## **Learning Outcomes**

After studying this article, you will be able to explain what qualifies as investment property under IAS 40, identify and compare the permitted measurement models, account for fair value changes, address transfers between property categories, and understand the mandatory disclosures for investment property in published financial statements.

## **ACCA Financial Reporting (FR) Syllabus**

For ACCA Financial Reporting (FR), you are required to understand the recognition, measurement, transfer, and disclosure requirements of IAS 40 Investment Property. In particular, you should revisit:

- The definition and scope of investment property under IAS 40
- The initial recognition and measurement of investment property
- The cost model and fair value model, and their accounting implications
- Accounting for transfers between investment property and other property categories
- Required disclosures in the notes and financial statements

## **Test Your Knowledge**

_Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision._

1. According to IAS 40, what is one key distinction between investment property and owner-occupied property?
2. Which financial statement line item is affected by a change in fair value under IAS 40’s fair value model?
3. True or false? An entity can use the cost model for one investment property and the fair value model for another in the same financial statements.
4. Briefly describe what disclosures are required if an entity applies the fair value model for investment property.

## **Introduction**

IAS 40 sets out the rules for recognising, measuring, and disclosing investment property in financial statements. These properties are not held for use in the production or supply of goods or services, or for administrative purposes, but instead to earn rental income, for capital appreciation, or both. Choosing the correct measurement model and applying transfer and disclosure requirements is an essential part of FR exam preparation.

> **Key Term: investment property**
> Property (land or a building—or part of a building—or both) held to earn rentals, for capital appreciation, or both, rather than for use in production, supply of goods/services, administrative purposes, or sale in the ordinary course of business.

## **Recognition and Initial Measurement**

An investment property is recognised as an asset when, and only when:

- it is probable that the future economic benefits associated with it will flow to the entity; and
- the cost can be measured reliably.

At initial recognition, measure investment property at cost, including transaction costs and (if applicable) present value of dismantling obligations.

## **Subsequent Measurement: Cost vs Fair Value Model**

After recognition, IAS 40 allows an accounting policy choice for all investment property:

- **Cost Model**: Continue to carry at cost less accumulated depreciation and impairment, as per IAS 16. No fair value remeasurement is required.
- **Fair Value Model**: Remeasure to fair value at each reporting date. All fair value changes are recognised in profit or loss, not other comprehensive income. No depreciation is charged under this model.

> **Key Term: fair value model**
> An accounting method where investment property is remeasured to fair value at each reporting date, with changes recognised in profit or loss.
>
> **Key Term: cost model**
> An accounting method where investment property is held at cost less accumulated depreciation and impairment, following rules similar to those for property, plant and equipment (IAS 16).
>
> **Key Term: fair value**
> The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

Under IAS 40, an entity must apply the chosen model to all of its investment properties. Mixed use of measurement models within the same entity is not permitted.

### **Worked Example 1.1**

An entity acquires a building for \$1,000,000 as an investment property. At the year end, the property’s fair value is assessed at \$1,090,000. Depreciation for the year (cost model) would be \$20,000.

How is the property shown in the financial statements under each allowed model?

> **Answer:**
>
> - **Cost model**: Carrying amount = \$1,000,000 – \$20,000 = \$980,000; depreciation is charged to profit or loss.
> - **Fair value model**: Carrying amount = \$1,090,000; gain of \$90,000 is credited to profit or loss. No depreciation is recorded.

## **Transfers and Reclassifications**

Transfers into or out of investment property must only be made when there is a change in use, evidenced by:

- Commencement of owner-occupation
- End of owner-occupation and start of leasing out to others
- Start of development with a view to sale

Upon transfer:

- If moving from owner-occupied (IAS 16) to investment property (fair value model), revalue to fair value. Any increase over carrying amount is a revaluation surplus (OCI) under IAS 16, then subsequent fair value changes go to profit or loss.
- If transferring to owner-occupied (IAS 16) from investment property, fair value at date of transfer becomes deemed cost under IAS 16.

## **Accounting for Fair Value Changes**

Under the fair value model, all changes in fair value are recognised in profit or loss. There is no revaluation surplus for investment property. Under the cost model, revaluations are not performed.

### **Worked Example 1.2**

Kappa Ltd owns an office measured under the fair value model. At the start of the year, fair value is \$3,000,000, at year-end it’s \$2,900,000. How is this accounted for?

> **Answer:**
> A fair value loss of \$100,000 is recorded as an expense in profit or loss. Year-end carrying amount is \$2,900,000.

### **Exam Warning**

A frequent error is taking fair value gains or losses to other comprehensive income. Under IAS 40’s fair value model, all such gains or losses must go to profit or loss.

## **Disclosures**

Entities must disclose:

- Whether the fair value or cost model is used
- For the fair value model: the fair value of each class of investment property, methods and significant assumptions applied in determining fair value, and whether independent valuers were involved
- Rental income, direct operating expenses, and contractual obligations
- If the cost model is used: fair value of the investment property must still be disclosed in the notes if this can be measured reliably

### **Worked Example 1.3**

Omega Co holds investment property at cost under IAS 40 but can reliably measure fair value at \$1,200,000. What must be disclosed in the notes?

> **Answer:**
> Omega Co must present the fair value of the property in the notes, along with other required disclosures (measurement model, rental income, expenses, etc.).

## **Transfers Between Categories**

If an asset is transferred into investment property measured at fair value, any difference between previous carrying amount and fair value is treated in accordance with the former category's rules (e.g., revaluation surplus for owner-occupied property).

If transferred from investment property measured at fair value to owner-occupied (IAS 16) or inventory, the property’s cost for subsequent accounting is its fair value at date of change.

## **Summary**

IAS 40 sets out clear recognition, measurement, and disclosure rules for investment property. The entity must select and apply one model (cost or fair value) to all investment properties, treat all fair value adjustments under the fair value model in profit or loss, and provide comprehensive note disclosure. Transfers between categories demand precise accounting adjustments.

## **Key Point Checklist**

_This article has covered the following key knowledge points:_

- Define investment property under IAS 40 and distinguish it from other property types
- Explain initial recognition and measurement rules
- Compare the cost model and fair value model, including accounting consequences
- Apply rules for transfers between investment property and other categories
- Identify mandatory disclosure requirements under both measurement models
- Recognise common exam errors relating to fair value gains/losses

## **Key Terms and Concepts**

- investment property
- cost model
- fair value model
- fair value

Investment property (IAS 40) - Measurement and disclosure