IAS 40 Investment Property: Fair Value vs Cost Model and Indian Real Estate Context
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Sai Manikanta Pedamallu
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IAS 40 Investment Property: Fair Value vs Cost Model and Indian Real Estate Context
By Sai Manikanta Pedamallu (ACCA, CMA US, CSCA US, CGMA, ACMA, Dip IFRS, M.Com, MBA, MA)
Lead Instructor, Global Fin X | www.globalfinx.in/manikanta
IAS 40 contains a measurement choice that produces two entirely different sets of financial statements from identical property portfolios. An entity electing the fair value model reports no depreciation and recognises every movement in property values through profit or loss. An entity electing the cost model reports depreciation and recognises nothing until disposal.
That choice does not exist in India.
Ind AS 40 prohibits the fair value model. Indian entities must apply the cost model, with fair value measured and disclosed in the notes. This is one of the most significant carve-outs in the entire Ind AS framework, and anyone moving between the Dip IFRS syllabus and Indian practice needs to hold both positions clearly, because the examinable answer and the Indian answer differ.
This post covers IAS 40 as examined, then the Indian position as applied.
What Qualifies as Investment Property
Investment property is land or a building, or part of a building, or both, held to earn rentals or for capital appreciation or both, rather than for use in the production or supply of goods or services, for administrative purposes, or for sale in the ordinary course of business.
The defining characteristic is that investment property generates cash flows largely independently of the other assets held by the entity. A factory generates cash flows in combination with the plant, workforce, and inventory inside it. A leased office building generates rent regardless of what else the entity owns.
Examples that qualify:
Land held for long-term capital appreciation rather than short-term sale.
Land held for a currently undetermined future use.
A building owned by the entity and leased out under one or more operating leases.
A vacant building held to be leased out.
Property being constructed or developed for future use as investment property.
Examples that do not qualify:
Property used in the production or supply of goods or services, or for administrative purposes, which is property, plant and equipment under IAS 16.
Property held for sale in the ordinary course of business, which is inventory under IAS 2.
Property being constructed on behalf of third parties.
Owner-occupied property, including property held for future use as owner-occupied.
The last exclusion matters for Indian real estate developers specifically. Apartments, villas, and commercial units under development for sale are inventory, not investment property, however long the development cycle runs. Post 69 covered their measurement at the lower of cost and net realisable value, and Post 72 covered the broader boundary questions.
Mixed-Use Property
Where a property is partly held to earn rentals or for capital appreciation and partly used by the owner, the portions are accounted for separately if they could be sold separately or leased out separately under a finance lease.
Where the portions cannot be sold or leased separately, the property is investment property only if an insignificant portion is held for owner use.
"Insignificant" is not defined numerically and requires judgment. A commercial development where the owner occupies a small management suite within a building otherwise leased to third parties is likely investment property in its entirety. A building where the owner occupies half the floor space is not.
Ancillary Services: The Judgment That Determines Classification
Where an entity provides ancillary services to the occupants of a property, the classification depends on how significant those services are to the arrangement as a whole.
Where the services are insignificant, the property remains investment property. Security and maintenance services provided to tenants of an office building are the standard example.
Where the services are significant, the property is owner-occupied and falls under IAS 16. An owner-managed hotel is the standard example: guests pay for a service of which accommodation is one element, not for the use of a room.
Indian practice has addressed a case that sits between the two. Business centres and serviced offices require assessment of the service level. Where a centre provides high-level services such as secretarial support, teleconferencing, and computing facilities, and occupants sign relatively short-term arrangements, the facilities are closer in nature to an owner-managed hotel and should not be classified as investment property. Where the owner provides only basic furnishing and users commit to a minimum period, the arrangement can be investment property.
The distinction turns on whether the entity is renting space or delivering a service.
Initial Measurement
Investment property is measured initially at cost, comprising the purchase price and any directly attributable expenditure.
Directly attributable expenditure includes professional fees for legal services, property transfer taxes, and other transaction costs.
It does not include start-up costs, unless necessary to bring the property to its intended condition; operating losses incurred before the property achieves its planned occupancy; or abnormal amounts of wasted material, labour, or other resources incurred in constructing or developing the property.
Where payment is deferred beyond normal credit terms, the cost is the cash price equivalent, with the difference recognised as interest over the credit period.
Where investment property is held by a lessee as a right-of-use asset, initial measurement follows IFRS 16 rather than IAS 40.
