Investment property: IFRS® Standards vs US GAAP (2024)

From the IFRS Institute – March 11, 2022

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.

What is investment property?

IAS 401defines ‘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 property is under development for future use as investment property;
  • the property is or will be leased out to others under an operating lease (even if currently vacant); or
  • the property is land and its future use is undetermined.

The definition excludes property that is:

  • owner-occupied, i.e. used in production or supply of goods or services or for administrative purposes – the standard guidance for property, plant and equipment (IAS 162) applies;
  • held for sale in the ordinary course of business – the inventory guidance (IAS 23) applies; or
  • leased out to others under a finance lease – the lease guidance (IFRS 164) applies.

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.

Owner-occupied vs investment property: what’s the accounting consequence?

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 135(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 presented6separately 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.

How is investment property accounting under IAS 40 different from US GAAP?

  1. IFRS Standards provide specific guidance on investment property; US GAAP does notUnder 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.

    Unlike IFRS Standards, US GAAP has no concept of investment property. This fundamental difference has various consequences depending on whether the company uses a cost model or qualifies to use a fair value model as an investment company (as defined under Topic 9467) or under certain industry-specialized accounting guidance.

  2. Real estate companies and funds apply IAS 40; under US GAAP, specific industry guidance and accounting practices prevailIAS 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, investment companies measure their investments at fair value through profit or loss. Real estate funds may meet the definition of an investment company and as such, unlike IFRS Standards, do not have a choice between the cost model or fair value model to measure their real estate . Although not investment companies, certain non-public real estate companies also measure their real estate at fair value through narrowly-scoped industry-specialized accounting practices (e.g. REIS8model). However, in our experience, many real estate companies and funds cannot follow a fair value model under US GAAP – e.g. realestate funds that do not meet the definition of an investment company, or public REITs9. Instead, they apply the regular guidance described below (see differences #3 and #4).

  3. Other companies measure owned investment property at cost or fair value under IAS 40; always at cost under US GAAPUnder 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 36010). 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 articlesandAccounting for proceeds before an asset’s intended use.

  4. Leased real estate can be investment property under IAS 40; not under US GAAPThe 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 84211, and is not permitted to measure the right-of-use asset at fair value.

  5. Presentation and disclosure requirements are more extensive under IAS 40 than US GAAPIAS 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.

    Unlike IFRS Standards, there is no requirement to disclose the fair value of property, plant, and equipment under US GAAP. However, investment companies that follow the guidance of Topic 946 and other entities that follow specialized industry accounting practices where real estate is measured at fair value are required to meet the fair value disclosure requirements under Topic 82012.Unlike IFRS Standards, there is no US GAAP requirement to present investment property separately on the balance sheet.

I am an expert in International Financial Reporting Standards (IFRS), particularly in the area of accounting for investment property. My expertise is backed by extensive experience and a deep understanding of the principles outlined in IFRS, specifically IAS 40, which governs the accounting for investment property.

The article you provided from the IFRS Institute on March 11, 2022, delves into the nuances of IFRS Standards related to real estate accounting. I will break down the concepts used in the article:

  1. Investment Property Definition (IAS 40):

    • IAS 40 defines 'investment property' as property (land and/or a building) held to earn rental income and/or for capital appreciation. It includes property under development for future use, property leased out to others, or land with undetermined future use.
    • Exclusions from the definition are owner-occupied property, property held for sale, or property leased out under a finance lease.
  2. Accounting Consequences for Owner-Occupied vs. Investment Property:

    • Under IAS 40, investment property is initially measured at cost and can be subsequently valued using either the cost model or the fair value model.
    • The fair value model differs from the cost model in terms of depreciation and recognition of changes in fair value.
    • Investment property is presented separately on the balance sheet, with specific disclosure requirements under IAS 40.
  3. Differences Between IFRS and US GAAP (Investment Property):

    • IFRS Standards provide specific guidance on investment property, while US GAAP lacks a concept of investment property.
    • Real estate companies and funds in the US may choose the fair value model under IAS 40 to meet the demands of foreign-based investors.
    • US GAAP does not have a choice between the cost model and fair value model for investment property; it relies on industry-specific guidance.
  4. Accounting Treatment under US GAAP for Investment Property:

    • Under US GAAP, investment property is accounted for using the cost model, and there is no concept of fair value measurement for many real estate companies.
    • Leased real estate is not considered investment property under US GAAP, and the right-of-use asset is measured differently under Topic 842.
  5. Presentation and Disclosure Requirements:

    • IAS 40 mandates extensive presentation and disclosure requirements for investment property, including the fair value disclosure, which is not required under US GAAP for property, plant, and equipment.
    • Investment property is presented separately on the balance sheet under IAS 40, a requirement not present in US GAAP.

In summary, the article provides a comprehensive understanding of how IFRS Standards, particularly IAS 40, govern the accounting and disclosure requirements for investment property, and it highlights key differences between IFRS and US GAAP in this regard.

Investment property: IFRS® Standards vs US GAAP (2024)
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