IAS 40: Investment property
Property held to earn rent or grow in value: the fair value and cost models, and moving property in and out of the category.
ACCA exams this helps with: FR Financial Reporting SBR Strategic Business Reporting See the ACCA map
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What it is: Property a company holds to earn rent or to grow in value, not to use itself or to sell as part of its trade.
The key idea: under the fair value model, the property is valued at fair value every year, the gain or loss goes to profit or loss, and there is no depreciation.
Example. An office block leased to tenants was bought for £1,000,000 and is worth £1,080,000 at the year end. The £80,000 gain goes to profit or loss.
Key words
- Investment property
- Land or buildings held to earn rent, for capital growth, or both.Example: An office block leased to other businesses.
- Owner-occupied property
- Property the company uses itself. It is covered by IAS 16, not IAS 40.Example: The company’s own head office.
- Fair value model
- Investment property is remeasured to fair value each year, with gains and losses in profit or loss and no depreciation.Example: A £30,000 rise in value is shown as a gain in profit.
- Cost model
- Investment property is held at cost less depreciation, like IAS 16, with its fair value disclosed.Example: An office block depreciated over 50 years.
Learn
Is it investment property?
| Property | Standard |
|---|---|
| Held to earn rent or for capital appreciation | IAS 40 investment property |
| Land held for an undecided future use | IAS 40 |
| Used by the company itself (offices, factories) | IAS 16 property, plant and equipment |
| Built or bought to sell in the ordinary course of business | IAS 2 inventory |
Measurement
Initially at cost, including transaction costs such as legal fees. After that, choose one model for all investment property:
| Fair value model | Cost model | |
|---|---|---|
| Carried at | Fair value at each year end | Cost less depreciation |
| Depreciation | None | Yes |
| Gains and losses | Profit or loss | Only impairment losses |
| Disclose fair value? | — | Yes |
Changes of use
When owner-occupied property becomes investment property under the fair value model, first revalue it under IAS 16: the gain goes to other comprehensive income (revaluation surplus). After that, changes in value go to profit or loss.
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Worked example
On 1 January a company buys an office block for £1,000,000 to lease to tenants. It uses the fair value model. At 31 December the fair value is £1,080,000.
| Working | £ |
|---|---|
| Fair value at 31 December | 1,080,000 |
| Carrying amount before remeasurement | (1,000,000) |
| Gain in profit or loss | 80,000 |
| Account | Dr £ | Cr £ |
|---|---|---|
| Investment property | 80,000 | |
| Gain on investment property (P/L) | 80,000 | |
| (Remeasurement to fair value) | ||
No depreciation is charged. Compare IAS 16: a revaluation gain on a building the company uses goes to OCI, not profit.
Practice questions
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