Strategic Business Reporting (International) · Non-current assets

IAS 40 Investment Property: Fair Value, Transfers and Disposals

Updated 11 October 2026 · Fact-checked

IAS 40 covers property held to earn rentals or for capital appreciation, not for use or sale in the ordinary course. You measure it at cost, then choose the cost model or the fair value model. Under fair value, gains and losses go to profit or loss and no depreciation is charged. Transfers follow a change in use.

Understand IAS 40 Investment Property

Investment property is land or a building (or part of one) held by the owner or a lessee to earn rentals, for capital appreciation, or both. The key idea is that it generates cash flows largely independent of the entity's other assets. That is what separates it from owner-occupied property.

Property used in production or supply of goods or services, or for administration, is owner-occupied and falls under IAS 16. Property held for sale in the ordinary course of business is inventory under IAS 2. Property being constructed for third parties falls under IFRS 15. A right-of-use asset under IFRS 16 can also qualify as investment property if it meets the definition.

Mixed-use property is common in exams. If the parts could be sold separately (or leased out separately under finance leases), you account for each part separately. If not, the whole is investment property only if an insignificant portion is owner-occupied. If the owner provides ancillary services, such as security and maintenance, to occupants, the property remains investment property if these services are an insignificant component of the arrangement. Property let to a group company is investment property in the lessor's own statements but owner-occupied in the consolidated statements.

After initial recognition at cost (including transaction costs), you choose one accounting policy for all your investment property: the cost model (as IAS 16: cost less depreciation and impairment) or the fair value model. Under fair value, you remeasure to fair value at each reporting date, take the change to profit or loss, and do not depreciate. Fair value is measured under IFRS 13, reflecting market conditions at the reporting date.

Once on fair value, you move to cost only if it is a more reliable presentation, which IAS 40 says is highly unlikely. Policy changes follow IAS 8. Under the cost model you must disclose the fair value of your investment property. Under both models you disclose the methods and assumptions used in determining fair value.

Key rules to remember

Definition test: Investment property = held to earn rentals and/or for capital appreciation, not for use or ordinary-course sale; If held for own use it is IAS 16. If held for resale in ordinary business it is IAS 2.
Initial measurement: Cost = purchase price + directly attributable costs (e.g. legal fees, transfer taxes); Applies to both models. Do not capitalise start-up losses or abnormal waste.
Fair value model gain or loss: Gain or loss = closing fair value − opening carrying amount (± additions and disposals); Recognise in profit or loss. No depreciation is charged.
Transfer from owner-occupied to investment property (fair value model): Apply IAS 16 up to the date of change in use. Any excess of fair value over carrying amount goes to OCI (revaluation surplus), as for a revaluation; If fair value is below carrying amount, treat as an IAS 16 revaluation decrease: first against any surplus, then to profit or loss. Under the cost model, transfers do not change the carrying amount, so the cost of the property for measurement and disclosure is unchanged.
Transfer from inventory to investment property (fair value model): Difference between fair value and previous carrying amount is recognised in profit or loss; Evidenced by the start of an operating lease to another party. Under the cost model, the carrying amount does not change on transfer.
Transfer from investment property to owner-occupied or inventory: Deemed cost for later accounting = fair value at the date of change in use; Applies when the investment property was at fair value. Under the cost model, transfers do not change the carrying amount, so the cost of the property for measurement and disclosure is unchanged.
Completion of self-constructed investment property (fair value model): Difference between fair value at completion and previous carrying amount is recognised in profit or loss (IAS 40 para 65); Property under construction for future use as investment property is within IAS 40 and is measured at fair value if that can be reliably measured. Use fair value at the date of completion.
Disposal: Gain or loss = net disposal proceeds − carrying amount; Recognise in profit or loss in the period of disposal. Under fair value, the carrying amount is the latest fair value.

How to solve IAS 40 Investment Property questions

Use this order for any IAS 40 question, whether it asks for classification, measurement, transfers or disposal.

1Identify the purpose for which each property is held: rental income, capital growth, own use, or sale in the ordinary course.
2Classify under IAS 40, IAS 16, IAS 2 or IFRS 16. Split mixed-use property if the parts can be sold or leased separately.
3Check which model the entity uses. The policy applies to all its investment property.
4Measure at initial cost, including directly attributable costs.
5Apply subsequent measurement: depreciate and test for impairment under cost, or remeasure to fair value with the change in profit or loss.
6If there is a change in use, date it, then apply the transfer rule for that direction and model.
7For disposals, calculate proceeds minus carrying amount at the date of sale and take it to profit or loss.
8Show the journal or the extract for the statement of financial position and profit or loss, and add a brief note on disclosure or ethical judgement if the scenario hints at it.

Quickest way: Purpose, model, direction

When to use it: Use when time is short and the scenario is a short transfer or measurement question.

Ask what the property is for: rent or growth means IAS 40.
Name the model in one line.
If fair value: gain equals closing fair value minus opening carrying amount, to profit or loss, no depreciation.
For a transfer, ask which direction and which category it leaves. Owner-occupied to investment property goes to OCI for a gain. Inventory to investment property goes to profit or loss.
Write the journal, then one sentence of justification tied to the scenario.

