A company owns a building. If it works in the building, the building is an ordinary asset and is depreciated. If it rents the building to others to earn rent, or holds it hoping the price will rise, the building is an investment. Investors judge such a building by what it is worth, not by what it cost years ago.
International Accounting Standard (IAS) 40, Investment Property, gives the rules, and lets the company choose between showing the property at fair value, with changes in value in profit, or at depreciated cost.
This topic covers the definition and examples of investment property, borderline cases, recognition and initial measurement, the fair value and cost models, transfers between categories, disposals, judgements and how the choice of model changes the ratios. The previous topic covered property, plant and equipment under IAS 16. The next topics cover intangible assets, provisions and impairment. May 2026 Question 3(b) applied fair value measurement to an investment property in a declining market.
In 30 seconds
An investment property is land or a building (or part) held to earn rentals or capital appreciation or both, not to use in production or administration and not to sell in the ordinary course of business. It is recognised on the same two tests as other assets (probable future benefits, reliable cost) and measured initially at cost including transaction costs.
Afterwards the entity chooses, for all its investment property, the fair value model (revalue every year, take the gain or loss to profit or loss, no depreciation) or the cost model (IAS 16: cost less depreciation and impairment, with fair value disclosed). Property is moved in or out of the category only when use changes, shown by evidence such as starting owner-occupation or starting an operating lease.
A change in management’s intention alone is not enough. The fair value model gives higher assets, lower gearing and, when prices rise, higher profit, but more volatility.
Key terms in plain English
| Term | What it means |
|---|---|
| Investment property | Property held to earn rent or for price growth, or both |
| Owner-occupied property | Property the owner uses to produce or supply goods or services or for administration (IAS 16) |
| Fair value model | Carrying the property at its market-based value each year |
| Cost model | Carrying it at cost less depreciation and impairment |
| Change in use | A real change in how the property is used, supported by evidence |
| Deemed cost | The fair value at the date of transfer, used as cost afterwards |
Syllabus check
IAS 40 is examinable at this level. This topic covers:
- B2(a) assessing how recognition and measurement methods and timing affect the reported position of non-financial assets;
- B2(b) appraising the treatment of non-current assets, including investment property under IAS 40;
- B1(a) and D2 the effect of the accounting policy choice on performance and ratios.
CAMA 2020 and investment property
The Companies and Allied Matters Act 2020 (CAMA 2020) sets the records and the statements, not the property rules.
| Section | What it says | Link to IAS 40 |
|---|---|---|
| s. 374(1) | The company keeps accounting records that explain its transactions | Leases, valuations and rental income need records |
| s. 377(1) and s. 378 | Directors prepare statements that follow International Financial Reporting Standards (IFRS) and give a true and fair view | The model chosen must be applied to all investment property and disclosed |
| s. 404(7) | The audit committee reviews accounting policies and internal control | It can review valuer independence and valuation assumptions |
| s. 407(3) | The auditor has a right of access to books, accounts and vouchers | Supports testing of valuations and leases |
Definition and classification
An investment property is property (land, a building, part of a building, or both) held to earn rentals or for capital appreciation or both. Examples: land held for long-term capital growth; land held for a future use not yet decided; a building leased out under operating leases, including one that is vacant but ready to lease; and property being built or developed for future use as investment property.
A property held by a lessee as a right-of-use asset under an operating-type lease can be investment property if the lessee uses the fair value model and the rest of the definition is met.
Borderline cases
- Partly owner-occupied. If the parts can be sold or leased separately, account for them separately. If not, the property is investment property only if the owner-occupied part is insignificant.
- Ancillary services. If the owner provides security or maintenance to tenants and these are a small part of the arrangement, it is still investment property. If the services are significant, as in an owner-managed hotel, it is owner-occupied.
- Intra-group rentals. Property rented to a parent, subsidiary or fellow subsidiary is owner-occupied in the consolidated statements, because the group uses it. It can be investment property in the lessor’s own separate statements.
Recognition and measurement
Recognition criteria are the same as IAS 16: probable future benefits and reliable cost. Initial measurement is at cost plus transaction costs. A leased property is initially measured by capitalising the lease under International Financial Reporting Standard (IFRS) 16.
After recognition the entity chooses one policy for all its investment property:
| Feature | Fair value model | Cost model |
|---|---|---|
| Carrying amount | Fair value at each reporting date | Cost less accumulated depreciation and impairment (IAS 16) |
| Gains and losses | Profit or loss as they arise | None from revaluation; depreciation and impairment charged |
| Depreciation | None | Yes |
| Disclosure of fair value | Carrying amount is the fair value | Fair value must still be disclosed |
IAS 40 says it is highly unlikely that a change from the fair value model to the cost model gives a more appropriate presentation, whereas a change from cost to fair value is permitted. Fair value is measured under IFRS 13 as the price a market participant would pay.
