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IAS 40

Investment Property

IAS 40 governs the recognition and measurement of property (land, a building, or part of a building, or both) held to earn rentals or for capital appreciation, or both, rather than for use in production or supply of goods or services, for administrative purposes, or for sale in the ordinary course of business, and requires a choice between the cost model and the fair value model applied to all investment property. [S1]

Effective 2005-01-01Related: IAS 1 · IAS 16 · IAS 36 · IFRS 16

Overview

IAS 40 turns on a single classification question: is the property held to earn rentals or for capital appreciation (investment property, IAS 40), or is it owner-occupied (used in production, supply, or administration, IAS 16), or is it held for sale in the ordinary course of business (inventory, IAS 2)? [S1] Once classified as investment property, an entity chooses — as a single accounting policy applied to all its investment property — either the fair value model (fair value at each reporting date, with changes recognised directly in profit or loss) or the cost model (cost less accumulated depreciation and impairment, following IAS 16's cost-model mechanics, with fair value disclosed in the notes). [S2]

Why it matters

Real estate is frequently one of the largest and most illiquid assets on a Nigerian company's balance sheet, and the investment-property-versus-owner-occupied classification directly determines whether fair value gains flow through profit or loss (IAS 40 fair value model) or bypass it into other comprehensive income (IAS 16 revaluation model), and whether the asset is depreciated at all. For property-holding and real estate businesses, this classification and measurement choice can be the single largest driver of reported profit volatility.

Scope

Applies to the recognition, measurement and disclosure of investment property, including investment property under construction or development for future use as investment property, and investment property held by a lessee as a right-of-use asset (which may itself be an investment property if it otherwise meets the definition and the entity applies the fair value model to all its investment property). It does not apply to biological assets related to agricultural activity, or to mineral rights and reserves such as oil, gas and similar non-regenerative resources.

Key definitions

term
Investment property
definition
Property (land or a building, or part of a building, or both) held by the owner or by a lessee as a right-of-use asset to earn rentals or for capital appreciation, or both, rather than for use in production/supply/administration or for sale in the ordinary course of business.
term
Owner-occupied property
definition
Property held for use in the production or supply of goods or services, or for administrative purposes; accounted for under IAS 16 (or IFRS 16 for a right-of-use asset), not IAS 40.
term
Fair value model
definition
Investment property is measured at fair value at each reporting date, with changes in fair value recognised directly in profit or loss.
term
Cost model
definition
Investment property is measured at cost less accumulated depreciation and accumulated impairment losses, following IAS 16's cost-model requirements, with fair value still disclosed in the notes.
term
Owner-managed ancillary services test
definition
The judgement of whether services provided to occupants of a property (e.g. security, maintenance) are insignificant to the arrangement as a whole (investment property) or so significant that the property is instead more akin to an owner-operated facility (e.g. a hotel, owner-occupied).

Recognition

Investment property is recognised as an asset only when it is probable that future economic benefits associated with it will flow to the entity, and its cost can be measured reliably — the same recognition threshold as IAS 16. A property interest held by a lessee under a lease may be classified and accounted for as investment property (as a right-of-use asset) if, and only if, the property would otherwise meet the definition of investment property and the lessee applies the fair value model to all its investment property. Mixed-use property (part investment, part owner-occupied) is accounted for separately as investment property and owner-occupied property if the portions could be sold or leased out separately; if not, the whole property is investment property only if an insignificant portion is owner-occupied.

Initial measurement

Investment property is measured initially at cost, including transaction costs (such as professional fees for legal services, property transfer taxes and other transaction costs). The cost of a purchased investment property comprises its purchase price and any directly attributable expenditure (e.g. professional fees, property transfer taxes); the cost of a self-constructed investment property is its cost at the date construction or development is complete, at which point it becomes accounted for under IAS 40 rather than as a self-constructed asset under IAS 16 principles for cost accumulation during construction.

