A property held to earn rent or to gain in value is a different kind of asset from a factory or head office. The owner is not consuming it to make goods. It earns income and its value moves with the market. International Accounting Standard (IAS) 40 Investment Property therefore allows a measurement basis that IAS 16 does not: fair value with changes taken to profit or loss.
This topic covers the definition of investment property, how it is recognised and measured, the two models, transfers into and out of the category, disposals and disclosures. The next topic covers non-current assets held for sale and discontinued operations.
In the diets reviewed for this page, the topic appears in May Diet, 2022, in the 30-mark compulsory accounts question, where an investment property carried at fair value is revalued down at the year end and the loss goes to profit or loss. Read borrowing costs first.
In 30 seconds
Investment property is land or a building, or part of one, held to earn rentals, for capital appreciation or both. It is not owner-occupied and not held for sale in the ordinary course. It is recognised when future benefits are probable and cost is reliable, and measured at cost plus transaction costs.
Afterwards the entity chooses, for all its investment property, the fair value model (revalue every year end, 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). A transfer needs a change in use shown by evidence, not only a change of intention.
A disposal gives a gain or loss of net proceeds less carrying amount in profit or loss.
What is investment property
Investment property is property (land, a building, part of a building or both) held to earn rentals or for capital appreciation or both. It may be owned or held under a lease. It includes a building while it is being constructed for eventual use as investment property.
Investment property differs from other property, which is used in producing or supplying goods or services or for administration, or is held for sale in the ordinary course of business. The following are not investment property:
- property intended for sale in the ordinary course of business (inventory, under IAS 2);
- property being built or developed on behalf of third parties; and
- owner-occupied property (property, plant and equipment, under IAS 16).
Where a property is partly investment and partly owner-occupied, the parts are accounted for separately if they could be sold separately. If they could not, the whole is investment property only if the owner-occupied part is insignificant. Where the owner provides minor ancillary services to tenants, such as security, the property is still investment property.
Recognition and measurement
The recognition criteria are the same as for property, plant and equipment: an investment property is recognised only when it is probable that future economic benefits will flow to the entity and the cost can be measured reliably. It is measured initially at cost plus transaction costs of acquisition.
After recognition the entity chooses one model as its accounting policy and applies it to all its investment property. A change of policy is allowed only if it gives a more appropriate presentation, and IAS 40 says that a change from the fair value model to the cost model is unlikely to do so.
One exception exists: if a fair value cannot be measured reliably on a continuing basis for a particular property, that property is carried under the cost model until it is disposed of.
The fair value model
Under the fair value model the entity measures all its investment property at fair value, which is the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date (International Financial Reporting Standard (IFRS) 13). It revalues at the end of each financial year and recognises the gain or loss in profit or loss.
The property is not depreciated. This differs from the revaluation model in IAS 16, where gains go to other comprehensive income and the revaluation surplus.
Why different treatment? Most property is used in the business and consumed over time, so depreciating it is right. An investment property earns income and cash flows largely independently of the entity’s other assets, and it is held to produce wealth through rent and capital growth.
The two are linked parts of the financial performance, so reporting the change in fair value in profit or loss alongside the rent shows that performance meaningfully. The most relevant information about such a property is what it could be sold for, and depreciation says little.
IAS 40 allows the cost model as well, partly to give preparers and users time to gain experience with fair value and partly for countries whose property markets and valuation professions are still developing.
The cost model
The cost model follows IAS 16. The property is carried at cost less accumulated depreciation and impairment, and the building element is depreciated while land is not. Under the cost model the entity also discloses the fair value of the property in the notes.
Transfers and disposals
A property is transferred into or out of investment property only when its use changes. The change must be evidenced, for example by the start of owner occupation, and not just by a change in management’s intention.
| Change of use | Transfer | Measurement at transfer |
|---|---|---|
| Owner occupation begins | Investment property to owner-occupied property | Fair value at the date of change becomes the deemed cost for later accounting. |
| Owner occupation ends | Owner-occupied property to investment property | Under the fair value model, revalue under IAS 16 up to the date of change; any difference is treated as a revaluation under IAS 16. |
| Development with a view to sale begins | Investment property to inventories | Fair value at the date of change becomes the deemed cost. |
| An operating lease to another party begins | Inventories to investment property | Fair value at the date of transfer; the difference from the previous carrying amount goes to profit or loss. |
The measurements in the table apply to an entity that uses the fair value model. Under the cost model, a transfer between investment property, owner-occupied property and inventories does not change the carrying amount of the property, nor its cost for measurement or disclosure, and it continues to be carried at cost less depreciation and impairment.
