IAS 40 Examples & Journal Entries (Step-by-Step)
IAS 40 Journal Entries: Examples & Step-by-Step
- All IAS 40 journal entries begin with initial recognition at cost — regardless of which subsequent measurement model is used.
- Under the fair value model, fair value movements are recorded directly to the investment property account with the corresponding entry in profit or loss.
- Under the cost model, depreciation is recorded each period; fair value changes are not journalised.
- Transfers between categories trigger specific measurement adjustments at the transfer date.
- Disposal gains and losses are calculated as net proceeds minus the carrying amount at the date of disposal.
IAS 40 journal entries follow a logical progression: initial recognition at cost, subsequent measurement using the fair value or cost model, transfers between categories, and final disposal. Each scenario has a specific accounting treatment under IAS 40, and mastering these entries is essential for IFRS exams and professional practice.
This guide provides step-by-step journal entries for every IAS 40 scenario, with full worked examples using Delta Properties Ltd. Each entry includes the relevant account names, amounts, and the IAS 40 paragraph that supports the treatment.
Journal Entry 1: Initial Recognition at Cost
All investment property — regardless of which subsequent measurement model will be used — is recognised initially at cost. Cost includes the purchase price and all directly attributable transaction costs.
IAS 40.20: "Investment property shall be measured initially at its cost. Transaction costs shall be included in the initial measurement."
Delta Properties Ltd — Acquisition
| Facts: Delta acquires an office building for $800,000. Legal fees and stamp duty total $20,000. |
Dr  Investment Property                        $820,000
      Cr  Bank                                           $820,000
To recognise acquisition of investment property at cost
(purchase price $800,000 + transaction costs $20,000)
Journal Entry 2: Fair Value Gain — Fair Value Model
Under the fair value model, when the fair value of the investment property increases between reporting dates, the increase is recognised as a gain in profit or loss. The carrying amount of the investment property is increased to reflect the new fair value.
IAS 40.35: "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."
Journal Entry — Fair Value Gain (Year 1):
Dr  Investment Property                       $50,000
      Cr  Fair Value Gain on Investment Property (P&L)  $50,000
To recognise increase in fair value of investment property
(IAS 40.35) — recognised directly in profit or loss, NOT in OCI
Journal Entry 3: Fair Value Loss — Fair Value Model
When the fair value of investment property decreases, a loss is recognised in profit or loss and the carrying amount of the investment property is reduced. There is no floor on how much can be recognised as a loss — unlike IAS 16 revaluations, there is no revaluation surplus to absorb losses first.
Journal Entry — Fair Value Loss (Year 2):
Dr  Fair Value Loss on Investment Property (P&L)  $30,000
      Cr  Investment Property                            $30,000
To recognise decrease in fair value of investment property
Closing carrying amount Year 2: $870,000 − $30,000 = $840,000
Journal Entry 4: Depreciation — Cost Model
Under the cost model, investment property is depreciated over its useful life using a systematic basis (typically straight-line). The approach follows IAS 16 principles: determine the depreciable amount (cost less residual value) and charge it evenly over the useful life.
Annual depreciation = $820,000 ÷ 50 = $16,400
Journal Entry — Annual Depreciation (Cost Model):
Dr  Depreciation Expense                       $16,400
      Cr  Accumulated Depreciation — Investment Property  $16,400
To charge annual depreciation on investment property (cost model)
Carrying amount after Year 1: $820,000 − $16,400 = $803,600
Cost Model — Multi-Year Carrying Amounts
| Year | Opening CA $ | Depreciation $ | Closing CA $ | FV (disclosed) $ |
|---|---|---|---|---|
| Year 1 | 820,000 | (16,400) | 803,600 | 870,000 |
| Year 2 | 803,600 | (16,400) | 787,200 | 840,000 |
| Year 3 | 787,200 | (16,400) | 770,800 | 860,000 |
Journal Entry 5: Rental Income
Rental income is recognised as revenue in profit or loss. It is accounted for separately from fair value movements or depreciation — rental income applies identically under both the fair value model and the cost model.
Monthly Journal Entry — Rental Receipt:
Dr  Bank                             $5,000
      Cr  Rental Income (P&L)               $5,000
If rent is accrued at period-end (not yet received):
Dr  Rent Receivable                     $5,000
      Cr  Rental Income (P&L)               $5,000
On receipt of the accrued rent:
Dr  Bank                             $5,000
      Cr  Rent Receivable                    $5,000
Journal Entry 6: Transfer from Investment Property to PPE (Owner-Occupied)
When an entity begins to occupy an investment property that was previously measured at fair value, a transfer out of investment property into PPE (IAS 16) is made. The deemed cost for the PPE is the fair value at the date of transfer. No gain or loss is recognised at the transfer date — the change in use simply reclassifies the asset.
IAS 40.60: "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."
