1.1 Investment Property

Definition of investment property

Investment property is 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. [IAS 40.5]
Examples of investment property: [IAS 40.8]

land held for long-term capital appreciation.
land held for a currently undetermined future use.
building leased out under an operating lease.
vacant building held to be leased out under an operating lease.
property that is being constructed or developed for future use as investment property.

The following are not investment property and, therefore, are outside the scope of IAS 40: [IAS 40.5 and 40.9]

property held for use in the production or supply of goods or services or for administrative purposes.
property held for sale in the ordinary course of business or in the process of construction of development for such sale (IAS 2 Inventories).
property being constructed or developed on behalf of third parties (IAS 11 Construction Contracts).
owner-occupied property (IAS 16 Property, Plant and Equipment), including property held for future use as owner-occupied property, property held for future development and subsequent use as owner-occupied property, property occupied by employees and owner-occupied property awaiting disposal.
property leased to another entity under a finance lease.

Illustration;
Imagine you are a small business owner named Alex, and you own a company that operates a chain of retail stores. Recently, you decided to invest in a piece of property with the intention of leasing it out to another business. This property will be classified as an investment property in your financial statements.
Step 1: Initial Recognition
At the time of purchase, you need to record the investment property on your company’s balance sheet. The cost of the property, including all acquisition expenses like legal fees and taxes, will be recognized as the initial carrying amount of the investment property.
Step 2: Subsequent Measurement
After initial recognition, you have two options for subsequent measurement of the investment property:
a) Fair Value Model: You can choose to measure the investment property at fair value. In this case, you’ll need to have the property’s fair value determined regularly (e.g., annually) by a professional valuer. Any changes in fair value will be recognized in your income statement, which could result in either a gain or a loss.
b) Cost Model: Alternatively, you can measure the investment property using the cost model. Under this method, the property’s initial carrying amount (cost) is adjusted for any accumulated depreciation and impairment losses. Changes in the property’s market value are not considered in the financial statements.
Step 3: Recognition of Rental Income
As the property owner, you will earn rental income from leasing the investment property to another business. This rental income will be recognized in your income statement when it becomes due and collectible.
Step 4: Operating Expenses
You’ll also have various operating expenses related to the investment property, such as property taxes, insurance, maintenance costs, and management fees. These expenses will be recorded in your income statement as they are incurred.
Step 5: Disclosures
In your financial statements, you’ll need to provide additional disclosures related to the investment property. These disclosures may include details about the property’s fair value, rental income received or receivable, significant terms of any lease agreements, and any restrictions on the property’s title.
Step 6: Depreciation or Impairment
If you choose the cost model, you’ll need to assess the investment property’s carrying amount for potential impairment periodically. If the property’s value declines significantly, you may need to recognize an impairment loss in your income statement to reflect the property’s reduced value.