On disposal, the gain or loss is the net disposal proceeds less the carrying amount, recognised in profit or loss in the period of disposal.
Disclosure
- Both models: which model is used; the methods and assumptions used to find fair values; the extent to which fair value is based on a valuation by an independent qualified valuer with recent experience; rental income and operating expenses on investment property; restrictions on the ability to sell it or remit income and proceeds; and contractual obligations to buy, build or develop it, or to repair and enhance it.
- Fair value model: a reconciliation of opening and closing carrying amounts showing additions, assets classified as held for sale under International Financial Reporting Standard (IFRS) 5, net gains or losses from fair value adjustments, and business combinations. Any property carried at cost because fair value cannot be measured reliably is shown separately, with a description, the reason and, if possible, the range of likely fair value.
- Cost model: depreciation methods and rates, gross carrying amounts and accumulated depreciation at the start and end, a reconciliation including depreciation, impairment losses and transfers, and the fair value of the property.
The ideas in more depth
Rental income is separate from the fair value change
In profit or loss, rent is income and the change in fair value is a separate gain or loss.
In the 30-mark accounts question in May Diet, 2022, the property carried at ₦15,000 million was valued at ₦14,000 million at the year end, so a ₦1,000 million loss went to profit or loss, the property appeared in the statement of financial position at ₦14,000 million, and the rental income of ₦2,500 million appeared separately as other income.
Why intention is not enough for a transfer
If a change in intention alone could move a property, an entity could shift it between categories to choose whether a gain goes to profit or loss. Requiring evidence of a change in use stops that.
Sources and references
- IAS 40 Investment Property: definition, recognition, measurement models, transfers, disposals and disclosure.
- IFRS 13 Fair Value Measurement; IAS 16 Property, Plant and Equipment; IAS 2 Inventories; IFRS 5 Non-current Assets Held for Sale and Discontinued Operations.
These points are stated as at 5 November 2026.
Worked examples
Example 1: two models. On 1 January Year 1 Entity P buys a building for investment for ₦40,000,000 with transaction costs of ₦400,000. The depreciable amount of the building element is ₦16,000,000 and its life is 40 years. At the end of Year 1 its fair value is ₦46,000,000. Required: the amounts at 31 December Year 1 on each model.
- Cost.
₦40,000,000 + ₦400,000 = ₦40,400,000. - Cost model.
Depreciation = ₦16,000,000 ÷ 40 = ₦400,000.
Carrying amount = ₦40,400,000 − ₦400,000 = ₦40,000,000.
Profit or loss: depreciation ₦400,000. - Fair value model. Statement of financial position: ₦46,000,000.
Profit or loss: gain = ₦46,000,000 − ₦40,400,000 = ₦5,600,000.
No depreciation.
Example 2: disposal on each model. Early in Year 2 the property in Example 1 is sold for ₦48,500,000, and selling costs are ₦500,000. Required: the gain on each model.
- Net disposal proceeds.
₦48,500,000 − ₦500,000 = ₦48,000,000. - Cost model.
Gain = ₦48,000,000 − ₦40,000,000 = ₦8,000,000. - Fair value model.
Gain = ₦48,000,000 − ₦46,000,000 = ₦2,000,000. - Check.
Over the two years, the fair value model reports ₦5,600,000 + ₦2,000,000 = ₦7,600,000, and the cost model reports ₦8,000,000 less depreciation ₦400,000 = ₦7,600,000.
The total is the same and the timing differs.
Example 3: a fall in value. An entity using the fair value model holds an investment property carried at ₦12,000 million. At the year end a valuer values it at ₦11,200 million. Rent for the year was ₦2,000 million. Required: the effect on the statements.
- Loss.
₦12,000 million − ₦11,200 million = ₦800 million, charged to profit or loss. - Statement of financial position. Investment property ₦11,200 million, with no depreciation charge.
- Rent. ₦2,000 million is shown as income, separately from the loss.
How to answer in the exam
- Define. Give the definition and list the three things that are not investment property.
- Explain the models. Fair value: revalue annually, profit or loss, no depreciation. Cost: IAS 16, with fair value disclosed. Say the choice applies to all investment property.
- Compare with IAS 16. The key difference is where the gain goes: profit or loss for investment property, other comprehensive income for revalued property, plant and equipment.