Subsequent measurement

Under the fair value model, investment property is remeasured to fair value at each reporting date, with the change recognised directly in profit or loss (not in other comprehensive income), and the property is not depreciated. Under the cost model, the property is depreciated over its useful life following IAS 16 mechanics, tested for impairment under IAS 36, with fair value disclosed in the notes regardless of which model is used (except in the rare cases fair value cannot be reliably determined on a continuing basis). Once selected, the fair value model is applied to all investment property and a change to the cost model is highly unlikely to result in a more relevant presentation, per IAS 8's general policy-change test. Where property is reclassified from owner-occupied to investment property, fair value is determined at the date of reclassification and any change in carrying amount up to that date is treated as a revaluation under IAS 16. [S6]

Presentation

Investment property is presented as a separate line item (or clearly identified within non-current assets) distinct from owner-occupied PPE, since the measurement basis and the treatment of value changes differ fundamentally between IAS 40 and IAS 16. Under the fair value model, the fair value gain or loss is presented within profit or loss for the period, typically as a separate line item given its size and volatility relative to operating results.

Disclosure checklist

  • Whether the fair value model or the cost model is applied, and if the fair value model, whether (and in what circumstances) property interests held under leases are classified and accounted for as investment property.
  • The methods and significant assumptions applied in determining fair value, including whether fair value was determined based on market evidence or was more heavily based on other factors given the nature of the property and lack of comparable market data.
  • The extent to which fair value is based on a valuation by an independent valuer with recognised and relevant professional qualifications and recent experience in the location and category of the property being valued.
  • Amounts recognised in profit or loss for rental income, direct operating expenses (including repairs and maintenance) arising from investment property that generated rental income during the period, and from investment property that did not generate rental income.
  • A reconciliation of the carrying amount of investment property at the beginning and end of the period, showing additions, business combination acquisitions, disposals, fair value gains/losses (fair value model) or depreciation/impairment (cost model), and transfers to/from inventories and owner-occupied property.
  • For the cost model, the fair value of investment property (if it can be reliably determined), the depreciation method and useful lives used, and the gross carrying amount and accumulated depreciation/impairment.
  • Restrictions on the realisability of investment property or the remittance of income and disposal proceeds, and contractual obligations to purchase, construct or develop investment property or for repairs, maintenance or enhancements.

Practical treatment

The threshold judgement is always classification, not measurement: a head-office building is owner-occupied (IAS 16), a building leased out to third parties under an operating lease is investment property (IAS 40), and a hotel the entity operates itself is generally owner-occupied because the ancillary services (housekeeping, front desk, food and beverage) provided to guests are significant to the arrangement as a whole, not incidental to it. Property held for a currently undetermined future use is classified as investment property (since it is presumed held for capital appreciation until a specific owner-occupation or sale plan is adopted). Once the fair value model is chosen, obtaining a robust, evidenced valuation at every reporting date (not just periodically) is the main practical discipline. See nigeria_notes for the particular valuation-evidence challenges in the Nigerian real estate market.

Common mistakes

  • Classifying a hotel or serviced-apartment building the entity operates itself as investment property, when the significant ancillary services provided make it owner-occupied under IAS 16.
  • Depreciating investment property carried under the fair value model, when fair-value-model investment property is not depreciated at all.
  • Recognising a fair value gain on investment property in other comprehensive income (mirroring IAS 16 revaluation treatment) instead of in profit or loss, where IAS 40's fair value model requires the latter.
  • Failing to disclose fair value in the notes when the cost model is used, unless fair value genuinely cannot be reliably determined on a continuing basis (a rare exception, not a default).
  • Not reassessing classification when use changes (e.g. a previously leased-out building the entity begins to occupy itself), and missing the required transfer accounting and disclosure.
  • Treating vacant land held for an undetermined future use as owner-occupied by default, rather than as investment property.