Where there is no active market, a discounted cash flow valuation is used, with unobservable inputs, and it is classified as the lowest level of the fair value hierarchy. A risk-adjusted discount rate that reflects market conditions, such as a declining local property market, is more appropriate than an unadjusted one.
Transfers
Transfer a property to or from investment property when, and only when, there is a change in use, shown by evidence. A change in management’s intentions alone is not evidence.
| Evidence | Transfer |
|---|---|
| Start of owner-occupation, or of development for owner-occupation | Investment property to owner-occupied |
| Start of development with a view to sale | Investment property to inventory |
| End of owner-occupation | Owner-occupied to investment property |
| Start of an operating lease to another party | Inventory to investment property |
- Investment property at fair value to owner-occupied or inventory: the deemed cost is the fair value at the date of change.
- Owner-occupied to investment property at fair value: apply IAS 16 (or IFRS 16) up to the date of change. Any difference between the carrying amount and fair value is treated like a revaluation under IAS 16 (an increase to a revaluation surplus in other comprehensive income, a decrease to profit or loss after any surplus).
- Inventory to investment property at fair value: the difference is recognised in profit or loss.
- Completion of a self-built investment property at fair value: the difference between fair value and previous carrying amount goes to profit or loss.
Disposal
Derecognise on disposal or when permanently withdrawn with no future benefits expected. The gain or loss is net proceeds less carrying amount, in profit or loss in the period. Compensation from third parties for impaired, lost or given-up property is recognised in profit or loss when receivable.
Areas of judgement
- Identifying investment property, especially mixed use and assets that come with the property (a vineyard, for example).
- Choosing the policy, which affects the volatility of profit.
- Obtaining reliable fair values.
The rules in more depth
Why gains go to profit and not to other comprehensive income
The property is held for investment return. Changes in its value are part of that return, so they are shown in profit. A building used in the business earns its return through operations, so its revaluation is shown separately in equity.
Why transfers need evidence
Without the evidence rule, a company could move a property between categories to choose which accounting gives the better result. A real change in use, such as signing a lease, is observable.
Effects on investors’ analysis
- Statement of financial position: in rising markets the fair value model gives higher assets and equity, so lower gearing and more security for lenders, but lower asset turnover.
- Profit: fair value gains raise profit and earnings per share. Under the cost model depreciation lowers profit.
- Volatility: fair values move, so profit under the fair value model is less predictable. Depreciation is steady.
- Cash flows: the policy has no effect on cash.
- Disclosure: cost-model entities disclose fair value, which helps comparison.
Worked examples
Example 1: fair value and cost models. A company buys a building as an investment for ₦100 million, paying ₦2 million transaction costs. Its life is 40 years. At the year end the fair value is ₦110 million. The figures are illustrative.
- Initial cost.
₦100m + ₦2m = ₦102 million. - Fair value model:
gain = ₦110m − ₦102m = ₦8 million in profit or loss.
No depreciation.
Carrying amount ₦110m. - Cost model:
depreciation = ₦102m ÷ 40 = ₦2.55m.
Carrying amount = ₦99.45m.
The fair value of ₦110m is disclosed. - Difference in profit = ₦8m gain versus ₦2.55m charge = ₦10.55m.
Example 2: transfer from owner-occupied. A company stops using a building and leases it to an unrelated tenant. The building has cost ₦80 million with accumulated depreciation of ₦20 million. Its fair value on the date the lease starts is ₦90 million. The company uses the fair value model for investment property.
- The start of an operating lease shows a change in use, so transfer to investment property.
- Carrying amount under IAS 16 = ₦80m − ₦20m = ₦60m.
- Difference = ₦90m − ₦60m = ₦30m, treated as a revaluation: credit other comprehensive income (revaluation surplus) ₦30 million.
- From then on, carry at fair value with changes in profit or loss. (If it had come from inventory carried at ₦70m, the ₦20m difference would go to profit or loss.)
Example 3: a building let out after staff move out. Fadekemi Ltd bought a building in 2021 for ₦10 million and used it for its staff. In December 2023 it was let to an unrelated party at a market rent and was included in the statements at fair value of ₦16 million. Assume a 40-year life.
- The building meets the definition of investment property only from the start of the lease. In 2021 and 2022 it was owner-occupied and had to follow IAS 16.
- This is a reaction to a change in use, not a change in accounting policy. No retrospective restatement is needed.