- Calculate. Show cost including transaction costs, then the model, then the gain or loss.
- Transfers. Name the change of use and the measurement at transfer.
Common mistakes in the exam
- Depreciating investment property under the fair value model.
- Taking a fair value gain to the revaluation surplus. Under IAS 40 it goes to profit or loss.
- Omitting transaction costs from initial cost.
- Moving a property between categories because management changes its mind, without a change in use.
- Using proceeds without deducting selling costs, or comparing proceeds with cost instead of carrying amount.
- Treating owner-occupied property as investment property.
Quick revision
- Investment property: held for rentals or capital appreciation; not owner-occupied, not inventory.
- Initial: cost plus transaction costs. After: fair value model or cost model, for all property.
- Fair value: revalue at year end; gain or loss in profit or loss; no depreciation.
- Cost: IAS 16; disclose fair value.
- Transfers need a change in use shown by evidence.
- Disposal: net proceeds less carrying amount, in profit or loss.
Practice questions
These are original questions written in the style of the Institute’s exams. Try each one before you open the answer. Section A is a recall check, because the paper itself is written.
Recall check: multiple choice
Question 1. Investment property is property held:
- For use in production
- For administrative purposes
- For sale in the ordinary course of business
- To earn rentals or for capital appreciation or both
Show the answer
D. That is the definition.
Question 2. Which of the following is NOT investment property?
- A building leased to tenants
- A building occupied by the owner as its head office
- Land held for long-term capital appreciation
- A building under construction for future rental
Show the answer
B. Owner-occupied property is property, plant and equipment.
Question 3. Under the fair value model, changes in fair value are recognised in:
- Profit or loss
- Other comprehensive income
- Retained earnings directly
- The revaluation surplus
Show the answer
A. This differs from the IAS 16 revaluation model.
Question 4. Under the fair value model, investment property is:
- Depreciated over its useful life
- Depreciated on the building element only
- Not depreciated
- Amortised over 10 years
Show the answer
C. It is carried at fair value, so no depreciation is charged.
Question 5. An entity that chooses a model for investment property must apply it to:
- One property
- All its investment property
- Only property in one city
- Only new property
Show the answer
B. The policy covers all investment property, apart from the exception for a property whose fair value cannot be measured reliably.
Question 6. Investment property is initially measured at:
- Fair value
- Market value
- Cost less depreciation
- Cost plus transaction costs
Show the answer
D. Transaction costs are included in the initial cost.
Question 7. A transfer to or from investment property requires:
- A change in use, shown by evidence
- A change in management’s intention
- The directors’ approval
- A new valuation report
Show the answer
A. Intention alone is not enough.
Question 8. The gain or loss on disposal of an investment property is:
- Proceeds less original cost
- Proceeds less fair value at purchase
- Net disposal proceeds less the carrying amount
- Proceeds less accumulated depreciation
Show the answer
C. It goes to profit or loss.
Question 9. An entity using the cost model must also disclose:
- Nothing about fair value
- Only the rental income
- The valuer’s name
- The fair value of the investment property
Show the answer
D. Fair value is disclosed under the cost model.
Question 10. If the fair value of a particular investment property cannot be measured reliably on a continuing basis, the entity:
- Carries that property under the cost model
- Leaves it out of the statements
- Uses the IAS 16 revaluation model
- Uses its insurance value
Show the answer
A. That property uses the cost model until it is disposed of.
Section B style: written questions
Question 11 (10 marks). (a) Define investment property and state THREE items that are not investment property. (4 marks) (b) State the two models allowed after initial recognition. (2 marks) (c) Explain why investment property is treated differently from owner-occupied property. (4 marks)
Question 12 (15 marks). On 1 January Year 1 Kano Rentals buys a building for ₦80,000,000 with transaction costs of ₦1,000,000. The depreciable amount of the building element is ₦48,000,000 and its life is 40 years. At 31 December Year 1 its fair value is ₦92,000,000. Early in Year 2 it is sold for ₦95,000,000, with selling costs of ₦2,000,000. (a) Show the amounts at 31 December Year 1 on the cost model and the fair value model.
(8 marks) (b) Calculate the gain on disposal on each model. (4 marks) (c) State THREE disclosures required under the fair value model. (3 marks)
A further written question
Question 13 (20 marks). (a) State the treatment at the date of change for each of the following, for an entity using the fair value model. (i) An investment property with a fair value of ₦30,000,000 becomes owner-occupied. (3 marks) (ii) An owner-occupied building with a carrying amount of ₦25,000,000 is let and has a fair value of ₦29,000,000.