Step 1 — Bring carrying amount to fair value at transfer date (if not already updated):
Dr  Investment Property                       $20,000
      Cr  Fair Value Gain (P&L)                      $20,000
(If fair value at transfer date differs from last-reported carrying amount)
Step 2 — Reclassify to PPE at fair value (deemed cost):
Dr  Property, Plant & Equipment               $860,000
      Cr  Investment Property                         $860,000
The PPE is now recorded at $860,000. Depreciation under IAS 16 begins from this date using the new deemed cost.
Journal Entry 7: Transfer from PPE to Investment Property
When an entity stops using a building in its own operations and begins leasing it to third parties, the asset transfers from PPE to investment property. If the fair value model is used, any difference between the fair value at the date of transfer and the carrying amount is treated as a revaluation under IAS 16 at that date.
IAS 40.61: "For a transfer from owner-occupied property to investment property carried at fair value, an entity shall apply IAS 16 up to the date of change in use."
The difference ($60,000) is treated as a revaluation surplus under IAS 16:
Dr  Investment Property                          $760,000
      Cr  Property, Plant & Equipment              $700,000
      Cr  Other Comprehensive Income (Revaluation Surplus)  $60,000
Note: The $60,000 goes to OCI (revaluation surplus under IAS 16) — it does NOT go to profit or loss at the transfer date. Future fair value movements after transfer are then recognised in P&L under IAS 40.
Journal Entry 8: Transfer from Investment Property to Inventory
When an entity begins to develop investment property with a view to selling it (rather than continuing to hold it for capital appreciation or rental), the property transfers to inventory. The deemed cost for inventory purposes is the fair value at the date the development for sale commences.
IAS 40.57(d): "Transfers from investment property shall be made when, and only when, there is a change of use, evidenced by ... commencement of development with a view to sale."
Step 1 — Update fair value to transfer date:
Dr  Investment Property                       $5,000
      Cr  Fair Value Gain (P&L)                      $5,000
Step 2 — Reclassify to Inventory at fair value (deemed cost):
Dr  Inventory (Property Held for Sale)         $875,000
      Cr  Investment Property                         $875,000
After reclassification, the property is accounted for under IAS 2 (inventory).
Journal Entry 9: Disposal of Investment Property
When an investment property is sold or permanently withdrawn from use (with no future economic benefits expected from disposal), it is derecognised. The gain or loss on disposal equals the net disposal proceeds minus the carrying amount at the disposal date.
Disposal — Fair Value Model
Gain on disposal = $900,000 − $870,000 = $30,000
Journal Entry:
Dr  Bank (Proceeds)                                      $900,000
      Cr  Investment Property                                 $870,000
      Cr  Gain on Disposal of Investment Property (P&L)  $30,000
To derecognise investment property and recognise gain on disposal.
Disposal — Cost Model
Gain on disposal = $900,000 − $803,600 = $96,400
Journal Entry:
Dr  Bank                                                       $900,000
Dr  Accumulated Depreciation                          $16,400
      Cr  Investment Property (cost)                           $820,000
      Cr  Gain on Disposal (P&L)                                $96,400
Note: Under the cost model, the gain is larger because the carrying amount is lower (due to depreciation). This does not mean the cost model produces better returns — it simply reflects a lower net book value at disposal.
Multi-Year Worked Example — Delta Properties Ltd
Let us trace Delta Properties through three full years under the fair value model, then compare the cumulative position.
Setup
- Acquisition: $820,000 at start of Year 1
- Annual rental income: $60,000
- Fair values: Year 1 end $870,000 | Year 2 end $840,000 | Year 3 end $900,000
- Measurement model: Fair value
Year 1 Journal Entries
Dr Investment Property $820,000 | Cr Bank $820,000
2. Rental income (annual):
Dr Bank $60,000 | Cr Rental Income $60,000
3. Fair value gain ($870,000 − $820,000):
Dr Investment Property $50,000 | Cr FV Gain (P&L) $50,000
Closing carrying amount: $870,000 | P&L impact: +$60,000 rental +$50,000 FV gain = +$110,000
Year 2 Journal Entries
Dr Bank $60,000 | Cr Rental Income $60,000
2. Fair value loss ($870,000 − $840,000):
Dr FV Loss (P&L) $30,000 | Cr Investment Property $30,000
Closing carrying amount: $840,000 | P&L impact: +$60,000 rental −$30,000 FV loss = +$30,000
Year 3 Journal Entries
Dr Bank $60,000 | Cr Rental Income $60,000
2. Fair value gain ($900,000 − $840,000):
Dr Investment Property $60,000 | Cr FV Gain (P&L) $60,000
Closing carrying amount: $900,000 | P&L impact: +$60,000 rental +$60,000 FV gain = +$120,000
Cumulative P&L Summary (Years 1–3)
| Year | Rental Income | FV Gain/(Loss) | Net P&L Impact | Carrying Amount |
|---|---|---|---|---|
| Year 1 | $60,000 | $50,000 | $110,000 | $870,000 |
| Year 2 | $60,000 | ($30,000) | $30,000 | $840,000 |
| Year 3 | $60,000 | $60,000 | $120,000 | $900,000 |
| Total | $180,000 | $80,000 | $260,000 | $900,000 |
The total fair value gain over three years ($80,000) equals the net movement in carrying amount ($900,000 − $820,000 = $80,000), which confirms the journal entries are correct.