CFO checklist

  • Document the classification test (investment property vs owner-occupied vs inventory) for every property in the portfolio, and revisit it whenever use changes.
  • Confirm the chosen measurement model (cost or fair value) is applied consistently to the entire investment property class, not selectively by asset.
  • For the fair value model, obtain a robust valuation at every reporting date from a suitably qualified, and where practical independent, valuer, with documented methodology and assumptions.
  • For the cost model, still obtain and disclose fair value information in the notes unless a genuine, rare exception applies.
  • Track and disclose rental income and direct operating expenses separately for investment property that did, and did not, generate rental income during the period.
  • Reassess classification and reclassify (with appropriate measurement treatment) whenever a property's use genuinely changes, evidenced by a change in use, not merely management's stated intention.

FAQs

q
We own a building, occupy the ground floor as our head office, and lease out the upper floors — how do we classify it?
a
If the ground floor and upper floors could be sold or leased out separately, account for each portion separately — owner-occupied (IAS 16) for the ground floor and investment property (IAS 40) for the leased floors. If the portions cannot be sold separately, the whole building is investment property only if the owner-occupied portion is insignificant; otherwise the whole building is treated as owner-occupied.
q
Do we depreciate an investment property carried under the fair value model?
a
No. Investment property measured under the fair value model is not depreciated; instead it is remeasured to fair value at each reporting date, with the change recognised directly in profit or loss.
q
We hold vacant land with no current development plan — how should it be classified?
a
Land held for a currently undetermined future use is classified as investment property, on the basis that it is presumed to be held for capital appreciation until management adopts a specific plan for owner-occupation or sale in the ordinary course of business.

Nigeria application notes

Regulatory overlay

IAS 40 applies in full to Nigerian public interest entities under the FRCN Act 2011 mandate. [S3] From 1 January 2026, fair value valuations obtained for investment property under IAS 40 should also have regard to the FRCN's Valuation Regulations for Financial Reporting, which set out a regulatory framework for valuers providing valuation services for financial reporting purposes in Nigeria; the Regulations were at exposure-draft stage when reviewed for this file and their final, in-force status should be confirmed. [S4] Land tenure in Nigeria is governed by the Land Use Act 1978, under which all land in a state is vested in the state Governor, who grants rights of occupancy typically evidenced by a Certificate of Occupancy for a term (commonly up to 99 years) rather than freehold ownership in the traditional sense; this affects how the underlying land interest is legally characterised, though it does not change the IAS 40 classification test itself. [S5]

Tax interaction (Nigeria)

Gains on disposal of investment property held by a company are subject to capital gains tax, which has been harmonised with the standard companies income tax rate at 30% under the Nigeria Tax Act 2025 (up from a historic 10% rate), a significant change relevant to any disposal planning for a property-holding company's portfolio. [S_TAX2][S_TAX1] Rental income itself is generally subject to companies income tax as part of ordinary assessable profits, subject to the small-company exemption and its qualifying conditions where applicable. Nigerian rates, thresholds, exemptions, incentives and filing rules referenced in this file (including CIT, VAT, capital gains tax and the small-company threshold) should be independently verified against the Nigeria Tax Act 2025, the Nigeria Tax Administration Act 2025, and current NRS practice in force at the reporting or filing date, since thresholds, rates and reliefs are subject to periodic revision and to sector- or entity-specific qualifying conditions. This file does not constitute legal or tax advice. [S_TAX1][S_TAX2]

FX considerations

Investment property is a non-monetary asset; where fair value is assessed by reference to comparable transactions denominated in a foreign currency (common in prime commercial real estate markets in Lagos and Abuja, where some transactions are priced with reference to US dollar values), the naira fair value should reflect a defensible translation of that market evidence at the valuation date, and the entity should disclose the basis for its fair value assessment given the potential for naira/dollar divergence to distort period-on-period fair value movements if not handled consistently.

SME practical note

Nigerian property-holding SMEs and family real estate businesses often hold investment property at a cost figure that has not been updated in years, with no formal valuation ever obtained; Outliers recommends confirming the client's intended measurement model early in any engagement, since committing to the fair value model brings an ongoing obligation to obtain credible, evidenced valuations every reporting period, which has cost and process implications the client should understand before the policy is adopted.

