Financial Reporting · Ind AS 40 Investment Property

Ind AS 40 Investment Property: Recognition and Measurement at Initial Recognition

Updated 5 October 2026 · Fact-checked

Under Ind AS 40, you recognise an investment property when future economic benefits are probable and its cost can be measured reliably. You measure it at cost: purchase price plus directly attributable costs such as legal fees and transfer taxes. For deferred payment use the cash price equivalent. For exchanges use fair value if the exchange has commercial substance.

Understand Recognition and Measurement at Initial Recognition

An investment property is property (land, a building or part of a building) held to earn rentals, for capital appreciation, or both. This page assumes the property already qualifies. The question here is when it goes on the balance sheet and at what amount.

Recognition has two conditions. It is recognised as an asset when and only when (a) it is probable that the future economic benefits will flow to the entity, and (b) the cost can be measured reliably. If either fails, you do not recognise it. You test this at the time each cost is incurred, whether the cost is initial or later.

At initial recognition, you measure the property at cost. For a purchased property, cost is the purchase price plus directly attributable expenditure. This covers professional fees for legal services, property transfer taxes and other transaction costs. It does not cover start-up costs, abnormal wastage or initial operating losses incurred before the property reaches the planned level of occupancy. Day-to-day servicing costs (mainly labour and consumables, and minor repairs) go to profit or loss.

If payment is deferred beyond normal credit terms, cost is the cash price equivalent. The difference between that and the total payments is interest expense over the credit period. If you acquire the property in exchange for non-monetary assets, cost is the fair value of the asset given up (or the asset received, if that is more clearly evident). This applies only if the exchange has commercial substance and fair value is reliably measurable. Otherwise cost is the carrying amount of the asset given up.

An exchange has commercial substance when the risk, timing and amount of the cash flows of the asset received differ from those of the asset given up. It also has commercial substance when the entity-specific value of the affected part of its operations changes, and in either case the difference is significant relative to the fair values exchanged.

Key rules to remember

Recognition test: Recognise if: future economic benefits are probable AND cost is reliably measurable; Both conditions must be met. Apply the test to initial and subsequent costs when they are incurred.
Cost of purchased investment property: Cost = Purchase price + Directly attributable costs (legal fees, transfer taxes, other transaction costs); Deduct trade discounts and rebates from the price. Exclude start-up costs, abnormal waste and initial operating losses.
Deferred payment: Cost = Cash price equivalent (present value of payments); Interest expense = Total payments − Cash price equivalent; Recognise the interest in profit or loss over the credit period. Do not capitalise it unless Ind AS 23 permits it.
Exchange with commercial substance: Cost = Fair value of asset given up (+ cash paid, − cash received); Use the fair value of the asset received instead if it is more clearly evident. The difference from the carrying amount of the asset given up is a gain or loss in profit or loss.
Exchange without commercial substance or no reliable fair value: Cost = Carrying amount of asset given up (+ cash paid, − cash received); No gain or loss arises on the asset given up.

How to solve Recognition and Measurement at Initial Recognition questions

Use this order for any recognition and initial measurement question on investment property.

1Confirm the property qualifies as investment property (held for rentals or capital appreciation, not for own use or sale in the ordinary course).
2Test recognition: are future economic benefits probable and is cost reliably measurable? If not, do not capitalise.
3Identify how it was acquired: purchase, self-construction, deferred payment, or exchange of assets.
4List every cost item. Include the price and directly attributable costs. Tick off exclusions such as start-up costs, abnormal waste, initial operating losses and general overheads.
5If payment is deferred, take the cash price equivalent as cost and treat the balance as interest over the credit period.
6If it is an exchange, check commercial substance and reliable fair value. Choose fair value or carrying amount of the asset given up, and adjust for cash paid or received.
7Compute cost and any gain or loss on the asset given up. State the journal entry and the conclusion with the paragraph logic.

Quickest way: Capitalise or Expense: the three-bucket sort

When to use it: Use when a question lists many costs and asks for the carrying amount at initial recognition.

Bucket 1 (capitalise): price net of discounts, legal fees, transfer taxes, brokerage and other directly attributable transaction costs.
Bucket 2 (adjust): deferred payment. Replace the price with the cash price equivalent and send the difference to interest.
Bucket 3 (expense): start-up costs, abnormal waste, initial operating losses, general admin and day-to-day servicing.
For exchanges, fix the base first: fair value given up if commercial substance, otherwise carrying amount. Then add cash paid or subtract cash received.
Add Bucket 1 to the base from Bucket 2 or the exchange rule. That is the cost.

