How IAS 40 works, and our Top 5 differences from real estate accounting under US GAAP.
IFRS Standards have different accounting and disclosure requirements for real estate depending on whether it is held to be sold to customers, owner-occupied or an investment property. This distinction generally depends on the use of the property rather than the type of company that holds it. This means any company, not just real estate companies or funds, may have land and buildings that are investment property and can be fair valued under IFRS Standards. Here we explain how to identify investment property, how the accounting works, and top differences from US GAAP.
IAS 40 1 defines ‘investment property’ as property (land and/or a building) that is held to earn rental income and/or for capital appreciation. It includes property that is owned or leased (right-of-use asset).
The definition includes any of the following situations:
The definition excludes property that is:
It is therefore critical to properly determine the classification of the property and, ensure the appropriate accounting. Properties might have different uses to different holders and the intended use of a property may also change over time. The distinction between investment and owner-occupied property may involve complex judgments especially when the company provides services – e.g. hotels, retail areas, airports. Services provided must be a ‘relatively insignificant component of the arrangement as a whole’ for the definition of investment property to be met.
Under IAS 40, investment property is initially measured at cost and the IAS 16 principles for attributing cost to property, plant and equipment apply equally to owner-occupied and investment property. The key differences in the accounting for these two types of property reside with subsequent measurement, presentation and disclosures.
After initial recognition, IAS 40 permits companies to choose between the cost model or the fair value model applying IFRS 13 5 (subject to limited exceptions). The same measurement model must be applied to all investment property as an accounting policy.
The cost model in IAS 40 is equivalent to that in IAS 16 – e.g. the asset is depreciated over its useful life and subject to impairment testing. Under the IAS 40 fair value model, investment property is not depreciated and changes in fair value are recognized in profit or loss. This is different from the revaluation model in IAS 16, under which the asset is depreciated and revaluation increases or decreases are recognized in other comprehensive income.
Finally, investment property is presented 6 separately on the balance sheet and subject to the disclosure requirements in IAS 40. For example, even if the cost model is elected as an accounting policy, the investment property fair value must be disclosed as well as whether the valuation was performed by an independent valuer; this information is not required under IAS 16 for owner-occupied property. Additionally, the fair value disclosures under IFRS 13 are made for each class of assets, which could require companies to disaggregate their investment property portfolios instead of being disclosed as a single asset class.
Under IFRS Standards, the accounting for real estate generally depends on its use by a company. IAS 40 applies to all companies that hold investment property, regardless of industry.
IAS 40 makes no exception for real estate companies and funds. Therefore, these companies also have a measurement choice between the cost model or fair value model. In our experience most real estate companies and funds in the US choose the fair value model under IAS 40, to meet the demands of their foreign-based investors.
Under US GAAP, a company (other than those described above in difference #2) accounts for real estate it owns, for purpose other than sale in the ordinary course of business, using the principles for property, plant and equipment (Topic 360 10 ). Accordingly, unlike IFRS Standards, investment property is measured using the cost model.
Additionally, even if the cost model is selected under IAS 40, there are differences from US GAAP in applying the cost model and performing impairment testing. Some of these differences are explained in KPMG IFRS Perspectives articles Accounting for PP&E under the IFRS component approach and Accounting for proceeds before an asset’s intended use.
The definition of an investment property under IAS 40 also applies to leased (rather than owned) real estate. In such a case, the right-of-use asset is measured initially at cost under the lease guidance (IFRS 16), then is subsequently measured using either the cost model (IFRS 16) or fair value model, consistent with the entity’s accounting policy for other investment property.
Under US GAAP, a lessee accounts for real estate leases under Topic 842 11 , and is not permitted to measure the right-of-use asset at fair value.
IAS 40 requires that the fair value of investment property be disclosed regardless of the measurement model selected. The fair value measurement and disclosure requirements under IFRS 13 also apply to investment properties and such disclosures are required for each class of asset. Additionally, as noted above, investment property is presented separately on the balance sheet.