Subsequent Measurement Under IAS 40: The Choice
IAS 40 requires an entity to choose either the fair value model or the cost model, and to apply the chosen model to all of its investment property.
The choice is an accounting policy under IAS 8, and changing it requires that the change results in financial statements providing more reliable and relevant information. IAS 40 states that a change from the fair value model to the cost model is highly unlikely to result in a more relevant presentation.
The Fair Value Model
Investment property is remeasured to fair value at the end of each reporting period, with fair value determined under IFRS 13 as covered in Posts 25 and 26.
Changes in fair value are recognised in profit or loss in the period in which they arise. Not in other comprehensive income, and not deferred.
No depreciation is charged. Fair value already reflects the consumption of the asset alongside market movements, so depreciating as well would double count.
This is one of the few places in IFRS where unrealised gains on a non-financial operating asset run through profit or loss, and it produces earnings that move with property markets rather than with rental performance.
Where an entity has previously measured an investment property at fair value, it continues to measure that property at fair value until disposal, even if comparable market transactions become less frequent or market prices less readily available.
The Cost Model
Investment property is measured at cost less accumulated depreciation and accumulated impairment losses, applying IAS 16 mechanics as covered in Post 33.
Fair value must still be disclosed in the notes. Electing the cost model does not remove the requirement to determine fair value; it removes it from the balance sheet.
Transfers
Transfers to or from investment property are made only when there is a change in use, evidenced by specific events, and a change in management's intentions alone is not sufficient.
The four transfers and their triggering events:
From investment property to owner-occupied property, on commencement of owner-occupation.
From investment property to inventory, on commencement of development with a view to sale.
From owner-occupied property to investment property, on the end of owner-occupation.
From inventory to investment property, on commencement of an operating lease to another party.
Under the fair value model, transfers can produce gains or losses. Where owner-occupied property is transferred to investment property carried at fair value, the difference between carrying amount and fair value at the date of transfer is treated as a revaluation under IAS 16, with the increase to other comprehensive income. Where inventory is transferred to investment property at fair value, the difference is recognised in profit or loss.
Under the cost model, transfers do not change the carrying amount of the property and do not change its cost for measurement or disclosure purposes. The asset simply moves between categories at its existing carrying amount.
Derecognition
Investment property is derecognised on disposal or when permanently withdrawn from use and no future economic benefits are expected from its disposal.
The gain or loss is the difference between net disposal proceeds and the carrying amount, recognised in profit or loss.
Under the fair value model, the carrying amount is the most recent fair value, so the gain or loss on disposal is typically small, representing only the movement between the last measurement and the disposal price, net of transaction costs.
The Ind AS 40 Carve-Out
Ind AS 40 does not permit the fair value model. The paragraphs of IAS 40 dealing with fair value measurement were deleted in the Indian version, and Indian entities must measure investment property using the cost model, in the same manner as property, plant and equipment under Ind AS 16.
Fair value must still be measured and disclosed. Ind AS 40 requires all entities to determine the fair value of investment property for disclosure purposes even though they are required to follow the cost model. Entities are encouraged, though not required, to base that measurement on a valuation by an independent valuer holding a recognised and relevant professional qualification with recent experience in the location and category of property being valued.
The rationale relates to concerns about the reliability of fair value measurement across the Indian property market, which is fragmented, has limited transparent transaction data outside prime micro-markets, and would introduce substantial unrealised movements into reported profit.
The practical effect is that India achieves the informational outcome through disclosure rather than through measurement. A user of Indian financial statements can find the fair value of investment property, together with the methods and significant assumptions used to determine it. What they will not find is that fair value on the balance sheet, or its movement in the income statement.
What This Changes
| IAS 40, fair value model elected | Ind AS 40 | |
|---|---|---|
| Balance sheet carrying amount | Fair value at reporting date | Cost less depreciation and impairment |
| Depreciation | None | Charged over useful life |
| Fair value movements | Profit or loss | Not recognised |
| Fair value information | On the balance sheet | Disclosed in the notes |
| Impairment testing under IAS 36 | Not applicable | Applies |
| Gain or loss on disposal | Small, against most recent fair value | Larger, against depreciated cost |
| Earnings volatility from property markets | High | None |
The final row is the substantive consequence. Two entities holding identical portfolios, one applying IAS 40 with fair value and one applying Ind AS 40, will report materially different profit in any period when property values move, from identical rental performance.
