What Is an Investment Property?
An investment property is land or a building held to earn rental income or for capital appreciation, rather than for use in production, supply of goods, or administrative purposes. IAS 40 lets companies choose between the cost model and the fair value model to measure it after initial recognition. Under the fair value model, gains and losses from changes in fair value go straight to profit or loss.
An investment property is real estate held for rental income or capital appreciation, and under the fair value model, any change in its fair value is recognized directly in profit or loss.
- •Held to earn rentals or for capital appreciation
- •Measured at cost or fair value model
- •Fair value changes go to profit or loss
- •Not used in production or admin
- •Used in production, supply, or admin
- •Measured at cost or revaluation model
- •Revaluation gains go to OCI (revaluation surplus)
- •Depreciated over useful life
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Step-by-step worked examples
A company owns an office building purchased purely to rent out to tenants. Its fair value rises from $500,000 to $540,000 during the year. How is the change accounted for under the fair value model?
This qualifies as an investment property (held to earn rentals) Gain = 540,000 − 500,000 = $40,000 Recognize a $40,000 gain directly in profit or loss (no depreciation charged)
A retailer owns a warehouse it uses to store its own inventory for its retail operations. Is this an investment property?
The warehouse is used in the company's own operations (supply of goods), not held for rental or appreciation This fails the IAS 40 definition Classify as property, plant and equipment (IAS 16) instead
An investment property's fair value falls from $1,200,000 to $1,150,000 over the year.
Loss = 1,150,000 − 1,200,000 = −$50,000 Recognize a $50,000 loss directly in profit or loss under the fair value model
Flashcards
Quick quiz
Q1.Which of these qualifies as an investment property?
Q2.Under the fair value model, where are gains from fair value increases recognized?
Q3.A property's fair value goes from $500,000 to $540,000. What is the gain?
Q4.What standard governs investment properties?
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Common mistakes
Classifying an owner-occupied building as an investment property. — Correct: Only property held for rentals or capital appreciation qualifies — owner-occupied property falls under IAS 16.
Depreciating an investment property measured at fair value. — Correct: Under the fair value model, no depreciation is charged; the property is remeasured to fair value each period instead.
Recognizing fair value gains on investment property in OCI. — Correct: Fair value gains and losses on investment property go through profit or loss, not OCI.
Assuming property held for future undetermined use is automatically an investment property. — Correct: Property with undetermined future use is generally still classified as investment property, but mixed-use property should be split if portions can be sold or leased separately.
FAQ
What is an investment property?
An investment property is land or a building held to earn rental income, for capital appreciation, or both — rather than for use in the owner's own operations.
What is the formula for the gain or loss on an investment property?
Gain or loss equals the fair value at the end of the period minus the fair value at the start of the period, recognized directly in profit or loss under the fair value model.
What are examples of investment properties?
An office building leased to tenants, land held for long-term capital appreciation, and a building whose future use is undetermined are typical investment properties.
How do you calculate the fair value change on an investment property?
Subtract the property's fair value at the beginning of the period from its fair value at the end of the period; the result is recognized as a gain or loss in profit or loss.