For the full explanation of how these measurement models work and when to choose between them, see our guide: IAS 40 Fair Value Model vs Cost Model.
Understanding how these journal entries flow into the full set of financial statements is important. Our financial statements guide explains how each entry affects the balance sheet, income statement, and cash flow statement.
Quick Reference: IAS 40 Journal Entry Summary
| Scenario | Debit | Credit |
|---|---|---|
| Acquisition at cost | Investment Property | Bank |
| Fair value gain (FV model) | Investment Property | FV Gain (P&L) |
| Fair value loss (FV model) | FV Loss (P&L) | Investment Property |
| Depreciation (cost model) | Depreciation Expense | Accumulated Depreciation |
| Rental income received | Bank | Rental Income (P&L) |
| Transfer IP → PPE (FV model) | PPE (at FV) | Investment Property |
| Transfer PPE → IP (FV model) — surplus | Investment Property | PPE + OCI (Revaluation Surplus) |
| Transfer IP → Inventory | Inventory (at FV) | Investment Property |
| Disposal (gain) | Bank | Investment Property + Gain (P&L) |
| Disposal (loss) | Bank + Loss (P&L) | Investment Property |
Related Reading
- IAS 40 Investment Property: Complete Guide — Full rules and context
- IAS 40: Fair Value Model vs Cost Model
- Investment Property Accounting: Recognition & Measurement
- IAS 40 Disclosure Requirements
- Depreciation Accounting Guide
- Goodwill Impairment: Complete Guide
- Bad Debt Expense: Complete Guide
Frequently Asked Questions — IAS 40 Journal Entries
1. Do fair value gains on investment property go to OCI or P&L?
Under IAS 40, fair value gains and losses on investment property always go to profit or loss — not to other comprehensive income (OCI). This is the key difference from the IAS 16 revaluation model, where surpluses go to OCI. The only exception under IAS 40 is when owner-occupied property (with an existing revaluation surplus) is transferred to investment property — the surplus arising at the transfer date goes to OCI, but subsequent fair value movements go to P&L.
2. What accounts are debited and credited when investment property is acquired?
At acquisition, you debit Investment Property (non-current asset) and credit Bank (or the consideration paid). The full cost — including purchase price and all directly attributable transaction costs such as legal fees and stamp duty — is included in the debit to Investment Property. Transaction costs are never expensed separately under IAS 40.
3. How do you account for investment property under the cost model after acquisition?
Under the cost model, you charge depreciation each period: debit Depreciation Expense and credit Accumulated Depreciation — Investment Property. The carrying amount reduces each year. You also assess for impairment under IAS 36 if there are indicators of impairment. Rental income is recognised separately as revenue.
4. What is the journal entry when investment property is transferred to inventory?
When investment property (measured at fair value) is transferred to inventory because the entity begins developing it for sale, debit Inventory and credit Investment Property at the fair value at the date of transfer (which becomes the deemed cost for IAS 2 purposes). Any fair value movement up to the transfer date is recognised in P&L before the reclassification journal entry.
5. What is the journal entry for disposal of investment property at a loss?
If proceeds are less than the carrying amount, you debit Bank (proceeds), debit Loss on Disposal (P&L), and credit Investment Property (carrying amount). Under the cost model, you also debit the accumulated depreciation account to zero it out against the gross cost. The net effect removes the asset from the balance sheet and recognises the loss in profit or loss.
6. Can impairment losses on investment property be reversed?
Yes — but only under the cost model. Under IAS 36, impairment losses can be reversed in subsequent periods if the recoverable amount increases. The reversal is limited to the carrying amount that would have existed had no impairment been recognised. Under the fair value model, impairment testing is not relevant because the asset is already carried at its current value — any recovery is automatically captured through the fair value remeasurement.
7. How is the gain on disposal calculated when investment property was measured at cost?
Under the cost model, the gain on disposal = Net proceeds − (Cost − Accumulated depreciation − Accumulated impairment). The gain is typically larger under the cost model than under the fair value model (assuming the property has appreciated) because the carrying amount is lower. However, this does not mean the entity made more money — it simply reflects the accounting treatment. In substance, the total return to the entity is the same regardless of which model was used.
Practice More IAS 40 Questions
The ACCA DipIFR exam regularly tests journal entry scenarios for IAS 40 — including transfers, disposals, and model-specific entries. Our structured resources give you the practice and understanding you need to score top marks.
About the Author
Eduyush Team — Our content is created by qualified accounting and finance professionals with extensive experience in IFRS, ACCA, CMA, and CPA curriculum design. The Eduyush Team brings together practitioners and educators to deliver technically accurate, exam-relevant guidance for accounting students and professionals worldwide.
Expertise: IAS 40 Journal Entries | IFRS Worked Examples | Investment Property | ACCA DipIFR | Financial Accounting
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