Common mistakes in IAS 40 Investment Property

Depreciating investment property held at fair value.
Students carry the IAS 16 habit into IAS 40.
Fix: Under the fair value model there is no depreciation. Only the fair value change goes to profit or loss.
Taking fair value gains on investment property to OCI.
Students confuse it with the IAS 16 revaluation model.
Fix: Under IAS 40 fair value model, gains and losses go to profit or loss. OCI is used only on transfer from owner-occupied property.
Treating property let to a subsidiary as investment property in the consolidated statements.
The parent's individual statements do classify it that way.
Fix: In the group statements the property is used by the group, so it is owner-occupied under IAS 16.
Getting the transfer direction and the double entry wrong.
There are several cases, and the treatment differs by direction.
Fix: Write the category it leaves and the category it joins first. Then apply the matching rule from your formula list.
Mixing models for different properties.
Students see one property with a gain and think the choice is per asset.
Fix: The policy applies to all investment property, with one exception. An entity may choose either model for all investment property backing liabilities that pay a return linked directly to the fair value of specified assets including that property. It may then choose either model for all its other investment property.
Classifying a whole mixed-use building as investment property.
Students overlook the owner-occupied part.
Fix: Split it if the parts can be sold or leased separately. Otherwise the whole qualifies only if the owner-occupied part is insignificant.

Worked examples

Example 1

Alpha Co buys an office block on 1 January 20X1 for $4,000,000 plus legal fees of $50,000. It lets the block to tenants and uses the fair value model. At 31 December 20X1 fair value is $4,300,000. Show the treatment for the year ended 31 December 20X1.

Show the solution

The block is held to earn rentals, so it is investment property under IAS 40.
Initial cost = 4,000,000 + 50,000 = $4,050,000, as legal fees are directly attributable.
Under the fair value model, no depreciation is charged.
Fair value gain = 4,300,000 − 4,050,000 = $250,000.
Journal: Dr Investment property 250,000; Cr Profit or loss 250,000.

Answer: Carrying amount at 31 December 20X1 is $4,300,000 and a gain of $250,000 is recognised in profit or loss. No depreciation is charged.

Example 2

Beta Co occupies a building with carrying amount $2,000,000 under the IAS 16 cost model (cost $2,400,000, accumulated depreciation $400,000). On 1 July 20X2 it moves out and leases the building to a tenant. Beta uses the fair value model for investment property. Fair value on 1 July 20X2 is $2,600,000, and at 31 December 20X2 it is $2,650,000. Depreciation to 1 July 20X2 has already been charged. Show the entries.

Show the solution

Change in use on 1 July 20X2: from owner-occupied (IAS 16) to investment property (IAS 40 fair value).
Depreciation is up to date to 1 July, so the carrying amount is $2,000,000.
Excess of fair value over carrying amount = 2,600,000 − 2,000,000 = $600,000.
Because it moves from owner-occupied, the excess goes to OCI as a revaluation surplus.
Journal on transfer: Dr Investment property 2,600,000; Dr Accumulated depreciation 400,000; Cr Property, plant and equipment (cost) 2,400,000; Cr Revaluation surplus (OCI) 600,000. Debits and credits both total 3,000,000.
At 31 December 20X2: gain = 2,650,000 − 2,600,000 = $50,000 to profit or loss. No depreciation.

Answer: On transfer, $600,000 goes to OCI (revaluation surplus). The investment property is $2,650,000 at 31 December 20X2, with a $50,000 gain in profit or loss.

Exam tips

Start every answer with the classification and the reason, using words from the scenario such as 'rentals' or 'own use'. This earns application marks.
Always state which model applies before calculating. Markers often award a mark for the model alone.
For transfers, write the direction and category first, then the entry. Write the OCI-versus-profit-or-loss point explicitly.
Link to IFRS 13 and IAS 16 where relevant. Many questions combine fair value measurement, IAS 40 and group classification.
If the scenario hints that management wants to reclassify to raise profit, comment on the ethical and professional scepticism point briefly.

Practice questions from 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 IAS 16 and IAS 40?

IAS 16 covers property used by the owner in operations or administration. IAS 40 covers property held to earn rentals or for capital growth. IAS 16 allows cost or revaluation with depreciation. IAS 40 allows cost or fair value, and fair value gains go to profit or loss with no depreciation.

Where do fair value changes on investment property go?

Under the fair value model, gains and losses go to profit or loss in the period they arise. No depreciation is charged. This differs from the IAS 16 revaluation model, which uses OCI.

How do you treat transfers to and from investment property?

Transfers happen only when there is a change in use, supported by evidence such as the start of owner-occupation or an operating lease. Under the fair value model, a transfer from owner-occupied property recognises any gain in OCI, and from inventory in profit or loss. A transfer out uses fair value at that date as the deemed cost.

Can I switch from fair value to cost model?

Only by a change in accounting policy under IAS 8, and only if the change gives a more reliable and relevant presentation. IAS 40 states this is highly unlikely for a move from fair value to cost.