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Financial Reporting · Tangible non-current assets

IAS 40 Investment Property for ACCA FR

Updated 11 October 2026 · Fact-checked

Investment property is land or a building held to earn rent or for capital appreciation, not for use in the business or for sale in the ordinary course. Under IAS 40 you choose the cost model or the fair value model. Fair value gains and losses go to profit or loss, with no depreciation.

Understand IAS 40 Investment Property

Investment property is property (land, a building, or part of one) that the owner or a lessee holds to earn rentals, for capital appreciation, or both. It generates cash largely independently of the entity's other assets. That is what sets it apart from other property.

It is not investment property if you use it to produce goods or services or for administration (that is owner-occupied property, IAS 16). It is also not investment property if you hold it for sale in the ordinary course of business (that is inventory, IAS 2). Property being built for a third party is a construction contract, covered by IFRS 15.

Some properties are mixed. If the parts could be sold separately, account for each part separately. If not, the whole is investment property only if an insignificant portion is owner-occupied. If a company rents rooms to a subsidiary or parent and the group uses them, the property is investment property in the owner's own books but owner-occupied in the consolidated accounts.

After initial measurement at cost (including transaction costs), you pick one accounting policy for all your investment property: the cost model or the fair value model. The cost model follows IAS 16: cost less depreciation and impairment. The fair value model carries the property at fair value at each reporting date. It is not depreciated, and any gain or loss goes to profit or loss, not to a revaluation surplus.

The fair value model is not the same as the IAS 16 revaluation model. Under IAS 16 gains go to other comprehensive income. Under IAS 40 fair value they go to profit or loss. Changing policy follows IAS 8, and IAS 40 says a change from fair value to cost is unlikely to give a more relevant presentation.

Key rules to remember

Definition test
Held for rent and/or capital appreciation → investment property (IAS 40)
Used in production or administration → IAS 16. Held for sale in ordinary course → IAS 2.
Initial measurement
Cost = purchase price + directly attributable transaction costs
Applies under both models.
Fair value model gain or loss
Gain or (loss) = closing fair value − opening carrying amount
Recognise in profit or loss. No depreciation is charged.
Cost model carrying amount
Cost − accumulated depreciation − impairment
Same treatment as IAS 16 cost model.
Owner-occupied to investment property (fair value model)
Revalue under IAS 16 up to the date of change; any difference between carrying amount and fair value goes to OCI (revaluation surplus), or to profit or loss as a loss where it reverses an earlier loss
A decrease first reduces any existing surplus for that asset. The rest of the decrease is an expense.
Inventory to investment property (fair value model)
Difference between fair value and previous carrying amount → profit or loss
The change must be evidenced by the start of an operating lease to another party.
Investment property to owner-occupied or inventory
Deemed cost for later accounting = fair value at date of change
The change must be evidenced by the start of owner-occupation or of development with a view to sale.

How to solve IAS 40 Investment Property questions

Use this order for any IAS 40 question, whether it is an objective test item or a constructed response.

  1. 1Classify the property. Ask why it is held: rent or capital growth (IAS 40), own use (IAS 16), or sale in the ordinary course (IAS 2). For mixed use, ask whether the parts can be sold separately.
  2. 2Identify the model: cost or fair value. If the question says the entity uses the fair value model, do not depreciate.
  3. 3Record initial cost, including legal fees and other transaction costs.
  4. 4Under fair value, compute the gain or loss as closing fair value less opening carrying amount. Post it to profit or loss.
  5. 5Under cost, compute depreciation using the IAS 16 method, and check for impairment.
  6. 6Check for transfers. Identify the date and the evidence of the change in use, then apply the rule for that direction and model.
  7. 7Present the result: investment property in non-current assets, gains or losses in profit or loss, rental income in revenue or other income as the question directs.
  8. 8Check the answer: carrying amount, profit or loss effect, and any OCI entry should reconcile to the opening balance.

Quickest way: Four-question shortcut

When to use it: Use this for Section A and Section B objective test questions, where speed matters and the answer is all or nothing.

  1. Why is it held? Rent or growth means IAS 40. Own use means IAS 16.
  2. Which model? Fair value means no depreciation and gains to profit or loss.
  3. Was there a transfer? If so, read the direction and the model.
  4. Compute: closing fair value less opening carrying amount. Then match to the option with the right sign and the right place (profit or loss or OCI).

Common mistakes in IAS 40 Investment Property

  • Taking fair value gains on investment property to a revaluation surplus in OCI.

    Students mix up the IAS 16 revaluation model with the IAS 40 fair value model.

    Fix: Remember that IAS 40 fair value gains and losses always go to profit or loss. Only the transfer from owner-occupied adds an OCI element.

  • Depreciating investment property under the fair value model.

    Depreciation is a habit from IAS 16 questions.

    Fix: Fair value model means no depreciation. Only the cost model depreciates.

  • Treating property let to a group company as investment property in the consolidated accounts.

