IAS/NAS 40: Investment Property
Prescribes the accounting treatment for investment property and related disclosure requirements.
Investment property is property (land or a building or part of a building or both) held (by the owner or by the lessee as a right-of-use asset) to earn rentals or for capital appreciation or both, rather than for:
- use in the production or supply of goods or services or for administrative purposes; or
- sale in the ordinary course of business.
Property Classification
Owner-Occupied Property
(NAS 16)
Used in production, supply of goods/services, or for administrative purposes.
Investment Property
(NAS 40)
Inventory
(NAS 2)
Held for sale in the ordinary course of business.
Recognition Criteria:
An owned investment property shall be recognized as an asset when, and only when:
- It is probable that the future economic benefits that are associated with the investment property will flow to the entity; and
- The cost of the investment property can be measured reliably.
Author's Note: The concept of future economic benefit is the same as defined in IAS/NAS 16.
Initial Measurement:
An owned investment property shall be measured initially at its cost. Transaction costs shall be included in the initial measurement.
This is the same treatment as for Property, Plant, and Equipment (PPE) under IAS/NAS 16.
A real estate company purchased a commercial building to earn rental income. The costs associated with the purchase are:
| Purchase Price | $1,000,000 |
| Legal Fees | $20,000 |
| Property Transfer Tax | $30,000 |
| Architects Fee for alterations | $10,000 |
| Initial Repairs (necessary to rent it) | $15,000 |
| Total Capitalized Cost | $1,075,000 |
Rapti Pvt. Ltd. purchased a commercial office space for 5 crores and paid a one-time, non-refundable joining fee of 10,75,000 to the Nepal Commercial Complex Association.
Instruction:
The cost of a purchased investment property includes its purchase price and any directly attributable expenditure. The one-time joining fee is a directly attributable cost and must be capitalized.
Total Initial Cost of Investment Property:
5,00,00,000 + 10,75,000 = 5,10,75,000
Author's Note: Writing off the joining fee as a 'Membership' expense is incorrect.
Aarav Limited purchased a building for 30,00,000 to earn rentals and incurred several other costs for acquisition and redevelopment.
Total Cost Calculation:
| Purchase Price | 30,00,000 |
| Add: Property transfer taxes | 1,00,000 |
| Add: Direct legal costs | 20,000 |
| Add: Fee for planning permission | 2,00,000 |
| Add: Construction costs (7,00,000 - 40,000 refundable tax) | 6,60,000 |
| Total Capitalized Cost | 39,80,000 |
Author's Note: The following methods also apply to Property, Plant, and Equipment (IAS/NAS 16).
- Through Purchase (Direct Acquisition): Entity buys property outright. The asset is recognized at cost, including purchase price and directly attributable expenses.
- Through Exchange of Assets (Non-monetary Acquisition): When investment property is acquired in exchange for another asset. It is measured at fair value unless the exchange lacks commercial substance or fair value cannot be reliably measured.
Author's Note: An exchange transaction lacks commercial substance if the entity's future cash flows are not expected to change significantly as a result of the exchange. For example, trading a delivery truck for an identical truck is not a commercially substantive exchange.
- Through Self-Construction: An entity constructs an investment property. The cost includes materials, labor, and other directly attributable costs (similar to IAS/NAS 16).
- Acquisition through Business Combination: When an investment property is acquired as part of acquiring another entity (under IFRS/NFRS 3). The property is measured at fair value at the acquisition date.
- Lease (Right-of-Use Assets): Under IFRS/NFRS 16, a lessee may classify a right-of-use asset as investment property if it is held to earn rentals or for capital appreciation. It is initially measured at cost, which includes the lease liability and other directly attributable costs.
An entity must choose either the cost model or the fair value model as its accounting policy and must apply it to all of its investment property.
After initial recognition, the investment property is carried at cost less accumulated depreciation and impairment losses, identical to the cost model under IAS/NAS 16.
All provisions for Depreciation, useful life and residual amount are the same as for PPE under IAS/NAS 16.
The investment property is remeasured at fair value at each reporting date. Crucially:
- No depreciation is charged.
- All gains or losses from fair value changes are recognized directly in profit or loss.
Key Difference: Revaluation Model (IAS/NAS 16) vs. Fair Value Model (IAS/NAS 40)
The key distinction is where the value changes are recorded. Under the Revaluation Model (IAS/NAS 16), gains go to OCI (Revaluation Surplus). Under the Fair Value Model (IAS/NAS 40), all gains and losses go directly to the Profit or Loss statement.
A real estate investment firm purchases a building for $3,400,000 to rent out and applies the Fair Value model.
End of Year 1:
The fair value of the building increases to $4,500,000. A gain of $1,100,000 is recognized.