- Carrying amount before transfer = ₦10m less depreciation for two years (₦0.5m) = ₦9.5m. Difference to fair value ₦16m = ₦6.5m, taken to a revaluation surplus in other comprehensive income.
Section 374(1) of CAMA 2020 requires records of the change, such as the lease and valuation report.
How to score full marks
- Classify first. Who uses the property and why? Rent or growth means investment property. Own use means IAS 16. Sale in the ordinary course means inventory.
- State the transfer evidence for any reclassification, and say that intention alone is not enough.
- For transfers, name the direction and the rule for the difference: revaluation for owner-occupied, profit or loss for inventory and completed developments.
- For policy discussion, cover assets, equity and gearing, profit and earnings per share, volatility, cash flows and disclosure.
- For fair value questions, identify the inputs and the level in the hierarchy, and justify the discount rate.
Common mistakes in the exam
- Depreciating investment property under the fair value model.
- Taking fair value gains to other comprehensive income instead of profit or loss.
- Treating a change in management’s plans as a change in use.
- Calling a hotel owner’s property investment property when services are significant.
- Treating intra-group rented property as investment property in the group statements.
- Applying different models to different investment properties.
- Forgetting that cost-model entities must still disclose fair value.
Quick revision
- Investment property: held for rent or capital growth or both.
- Initial measurement: cost plus transaction costs.
- Models: fair value (gains to profit or loss, no depreciation) or cost (IAS 16, disclose fair value). One policy for all.
- Transfers only on change in use, with evidence.
- Owner-occupied to investment property (fair value model): revaluation treatment. Inventory to investment property: profit or loss.
- Partial own use: split if separable. Ancillary services: significance. Intra-group: owner-occupied in the group.
- CAMA 2020: ss. 374(1), 377(1), 378, 404(7), 407(3).
Practice questions
These are original questions written in the style of the Institute of Chartered Accountants of Nigeria (ICAN) exam. Try each one before you open the answer. Full model answers follow the written questions.
Recall check: multiple choice
The real ICAN paper has no multiple-choice section. These questions are for quick recall. The written questions that follow are closer to the exam.
Question 1. Investment property is held to:
- Produce goods
- Earn rentals or for capital appreciation or both
- Sell in the ordinary course of business
- House administrative staff
Show the answer
B. Owner-occupied property follows IAS 16.
Question 2. Investment property is initially measured at:
- Fair value
- Cost plus transaction costs
- Revalued amount
- Nil
Show the answer
B. The model chosen applies afterwards.
Question 3. Under the fair value model, gains and losses are recognised in:
- Other comprehensive income
- Profit or loss
- Share capital
- Retained earnings directly
Show the answer
B. No depreciation is charged.
Question 4. Under the cost model, the entity must also:
- Ignore fair value
- Disclose fair value
- Revalue annually
- Use IAS 2
Show the answer
B. This helps comparison between entities.
Question 5. A property is transferred to or from investment property:
- Whenever management changes its mind
- Only when there is a change in use supported by evidence
- Every year
- Never
Show the answer
B. Intention alone is not evidence.
Question 6. Property rented to a subsidiary is, in the consolidated statements:
- Investment property
- Owner-occupied property
- Inventory
- An intangible asset
Show the answer
B. The group uses it.
Question 7. An owner-managed hotel is normally:
- Investment property
- Owner-occupied because services are significant
- Inventory
- Land held for sale
Show the answer
B. Ancillary services of small significance would still allow investment property.
Question 8. A building carried at ₦60m under IAS 16 becomes investment property at fair value ₦90m. The ₦30m difference is:
- Profit or loss
- A revaluation surplus in other comprehensive income
- Ignored
- Revenue
Show the answer
B. It is treated like a revaluation under IAS 16.
Question 9. Inventory carried at ₦70m is transferred to investment property at fair value ₦90m. The ₦20m difference is:
- In profit or loss
- In other comprehensive income
- In equity directly
- Ignored
Show the answer
A. Transfers from inventory differ from owner-occupied transfers.
Question 10. Which section of CAMA 2020 requires the statements to follow IFRS and give a true and fair view?
- Section 378
- Section 394
- Section 402
- Section 409
Show the answer
A. The model chosen must meet IAS 40.
Written questions
Question 11 (10 marks). (a) Define investment property and give two examples. (4 marks) (b) Explain how partial own use, ancillary services and intra-group rentals affect classification. (6 marks)
Question 12 (20 marks). (a) Describe the cost and fair value models for investment property and the rule on choosing between them. (6 marks) (b) State when a transfer is made and the accounting for the difference on a transfer from owner-occupied property and from inventory. (6 marks) (c) Discuss the effect of the choice of model on investors’ analysis.