Indian REITs: Where the Fair Value Information Actually Sits
India has five listed real estate investment trusts: Embassy Office Parks REIT, Mindspace Business Parks REIT, Brookfield India Real Estate Trust, Nexus Select Trust, and Knowledge Realty Trust. Combined gross assets under management exceed Rs. 2.4 lakh crore across a portfolio of more than 175 million square feet of Grade A commercial and retail space, with cumulative distributions to unitholders exceeding Rs. 26,500 crore since the first listing in 2019.
These are the most significant holders of investment property in India, and their treatment illustrates precisely how the Indian framework works.
In their Ind AS financial statements, investment property is measured at cost less depreciation and impairment, with fair value disclosed in the notes. The fair value model is not available to them any more than to any other Indian entity.
Fair value reaches investors through a separate SEBI framework. The REIT Regulations require independent valuation of REIT assets, published valuation reports, and disclosure of net asset value computed on a fair market value basis. Distributions are governed by the net distributable cash flow framework, with REITs required to distribute at least ninety per cent of NDCF at least semi-annually.
The two frameworks answer different questions. The Ind AS financial statements report historical cost-based performance and position. The SEBI valuation and NAV disclosures report what the portfolio is worth. Both are published, and a REIT investor uses the second more than the first.
This is the correction to a common misunderstanding: Indian REITs are frequently described as carrying their properties at fair value. Their regulatory reporting is fair value based. Their Ind AS financial statements are not, and cannot be.
Indian Real Estate Developers
For developers, the classification question matters more than the measurement question, because the cost model applies either way.
Units under construction for sale are inventory under Ind AS 2, measured at the lower of cost and net realisable value. Borrowing costs are capitalised where the development period is substantial, as Post 65 covered.
Completed units retained and leased out are investment property under Ind AS 40, measured at cost less depreciation.
Land held for future development and sale is inventory. Land held for long-term capital appreciation or with no determined use is investment property.
Commercial space occupied by the developer's own offices is property, plant and equipment under Ind AS 16.
A large Indian developer holds all four categories simultaneously, and the classification determines whether the asset depreciates, whether it is subject to a net realisable value test or an impairment test, and where any eventual gain is recognised.
The transfer rules matter here. A developer that completes a commercial tower intending to sell it, and subsequently decides to retain and lease it, transfers from inventory to investment property at the commencement of the operating lease. Under Ind AS 40's cost model, that transfer occurs at carrying amount, with no gain recognised. Under IAS 40 with the fair value model, the same transfer would produce a gain in profit or loss equal to the excess of fair value over the previous carrying amount.
Disclosure Requirements
IAS 40 and Ind AS 40 both require:
The measurement model applied, and where classification is difficult, the criteria used to distinguish investment property from owner-occupied property and from property held for sale in the ordinary course of business.
The methods and significant assumptions applied in determining fair value, including whether the determination was supported by market evidence or relied to a greater extent on other factors.
The extent to which fair value is based on a valuation by an independent, professionally qualified valuer with recent experience in the location and category of property. Where there has been no such valuation, that fact must be disclosed.
Amounts recognised in profit or loss for rental income, direct operating expenses arising from property that generated rental income, and direct operating expenses arising from property that did not generate rental income.
The existence and amounts of restrictions on the realisability of investment property or the remittance of income and proceeds of disposal.
Contractual obligations to purchase, construct or develop investment property, or for repairs, maintenance or enhancements.
A reconciliation of the carrying amount from the beginning to the end of the period, showing additions, disposals, depreciation, impairment losses and reversals, and transfers.
For entities applying the cost model, which under Ind AS is all of them, the fair value of investment property must be disclosed, and in the exceptional cases where fair value cannot be reliably measured, that fact together with a description of the property, an explanation of why fair value cannot be reliably measured, and if possible the range of estimates within which fair value is highly likely to lie.
Ind AS 40 vs IAS 40
| Area | IAS 40 | Ind AS 40 |
|---|---|---|
| Definition of investment property | Same | Same |
| Scope and exclusions | Same | Same |
| Mixed-use property | Same | Same |
| Ancillary services test | Same | Same; additional Indian guidance on business centres and serviced offices |
| Initial measurement at cost | Same | Same |
| Subsequent measurement | Choice of fair value model or cost model | Cost model only; fair value model prohibited |
| Depreciation | None under fair value model | Charged, following Ind AS 16 |
| Fair value movements | Profit or loss under fair value model | Not recognised |
| Fair value disclosure | Required under cost model | Required, for all entities |
| Transfers | May produce gains or losses under fair value model | At carrying amount; no gain or loss arises |
| Impairment under IAS 36 | Applies under cost model only | Applies |
| REIT reporting | Varies by jurisdiction | Ind AS financial statements at cost; SEBI framework requires independent valuation and fair value NAV disclosure separately |
What Big 4 Auditors Focus On
Classification between investment property, PPE, and inventory. This is the highest-risk judgment for Indian real estate clients, because the three categories carry different measurement bases and different impairment or net realisable value tests. Auditors examine intent evidence, board approvals, marketing activity, and lease arrangements rather than accepting management's designation.
