International Accounting Standard 40 (IAS 40) defines investment property as the “property (land or a building — or part of a building — or both) held (by the owner or by the lessee under a finance lease) to earn rentals or for capital appreciation or both, rather than for:
a) use in the production or supply of goods or services or for administrative purposes; or
b) sale in the ordinary course of business”.
Investment property is held to earn rentals or to gain from capital appreciation from the changes in the value of the property or for both of these purposes. Investment property, as opposed to owner occupied property, is not for use or sale in the ordinary course of business.
An important distinguishing characteristic of investment property is that it generates cash flows which are significantly independent from other assets held by an entity. This factor distinguishes investment property from owner occupied property. Because the usage of property in the production or supply of goods generates cash flows which are attributable to the property as well as other assets used in the process of production or supply of goods.
Property held by a lessee under an operating lease can also be classified as investment property (it is optional). It can be classified investment property if it meets the above definition of investment property.
The following are some of the examples of investment property:
land held for long-term capital appreciation
a building leased out under one or more operating leases
a building that is currently vacant but is held to be leased out under one or more operating leases
Another important of example of investment property is land held for a currently undetermined future use. If an entity has not decided whether it will use the land as owner-occupied property or for short-term sale in the ordinary course of business, the land is regarded as investment property.
It should be noted that the property that is being constructed or developed for future use as investment property will not be treated as investment property. Such a property will be classified as investment property only when the construction or development completes.
Investment property is a type of property held by an entity for earning rental income, capital appreciation, or both, rather than for use in the entity's operations or for sale in the ordinary course of business.
Investment Property According to IFRS and US GAAP
The accounting for investment property is similar under both International Financial Reporting Standards (IFRS) and US Generally Accepted Accounting Principles (GAAP), but there are some key differences.
Under IFRS, investment property is accounted for using the fair value model or the cost model, depending on the entity's choice. The fair value model requires that the investment property is measured at fair value, with changes in fair value recognized in profit or loss. The cost model requires that the investment property is measured at cost less accumulated depreciation and impairment, with no recognition of changes in fair value.
Under US GAAP, investment property is accounted for using the cost model, which requires that the investment property is initially measured at cost and subsequently measured at cost less accumulated depreciation and impairment. Unlike IFRS, there is no option to use the fair value model.
Furthermore, under IFRS, investment property is classified as either held-for-rental or held-for-sale, whereas under US GAAP, investment property is not classified in this way. Instead, it is classified as either property, plant, and equipment or as a long-term investment, depending on its nature and intended use. This means that under US GAAP, investment property is typically subject to the same accounting rules as other fixed assets, whereas under IFRS, the classification of investment property as either held-for-rental or held-for-sale can have significant implications for its measurement and presentation in the financial statements. For example, if investment property is classified as held-for-sale under IFRS, it must be measured at the lower of its carrying amount or fair value less costs to sell, and any gains or losses arising from changes in fair value must be recognized in profit or loss. In contrast, under US GAAP, investment property that is held for sale is generally accounted for as inventory, and is therefore subject to a different set of rules for measurement and recognition of income and expenses
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