    Students look at the single entity's view only.

    Fix: In the consolidated statements the group uses the property, so it is owner-occupied (IAS 16). In the lessor's own accounts it is investment property.

  • Leaving transaction costs out of initial cost, or expensing them.

    Students think only the purchase price counts.

    Fix: Include directly attributable costs such as legal fees and transfer taxes in the initial cost.

  • Applying the fair value model to just one property.

    Students think the choice is made asset by asset.

    Fix: The policy applies to all investment property. State this when explaining in a written answer.

  • Putting the whole gain on an owner-occupied to investment property transfer in profit or loss.

    Students apply the general IAS 40 rule to every transfer.

    Fix: For this transfer, treat the difference like an IAS 16 revaluation: a gain to OCI, and a loss first against any surplus on that asset, with the rest in profit or loss.

Worked examples

Example 1

On 1 January 20X1 Delta bought an office block for $2,000,000 plus legal fees of $40,000, and lets it to third parties. Delta uses the fair value model. Fair value at 31 December 20X1 was $2,150,000. Rental income for the year was $120,000. Show the effect on profit or loss and the carrying amount.

Show the solution
  1. Classification: held to earn rent, so it is investment property under IAS 40.
  2. Initial cost: $2,000,000 + $40,000 = $2,040,000.
  3. Fair value model, so no depreciation is charged.
  4. Gain = $2,150,000 − $2,040,000 = $110,000, recognised in profit or loss.
  5. Rental income of $120,000 is also in profit or loss.
  6. Total credit to profit or loss = $110,000 + $120,000 = $230,000.

Answer: Carrying amount at 31 December 20X1 is $2,150,000. Profit or loss includes a fair value gain of $110,000 and rental income of $120,000, a total of $230,000.

Example 2

Echo owns a building used as its head office, carried under the IAS 16 revaluation model. At 31 March 20X2 the carrying amount is $800,000 and the balance on the revaluation surplus for this building is $100,000. On 1 April 20X2 Echo moves out and begins to let it to a third party. Fair value on that date is $950,000. Echo uses the fair value model for investment property. Show the entries on transfer, and the effect of a fair value of $880,000 at 31 December 20X2 (ignore depreciation from 1 April and deferred tax).

Show the solution
  1. Transfer from owner-occupied to investment property, evidenced by the end of owner-occupation.
  2. Apply IAS 16 up to the date of change: revalue from $800,000 to $950,000.
  3. Gain on revaluation = $950,000 − $800,000 = $150,000, taken to OCI (revaluation surplus).
  4. Revaluation surplus for the building is now $100,000 + $150,000 = $250,000, and it is not transferred to profit or loss on the change in use.
  5. From 1 April 20X2 the property is measured at fair value under IAS 40.
  6. At 31 December 20X2 fair value is $880,000. Change = $880,000 − $950,000 = a loss of $70,000.
  7. The $70,000 loss goes to profit or loss. It is not set against the surplus, because under IAS 40 the gains and losses are recognised in profit or loss.

Answer: On transfer, $150,000 goes to OCI and the carrying amount becomes $950,000. At 31 December 20X2 a loss of $70,000 is recognised in profit or loss and the carrying amount is $880,000.

Exam tips

  • Read the scenario for the reason the property is held. Words such as rent, tenants and capital growth point to IAS 40. Words such as head office and factory point to IAS 16.
  • Check which model is stated before you calculate. A fair value question with a depreciation figure is a trap.
  • For transfers, find the direction and the date. Then say where the difference goes: profit or loss or OCI.
  • In written answers, state the definition, name the model and give the entries in a clear layout. Show gains and losses in profit or loss as separate lines.
  • In objective questions, work out the figure first, then pick the option. Look at the sign and the place (profit or loss or OCI).

Practice questions from Tangible non-current assets

IAS 40 Investment Property in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

IAS 40 Investment Property: frequently asked questions

What is the difference between investment property and owner-occupied property?

Investment property is held to earn rent or for capital growth. Owner-occupied property is used to produce goods or services or for administration. The first falls under IAS 40 and the second under IAS 16.

Where do changes in fair value of investment property go?

Under the fair value model, both gains and losses go to profit or loss in the period they arise. There is no depreciation. They do not go to a revaluation surplus.

Can I choose the cost model for some investment properties and fair value for others?

No. You choose one accounting policy and apply it to all your investment property. The exception, covered at a higher level, is property backing liabilities linked to its returns.

What is the difference between the IAS 40 fair value model and the IAS 16 revaluation model?

The IAS 40 fair value model revalues at every reporting date and puts all gains and losses in profit or loss, with no depreciation. The IAS 16 model revalues with enough regularity, depreciates, and takes gains to OCI.

How are transfers of property treated under IAS 40?

A transfer happens only when use changes, shown by the start or end of owner-occupation, development for sale, or an operating lease to another party. The accounting depends on the direction and the model used.