The ancillary services assessment. For business centres, serviced offices, and managed workspace operators, auditors test whether the service level takes the property outside investment property classification.
Transfer triggers and timing. Auditors test whether transfers occurred on the specified triggering events rather than on a management decision, and that under the cost model the transfer was recorded at carrying amount without any gain.
The fair value disclosure. Because Ind AS mandates the cost model, the fair value figure appears only in the notes, and it receives less internal scrutiny than a balance sheet number would. Auditors test the valuation methodology, the assumptions, and whether an independent valuer was engaged, since this is the only fair value information the user receives.
Capitalisation of costs into investment property. Auditors test that start-up costs, pre-occupancy operating losses, and abnormal waste have been excluded from cost.
Impairment. Because Ind AS 40 mandates the cost model, investment property remains within Ind AS 36's scope, and auditors test whether impairment indicators have been assessed. Under IAS 40's fair value model this question does not arise, which is a further practical consequence of the carve-out.
Dip IFRS Exam Angle
The examinable position is IAS 40, including the fair value model. The Indian prohibition is not examinable and must not be applied in an examination answer.
Most tested areas:
Classifying property as investment property, owner-occupied property, or inventory from a described scenario, including mixed-use and ancillary services cases.
Applying the fair value model: recognising movements in profit or loss and charging no depreciation.
Applying the cost model: IAS 16 mechanics with fair value disclosed.
Accounting for transfers, particularly the difference between a transfer from owner-occupied property to investment property at fair value, where the increase goes to other comprehensive income under IAS 16 revaluation principles, and a transfer from inventory, where the difference goes to profit or loss.
Recognising that a change from fair value to cost is highly unlikely to be appropriate.
Common traps:
Recognising fair value movements in other comprehensive income. Under IAS 40's fair value model they go to profit or loss.
Charging depreciation on investment property measured at fair value.
Applying IAS 36 impairment to investment property carried at fair value. It does not apply; fair value already reflects any diminution.
Transferring on a change of intention alone. A change in use evidenced by a specified event is required.
Applying the fair value model to some properties and the cost model to others. The model applies to all investment property.
Answering an IAS 40 question with the Ind AS position. This is the specific risk for Indian candidates and it produces a wrong answer on a straightforward question.
FAQ
Can an Indian company use the fair value model for investment property?
No. Ind AS 40 prohibits it. The cost model is mandatory, with fair value measured and disclosed in the notes.
Then why learn the fair value model?
Because it is examinable in Dip IFRS, and because anyone working on group reporting for an IFRS parent, or on a foreign listing, will encounter it. The Indian prohibition is a domestic carve-out, not the international position.
Do Indian REITs carry their properties at fair value?
Not in their Ind AS financial statements, where the cost model applies. Fair value reaches investors through SEBI's separate requirements for independent valuation reports and net asset value disclosure. The two frameworks coexist and answer different questions.
Is investment property depreciated in India?
Yes. Because the cost model is mandatory, investment property is depreciated over its useful life following Ind AS 16 mechanics, and it remains subject to impairment testing under Ind AS 36.
Is a serviced office building investment property?
It depends on the service level. Where high-level services such as secretarial support and computing facilities are provided and occupants sign short-term arrangements, the arrangement resembles an owner-managed hotel and is not investment property. Where only basic furnishing is provided and users commit to a minimum period, it can be.
What happens on transfer from inventory to investment property under Ind AS 40?
The property transfers at its existing carrying amount. No gain or loss arises, because the cost model applies and the carrying amount does not change on transfer. Under IAS 40's fair value model, the same transfer would produce a gain or loss in profit or loss.
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This is Post 35 of the Global Fin X IFRS Series. Previous: IAS 16 Revaluation Model, Componentisation and Derecognition. Next: Post 36: IAS 38 Intangible Assets: Recognition Criteria and the Internally Generated Problem.