Common mistakes in Recognition and Measurement at Initial Recognition

Capitalising initial operating losses or the cost of finding a tenant as part of cost.
Students assume every cost before the first rent is a cost of getting the property ready.
Fix: Only directly attributable acquisition costs are capitalised. Losses before the planned level of occupancy and general overheads go to profit or loss.
Capitalising the total deferred payment instead of the cash price equivalent.
The question gives the larger future figure and students use it directly.
Fix: Take the present value as cost. Charge the difference as interest over the credit period.
Always using fair value for an exchange of assets.
Students remember 'fair value' but skip the commercial substance test.
Fix: Check commercial substance and reliable fair value first. If either fails, cost is the carrying amount of the asset given up.
Recognising a gain on the asset given up when the exchange lacks commercial substance.
Students apply the fair value route automatically.
Fix: With carrying amount as cost, no gain or loss arises. Gain or loss comes only on the fair value route.
Forgetting cash paid or received in an exchange.
Students focus on the two non-monetary assets only.
Fix: Add cash paid to the base or deduct cash received. Write it as a separate line in your working.
Capitalising routine repairs and maintenance of an existing property.
Students mix up Ind AS 40 with the replacement-part rule.
Fix: Day-to-day servicing is expensed. Only the cost of replacing a part is capitalised, and the carrying amount of the replaced part is derecognised.

Worked examples

Example 1

Rental Co Ltd buys a commercial building on 1 April to lease it out. The seller allows payment of ₹6,05,00,000 after 2 years, or ₹5,00,00,000 cash today. The company chooses deferred payment. The implicit rate is 10% a year. It pays legal fees of ₹4,00,000 and stamp duty and registration of ₹30,00,000 in cash on day one. It also incurs ₹3,00,000 of operating losses before the first tenant moves in. Compute the initial cost and the interest to be recognised in each year.

Show the solution

Recognition: leasing gives probable future benefits and all amounts are measurable, so the building is recognised.
Deferred payment: cost uses the cash price equivalent of ₹5,00,00,000, not ₹6,05,00,000. Check: ₹5,00,00,000 × 1.10 × 1.10 = ₹6,05,00,000.
Add directly attributable costs: legal fees ₹4,00,000 + stamp duty and registration ₹30,00,000 = ₹34,00,000.
Exclude the ₹3,00,000 initial operating losses. Expense them in profit or loss.
Cost = ₹5,00,00,000 + ₹34,00,000 = ₹5,34,00,000.
Interest year 1 = ₹5,00,00,000 × 10% = ₹50,00,000. Liability becomes ₹5,50,00,000.
Interest year 2 = ₹5,50,00,000 × 10% = ₹55,00,000. Liability becomes ₹6,05,00,000. Total interest = ₹1,05,00,000, which equals ₹6,05,00,000 − ₹5,00,00,000.

Answer: Initial cost of the investment property is ₹5,34,00,000. Interest expense is ₹50,00,000 in year 1 and ₹55,00,000 in year 2. The ₹3,00,000 operating losses are expensed.

Example 2

Yash Ltd owns land with a carrying amount of ₹3,00,00,000 and a fair value of ₹4,50,00,000. It exchanges the land for a building that it will lease out, and pays ₹20,00,000 cash in addition. The fair value of the building is not clearly evident. The exchange (a) has commercial substance, or (b) lacks commercial substance. Compute the cost of the building and any gain in each case.

Show the solution

(a) Commercial substance exists and the fair value of the land given up is reliably measurable, so use fair value of the asset given up.
(a) Cost = fair value of land ₹4,50,00,000 + cash paid ₹20,00,000 = ₹4,70,00,000.
(a) Gain on the land = ₹4,50,00,000 − ₹3,00,00,000 = ₹1,50,00,000, recognised in profit or loss.
(b) Without commercial substance, cost is the carrying amount of the asset given up plus cash paid.
(b) Cost = ₹3,00,00,000 + ₹20,00,000 = ₹3,20,00,000.
(b) No gain or loss arises on the land.

Answer: (a) Cost of building is ₹4,70,00,000 and a gain of ₹1,50,00,000 is recognised. (b) Cost of building is ₹3,20,00,000 and no gain or loss is recognised.

Exam tips

In MCQs on cost, look first for the trap items: initial operating losses, abnormal waste, general overheads and interest on deferred payment. They are usually offered as options to be added.
For deferred payment cases, always show the cash price equivalent and the interest working. Examiners award marks for the interest split.
For exchange questions, write the commercial substance test in one line before computing. Then give both the cost and the gain or loss.
Write answers in provision, facts, conclusion form: state the Ind AS 40 rule, apply it to the numbers given, then conclude with the cost and journal entry.

Practice questions from Ind AS 40 Investment Property

Recognition and Measurement at Initial Recognition in other exams

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

Recognition and Measurement at Initial Recognition: frequently asked questions

When is investment property first recognised under Ind AS 40?

When it is probable that future economic benefits will flow to the entity and its cost can be measured reliably. Both conditions must be met. You apply the same test to later costs when they are incurred.

Are transaction costs included in the cost of investment property?

Yes, for a purchased property. Directly attributable costs such as legal fees, property transfer taxes and other transaction costs are part of cost. Start-up costs, abnormal waste and initial operating losses are not.

How do I measure investment property bought on deferred payment?

Cost is the cash price equivalent, which is the present value of the payments. The difference between total payments and that amount is interest expense recognised over the credit period.

When is the fair value of an asset given up used as the cost in an exchange?

When the exchange has commercial substance and the fair value of the asset received or given up is reliably measurable. Otherwise cost is the carrying amount of the asset given up. Adjust either base for any cash paid or received.