(4 marks) (d) A building cost ₦80m with accumulated depreciation ₦20m. It is leased out and its fair value is ₦90m. The company uses the fair value model. Show the entry. (4 marks)
Question 13 (10 marks). Fadekemi Ltd bought a building in 2021 for ₦10m and used it for its staff. In December 2023 it let it to an unrelated party at a market rent and carried it at fair value of ₦16m. Assume a 40-year life. (a) Explain the classification and whether this is a change in accounting policy. (5 marks) (b) Calculate the amount taken to equity on transfer and say where it goes. (5 marks)
Model answers
Show the model answer to Question 11
(a) Definition (4 marks). Investment property is land or a building, or part of one, held to earn rentals or for capital appreciation or both. (2) Examples: land held for long-term capital growth; a building leased under operating leases, including a vacant one planned to be leased; property being developed for future use as investment property. (1 each, any two)
(b) Borderline cases (6 marks). Partial own use: if the parts can be sold or leased separately, account for them separately, so the rented part is investment property. (1.5) If not separable, it is investment property only if the owner-occupied part is insignificant. (1) Ancillary services: if services such as security and maintenance are a small part of the arrangement, it can be investment property.
(1.5) If they are significant, as in an owner-managed hotel, it is owner-occupied. (0.5) Intra-group rentals: property rented to a parent, subsidiary or fellow subsidiary is owner-occupied in the consolidated statements. (1) It may be investment property in the lessor’s separate statements. (0.5)
Show the model answer to Question 12
(a) Models (6 marks). Initial measurement is cost plus transaction costs. (1) Fair value model: carry at fair value at each reporting date, with gains and losses in profit or loss and no depreciation. (2) Cost model: cost less accumulated depreciation and impairment under IAS 16, with fair value disclosed. (2) The chosen policy applies to all investment property, and a change from fair value to cost is highly unlikely to be more appropriate. (1)
(b) Transfers (6 marks). Transfer only when there is a change in use supported by evidence, not management’s intention alone. (2) Owner-occupied to investment property at fair value: apply IAS 16 up to the date of change and treat the difference between carrying amount and fair value as a revaluation under IAS 16. (2) Inventory to investment property at fair value: the difference goes to profit or loss. (2)
(c) Investors (4 marks). Fair value gives higher assets and equity in rising markets, so lower gearing, but lower asset turnover. (1) Profit and earnings per share are higher with fair value gains. (1) Fair value profit is more volatile, while depreciation is predictable. (1) The choice has no effect on cash flows, and cost-model entities disclose fair value. (1)
(d) Entry (4 marks).
- The start of the lease is a change in use. (1)
- Carrying amount.
₦80m − ₦20m = ₦60m. (1) - Difference = ₦90m − ₦60m = ₦30m, a revaluation. (1)
- Debit investment property ₦30m (and remove the accumulated depreciation), credit other comprehensive income (revaluation surplus) ₦30m. (1)
Show the model answer to Question 13
(a) Classification (5 marks). The building became investment property when it was let to an unrelated party at market rent, which is evidence of a change in use. (2) In 2021 and 2022 it was owner-occupied and had to follow IAS 16. (1) It is a response to a change in the asset’s use and not a change in accounting policy, so no retrospective restatement is needed. (2)
(b) Amount to equity (5 marks).
- Depreciation for two years.
₦10m ÷ 40 × 2 = ₦0.5m. (1) - Carrying amount = ₦9.5m. (1)
- Difference = ₦16m − ₦9.5m = ₦6.5m. (1)
- It is treated as a revaluation under IAS 16 and credited to other comprehensive income as a revaluation surplus. (2)
Pathfinder on IAS 40 investment property
These are the ICAN Pathfinder questions that test this topic. ICAN owns the questions and the suggested solutions, so we point you to them and do not copy them. Open your Pathfinder, attempt each question under exam conditions, then check your answer against the notes above.
The marking guide gives 5 marks to the investment property exhibit. The solution classifies the measurement as unobservable inputs (the lowest level of the fair value hierarchy), prefers the 14% risk-adjusted discount rate to 12% because the local market is declining, and discloses the technique, inputs, sensitivity and a reconciliation. The measurement section of this topic gives you the same logic.
Revise first: Recognition and measurement
The worked examples and practice questions 12 and 13 follow these questions: classify by change in use, say it is not a policy change, and discuss assets, gearing, profit, volatility and disclosure.
Revise first: Worked examples
Source: ICAN Pathfinder, Strategic Business Reporting. Diets covered: May Diet, 2026 and November Diet, 2025.
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