Overview Investment property is property held to earn rentals or for capital appreciation or both. Investment property accounting is required for all investment property. A portion of a dual-use property is classified as investment property only if the portion could be sold or leased out under a finance lease. Otherwise the entire property is classified as property, plant and equipment, unless the portion of the property used for own-use is insignificant. When ancillary services are provided, a property is classified as investment property if such services are a relatively insignificant component of the arrangement as a whole. When a property is managed by a third party, criteria should be developed in order to classify such property as either investment property or property, plant and equipment on a consistent basis. Investment property is recognized initially at cost. Subsequent to initial recognition, all investment property should be measured either by using the fair value model (subject to limited exceptions) or by using a cost model. Disclosure of the fair value of all investment properties is required, regardless of the measurement model used. Subsequent expenditure is capitalized only when it is probable that it will give rise to future economic benefits in excess of the originally assessed standard of performance of the asset. Transfers to or from investment property can only be made when there has been a change in the use of the property. The gain or loss on disposal is the difference between the net disposal proceeds and the carrying amount of the property.

1. DefinitionIAS 40 is not a specialized industry standard. Therefore, determining whether a property is investment property depends upon the use of the property rather than the type of entity that holds the property.

Investment property is property held to earn rental income or for capital appreciation or both, rather than for: use in the production or supply of goods or services or for administrative purposes; or sale in the ordinary course of business.

For example, a retail site owned by entity A, but leased out to third parties in return for rental income, is an investment property; however, a factory owned and used by entity B is not an investment property because it is used in the production of goods.

Although the above definition appears relatively straightforward, determining what is or is not an investment property raises some difficult practical issues. Some of these problem areas are discussed below.

BuildingsAn investment property may comprise: land; a building or part of a building; or both.

Equipment and furnishingsEquipment and furnishings physically attached to a building are considered to be part of the investment property. So, for example, lifts, escalators, air conditioning units, decorations and installed furniture such as built-in cabinetry would be included as part of the cost and fair value of the investment property and would not be classified separately, as property, plant and equipment.

Leased propertyIAS 17 (lease accounting), rather than IAS 40 applies to: property held under an operating lease in a lessees financial statements; and property leased out under a finance lease in a lessors financial statements.

Forthcoming requirementsRevised IAS 17 clarifies that a lease of land and buildings should be treated as separate leases of the land and of the building. As a result the leases may be classified differently (e.g., the land as an operating lease and the building as a finance lease).

Forthcoming requirementsThe revised standard permits property held by a lessee under an operating lease to be classified as investment property if the rest of the definition of investment property is met and the lessee measures the property at fair value. In such cases the leasehold interest would be accounted for as if it were a finance lease. The use of the fair value model for property held by a lessee under an operating lease (by classifying the property interest as an investment property) can be elected on an asset-by-asset basis. However, if the fair value model is used for one such asset, all owned investment properties also must be measured using the fair value model.

Inventory versus investment propertyProperty that is held for sale in the ordinary course of business, or which is in the process of construction or development for such sale, is classified as inventory (see 3.7) rather than as investment property.

Property as collateralOften financial institutions take possession of property that was originally pledged as security for loans. Such property should be classified as either investment property or property, plant and equipment in the normal way.

Consolidated versus entity financial statementsIn determining the classification of a property in consolidated financial statements, the definition is assessed from the point of view of the group as a single entity. While this is consistent with the requirement for the consolidated financial statements to be presented as those of a single entity, it means that a property might be classified differently in separate entity and consolidated financial statements.

Dual-use propertyProperty often has dual purposes whereby part of the property is used for own-use activities that fall within the scope of IAS 16, the standard on property, plant and equipment and part of the property is used for activities that fall within the scope of IAS 40. A portion of a dual-use property is classified as an investment property only if the portion could be sold or leased out separately under a finance lease; in some countries the ability to sell a portion of a property is referred to as strata title or condominiumization.

Ancillary servicesIn many cases the owner of a property provides ancillary services to tenants. In such cases the key to identifying investment property is to decide whether the services provided are a relatively insignificant component of the arrangement as a whole. The standard gives two examples of properties where ancillary services are provided: an owner-managed hotel is not an investment property because ancillary services provided are asignificant component of the arrangement; and an office building where security and maintenance services are provided by the owner is aninvestment property because these ancillary services are an insignificant component ofthe arrangement.

Properties managed by othersWhen a property is operated by a third party under a management contract, it is necessary to apply judgment in assessing whether the definition of investment property is met. The standard acknowledges that the terms of management contracts vary widely, and requires an entity to develop criteria that are applied consistently in making an assessment.

2. RecognitionIf an entity acquires a piece of land with the intention of constructing an investment property on it, in our view, during the construction phase only the building should be accounted for as property, plant and equipment in accordance with IAS 16. The land component of the property should be classified as investment property immediately.

Investment property is recognized as an asset when: it is probable that the future economic benefits that are associated with the investment property will flow to this entity; and the cost of the investment property can be measured reliably.

3. Initial measurementInvestment property is measured initially at cost except when the asset is transferred from another balance sheet category.

The cost of investment property includes transaction costs and directly attributable expenditure on preparing the asset for its intended use. The principles discussed in respect of attributing cost to property, plant and equipment apply equally to the recognition of investment property. In addition, clearly identified inefficiencies and initial operating losses should be expensed as incurred, which also is similar to property, plant and equipment.

4. Subsequent measurementSubsequent to initial recognition an entity must make an accounting policy election, which should be applied consistently, to either: measure all investment property based on the fair value model, subject to limited exceptions that are discussed below; or measure all investment property based on the cost model.

Fair value modelGeneral requirementsIf an entity chooses to measure investment property using the fair value model, it must measure the property at fair value at each balance sheet date, with changes in fair value recognized in the income statement. Considerable guidance is provided on determining the fair value of investment property, which generally involves consideration of: the actual current market for that type of property in that type of location at a specific date (i.e., the balance sheet date) and current market expectations; rental income from current leases and market expectations regarding possible future lease terms; hypothetical sellers and buyers, who are reasonably informed about the current market and who are motivated, but not compelled, to transact in that market on an arms length basis; and investor expectations, for example, when valuation has been done by independent valuer in the past.

Exemption from fair valueIn exceptional cases there will be clear evidence on initial recognition of a particular investment property that its fair value cannot be determined reliably on a continuing basis. In such cases the property in question is measured using the cost model in accordance with IAS 16 (see 3.2), except that the residual value is deemed to be zero in all cases. The exemption applies only when comparable market transactions are infrequent and alternative estimates of fair value (e.g., based on discounted cash flow projections) are not available.

Cost modelIf an entity chooses to measure investment property using the cost model, the property is accounted for in accordance with the cost model for property, plant and equipment in IAS 16 (i.e., at cost less accumulated depreciation (see 3.2) and less any accumulated impairment losses). However, the property continues to be classified as investment property in the balance sheet.