Investment Property A/c Dr. 1,100,000
To FV Gain (P&L) A/c 1,100,000End of Year 2:
A regional housing bubble bursts and the building is now worth $1,600,000. A loss of $2,900,000 ($4.5M - $1.6M) is recognized.
FV Loss (P&L) A/c Dr. 2,900,000
To Investment Property A/c 2,900,000Kamal Limited owns a building used to earn rentals with a carrying amount of 50,00,000. They replaced interior walls for 5,00,000. The carrying amount of the old walls was 1,00,000.
Instruction:
The cost of the new walls should be added to the carrying amount, and the carrying amount of the replaced (old) walls must be derecognized. This is consistent with the component approach in IAS/NAS 16.
New Book Value of the Building:
50,00,000 + 5,00,000 - 1,00,000 = 54,00,000
// Fair Value Gain
Investment Property A/c Dr. 1,100,000
To FV Gain (P&L) A/c 1,100,000
// Fair Value Loss
FV Loss (P&L) A/c Dr. 2,900,000
To Investment Property A/c 2,900,000When can an entity argue it cannot determine fair value reliably?
This situation is extremely rare and only applies on initial acquisition when the market for a comparable property is inactive and alternative reliable measurements (like discounted cash flow projections) are not available.
[Ref: para 53] There is a rebuttable presumption that an entity can reliably determine the fair value of an investment property on a continuing basis. However, in exceptional cases... when an entity is unable to determine the fair value reliably, the entity shall account for that investment property using the Cost Model in IAS/NAS 16.
[Ref para 55] Once an entity has measured an investment property at fair value, it must continue to do so until disposal, even if market transactions become less frequent. A recession or pandemic is not a sufficient reason to switch from the fair value model to the cost model.
An entity shall transfer a property to, or from, investment property only when there is a change in use. There must be evidence of a change in use; a mere intention of management is not enough. For example, a transfer to PPE requires the start of owner-occupation. A transfer to Inventory requires the commencement of development with a view to sale.
| From | To | Accounting Treatment at Transfer Date |
|---|---|---|
| Owner-occupied property (IAS/NAS 16) | Investment Property | Treat as revaluation under IAS/NAS 16. Any gain goes to OCI. Fair value at transfer date becomes deemed cost. |
| Inventories (IAS/NAS 2) | Investment Property | Remeasure to fair value. Recognize any gain/loss in P&L. Fair value at transfer date becomes deemed cost. |
| Investment Property (Fair Value Model) | Owner-occupied property (IAS/NAS 16) or Inventories (IAS/NAS 2) | Fair value at transfer date becomes the deemed cost for subsequent accounting under IAS/NAS 16 or IAS/NAS 2. |
| Investment Property (Cost Model) | Owner-occupied property (IAS/NAS 16) or Inventories (IAS/NAS 2) | Transfer at the carrying amount. No gain or loss is recognized. |
Koshi Enterprises Pvt Ltd relocates its head office and decides to lease out its old administrative building to a third party.
Accounting Treatment:
- On the date of change in use, the building is transferred from PPE (IAS/NAS 16) to Investment Property (IAS/NAS 40).
- IAS/NAS 16 is applied up to the date of transfer. Any difference between the fair value and the carrying amount at the transfer date is treated as a revaluation under IAS/NAS 16 (i.e., recognized in Other Comprehensive Income).
- The fair value at the date of change becomes the new 'deemed cost' for the investment property for subsequent accounting under IAS/NAS 40.
Bagmati Developers Ltd, a real estate developer, decides to stop renting out a commercial complex and instead develops it into individual office units for sale.
Accounting Treatment:
- On the date of change in use, a transfer is made from Investment Property to Inventory (IAS/NAS 2).
- Assuming the fair value model was used for the Investment Property, the property is remeasured to its fair value at the date of transfer.
- Any resulting gain or loss from this remeasurement is recognized in Profit or Loss.
- This fair value at the date of transfer becomes the 'deemed cost' for the inventory.
An investment property should be derecognized on disposal or when it is permanently withdrawn from use and no future economic benefits are expected. Gains or losses are recognized in profit or loss.
A property group owns an office building (investment property, fair value model). On March 31, 2025, it sells the building.
| Carrying Amount (Fair Value) at sale date | $1,200,000 |
| Sale Proceeds | $1,500,000 |
| Broker Commissions | ($35,000) |
| Net Disposal Proceeds | $1,465,000 |
Gain on Disposal (recognized in P&L):
$1,465,000 (Net Proceeds) - $1,200,000 (Carrying Amount) = $265,000
[Ref: Para 66 & 69] An investment property shall be derecognized on disposal or when it is permanently withdrawn from use and no future economic benefits are expected. Gains or losses on disposal are calculated as the difference between the net disposal proceeds and the carrying amount, and are recognized in profit or loss.