Common Nigerian pitfalls

  • Adopting the fair value model without a realistic plan or budget for obtaining a credible valuation every reporting period going forward.
  • Relying on an informal or undocumented valuation for investment property fair value, without considering the FRCN Valuation Regulations framework once confirmed in force.
  • Confusing the Certificate of Occupancy leasehold structure under the Land Use Act with a limitation on IAS 40 classification, when it is a legal land-tenure question separate from the accounting classification test.
  • Assuming the historic 10% capital gains tax rate still applies to a property disposal, when the rate has been harmonised to 30% under the Nigeria Tax Act 2025.

FRC pronouncements

The relevant FRCN instrument for investment property valuation is the Valuation Regulations for Financial Reporting referenced above; no separate FRCN pronouncement specific to IAS 40 recognition or measurement itself has been identified. [S4]

Worked examples

Fair value model — remeasurement of a leased-out office building

A property-holding company owns an office building in Lagos leased out entirely to unrelated tenants under operating leases. The building is carried under the fair value model. At the start of the year its fair value was ₦800,000,000. An independent valuer assesses fair value at the reporting date at ₦870,000,000, reflecting stronger rental demand in the location.

Facts

Workings

Fair value gain for the period: 870,000,000 - 800,000,000 = 70,000,000

The building is not depreciated, since it is carried under the fair value model.

Journal entries

Recognise the fair value gain on investment property directly in profit or loss.

AccountDr (₦)Cr (₦)
Investment property70,000,000
Fair value gain on investment property (profit or loss)70,000,000

Transfer from owner-occupied property to investment property

A company relocates its head office and begins leasing out its former office building to an unrelated third party under an operating lease. At the date of change in use, the building's carrying amount under the IAS 16 cost model was ₦300,000,000 (cost less accumulated depreciation), and its fair value at that date, assessed by an independent valuer, was ₦380,000,000. The company applies the fair value model to its investment property.

Facts

Workings

On transfer from owner-occupied (IAS 16) to investment property measured under the fair value model, the difference between the previous carrying amount and fair value at the date of transfer is treated as a revaluation under IAS 16 up to the transfer date.

Revaluation increase on transfer: 380,000,000 - 300,000,000 = 80,000,000, recognised in other comprehensive income (as a revaluation surplus) in accordance with IAS 16, since there is no prior revaluation decrease for this asset recognised in profit or loss.

Journal entries

Recognise the revaluation increase on transfer from owner-occupied property to investment property, and reclassify the asset at fair value.

AccountDr (₦)Cr (₦)
Investment property (at fair value)380,000,000
Property, plant and equipment (former head office, at carrying amount)300,000,000
Revaluation surplus (other comprehensive income / equity)80,000,000

Sources & citations

  1. [S1]IAS 40 Investment Property — IFRS Foundationaccessed 2026-07-18
  2. [S2]IAS 40 — Investment Property (standard summary) — IAS Plus, Deloitteaccessed 2026-07-18
  3. [S3]IFRS - Use of IFRS Standards by jurisdiction: Nigeria — IFRS Foundationaccessed 2026-07-18
  4. [S4]Call for Comments: Exposure Draft on Valuation Regulations for Financial Reporting, 2024 — Financial Reporting Council of Nigeriaaccessed 2026-07-18
  5. [S5]Procedure For Certificate Of Occupancy In Nigeria — Mondaqaccessed 2026-07-18
  6. [S6]IAS 40 Investment Property — IFRS in Brief — Moore Globalaccessed 2026-07-18
  7. [S_TAX1]Nigeria Tax Act, 2025 has been signed – highlights — EY Globalaccessed 2026-07-18
  8. [S_TAX2]Nigeria's 2025 Tax Reform Acts Explained: Key Changes — Baker Tilly Nigeriaaccessed 2026-07-18
Last reviewed 2026-07-18 · Reviewer: Rafiu Olawuyi, FCA (Author / Technical Reviewer)