(3 marks) (iii) Inventory property carried at ₦15,000,000 is let under an operating lease and has a fair value of ₦17,000,000. (3 marks) (iv) An investment property with a fair value of ₦33,000,000 is developed for sale. (3 marks)
(b) An investment property was carried at ₦12,000 million and is valued at ₦11,200 million at the year end. Rent was ₦2,000 million. Show the effect on profit or loss and the statement of financial position. (4 marks)
(c) State the disclosures required about the valuation of investment property. (4 marks)
Model answers
Show the model answer to Question 11
(a) Investment property is property held to earn rentals or for capital appreciation or both. (1) Not investment property (1 each, any three): property intended for sale in the ordinary course of business; property being built or developed for third parties; owner-occupied property.
(b) The fair value model (1) and the cost model (1).
(c) Most property is used in the business and consumed, so it is depreciated. (1) Investment property generates income and cash flows largely independently of other assets. (1) It is held to earn wealth through rent and capital growth, which are linked. (1) Its fair value is the most relevant information and depreciation is largely irrelevant. (1)
Show the model answer to Question 12
(a)
- Cost.
₦80,000,000 + ₦1,000,000 = ₦81,000,000 (1). - Cost model: depreciation ₦48,000,000 ÷ 40 = ₦1,200,000 (1); carrying amount ₦79,800,000 (1); profit or loss: depreciation ₦1,200,000 (1).
- Fair value model: carrying amount ₦92,000,000 (1); gain ₦92,000,000 − ₦81,000,000 = ₦11,000,000 in profit or loss (2); no depreciation (1).
(b)
- Net disposal proceeds.
₦95,000,000 − ₦2,000,000 = ₦93,000,000 (1). - Cost model.
₦93,000,000 − ₦79,800,000 = ₦13,200,000 (1.5). - Fair value model.
₦93,000,000 − ₦92,000,000 = ₦1,000,000 (1.5).
(c) (1 mark each, any three) That the fair value model is used; the methods and assumptions used to find fair value; the extent to which valuation was by an independent qualified valuer; rental income and operating expenses; a reconciliation of opening and closing carrying amounts showing fair value gains or losses; properties carried at cost because fair value cannot be measured reliably.
Show the model answer to Question 13
(a) (i) A change of use shown by the start of owner occupation (1); fair value at the date of change, ₦30,000,000, becomes the deemed cost (2). (ii) End of owner occupation (1); revalue under IAS 16 up to the date of change, and the ₦4,000,000 difference (₦29,000,000 − ₦25,000,000) is treated as a revaluation, in other comprehensive income (2). (iii) Start of an operating lease (1); measure at fair value ₦17,000,000 and take the ₦2,000,000 difference to profit or loss (2).
(iv) Start of development with a view to sale (1); fair value ₦33,000,000 becomes the deemed cost of the inventory (2).
(b)
- Loss ₦12,000 million − ₦11,200 million = ₦800 million in profit or loss (2).
- The property is shown at ₦11,200 million, undepreciated (1).
- Rent of ₦2,000 million is shown separately as income (1).
(c) (1 mark each) The model used; the methods and assumptions in finding fair values; the extent to which fair value is based on a valuation by an independent qualified valuer with recent experience; any restrictions on selling or remitting income.
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 compulsory accounts question includes an investment property carried at fair value, valued down at the year end, with the loss taken to profit or loss and the rental income shown separately. The other adjustments belong to later topics.
Revise first: The fair value model
Part (a) asks for four circumstances that lead to a transfer into or out of investment property, with the treatment of each (8 marks). Part (b) asks how two changes of use of an office building are reflected under the cost model and the fair value model (12 marks).
Revise first: Transfers and disposals
Part (c) asks for three rented properties to be categorised under the property, plant and equipment standard or the investment property standard, with reasons (5 marks). Other parts belong to other topics.
Revise first: What is investment property
The compulsory accounts question includes investment property carried at fair value, with a 7% fair value gain taken to profit or loss and rental income shown separately. The other adjustments belong to other topics.
Revise first: The fair value model
Source: ICAN Pathfinder, Financial Reporting. Diets covered: Every diet in the Pathfinder, from November Diet, 2021 to May Diet, 2026, was reviewed here. The diets listed above test this topic or include it within a longer question..
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