenue |
| Fair value gain | $50,000 | +$50,000 gain |
| Depreciation | Nil | $0 |
| Carrying amount (B/S) | $870,000 |
Year 1 — Cost Model
| Item | Amount | P&L Impact |
|---|---|---|
| Rental income | $60,000 | +$60,000 revenue |
| Depreciation ($820,000 ÷ 50) | $16,400 | −$16,400 expense |
| Fair value gain | Not recognised | $0 (disclosed only) |
| Carrying amount (B/S) | $803,600 |
For step-by-step journal entries covering all scenarios — acquisition, revaluation, transfers, and disposal — visit our dedicated guide: IAS 40 Examples & Journal Entries.
Understanding depreciation mechanics is also essential — our depreciation accounting guide explains the straight-line, diminishing balance, and units of production methods in detail.
Related IFRS Topics
- IAS 40: Fair Value Model vs Cost Model — Full Comparison
- Investment Property Accounting: Recognition, Measurement & Entries
- IAS 40 Disclosure Requirements: What You Must Report
- IAS 40 Examples & Journal Entries (Step-by-Step)
- Goodwill Impairment: Complete Guide
- Retained Earnings: Complete Guide
- Bad Debt Expense: Complete Guide
Frequently Asked Questions — IAS 40 Investment Property
1. What is the main purpose of IAS 40?
IAS 40 prescribes the accounting treatment for investment property — property held for rental income, capital appreciation, or both. It sets out recognition criteria, measurement options (fair value or cost), transfer rules, and disclosure requirements, ensuring financial statement users can assess the performance of an entity's investment property portfolio.
2. Can an entity switch from the cost model to the fair value model?
A change in accounting policy from the cost model to the fair value model is permitted only if it results in a more relevant presentation. IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors governs such changes — the entity must apply the new policy retrospectively and reassess whether the change is voluntary or required.
3. Where does the fair value gain go under IAS 40?
Under the fair value model, all fair value gains and losses are recognised in profit or loss — not in other comprehensive income (OCI). This contrasts with IAS 16 revaluation surplus, which goes to OCI. This treatment can cause significant volatility in the income statement for property-heavy entities.
4. Is depreciation required under IAS 40?
Depreciation is required only if the entity uses the cost model. Under the fair value model, no depreciation is charged because the asset is remeasured to fair value at each reporting date, which inherently reflects consumption of economic benefits. Under the cost model, depreciation is charged per IAS 16 principles.
5. What happens when an investment property is transferred to owner-occupied property?
When an investment property (measured at fair value) is transferred to owner-occupied use, the fair value at the date of transfer becomes the deemed cost for subsequent IAS 16 accounting. Any fair value changes up to that point have already been recognised in P&L and are not reversed.
6. Can land be classified as investment property?
Yes. Land held for long-term capital appreciation or for an undetermined future use is classified as investment property under IAS 40. Land is not depreciated — this is true under both IAS 40 and IAS 16. If land is held for short-term sale, it would be classified as inventory under IAS 2.
7. How does IAS 40 interact with IFRS 16 Leases?
A lessee may elect to classify a right-of-use asset as investment property if the underlying property meets the IAS 40 definition. If this election is made, the right-of-use asset is measured using the fair value model. Lessors who grant operating leases over investment property continue to recognise the asset under IAS 40 and recognise lease income on a straight-line basis.
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