An investment property is a property held for the purpose of earning rentals or capital appreciation or both. It differs from property, plant and equipment (PPE) in that the PPE is held for producing the company’s goods and services. It also does not include long-lived tangible assets held as inventory by a producer of the asset.
Cost model vs fair value model for investment property accounting
IFRS allows companies to use either the cost model or the fair value model in accounting for an investment property.
When the cost model (which is the same model used in accounting for property, plant and equipment) is used, the fair value of investment property must be disclosed. However, the fair value model is not the same as the revaluation model, because all changes in fair value under the fair value model affect net income. Hence, a company must be able to measure fair value reliably on a continuing basis to be able to use the fair value model.
Accounting for transfers of assets to/from investment property
A company must apply its chosen model (cost or fair value) to all of its investment property unless there is a change such that the item is no longer an investment property, i.e. when it becomes an owner-occupied property. In such a situation, if the investment property has been accounted for under the cost model, there is no change on transfer. However, if the fair value model is used, the transfer is made at fair value, i.e. the fair value at the time of transfer becomes the cost. Similarly, if a company transfers an owner-occupied PPE to investment property carried under the fair value model, the difference between the fair value and the carrying amount (as PPE) is accounted for as revaluation. However, if an inventory item is moved to investment property, the fair value change is recognized in profit and loss.
Financial statement disclosure requirements for investment property
Companies present investment property as a separate line item, disclose whether they use the cost model or the fair value model. If a company uses the fair value model, it discloses how it determines the fair value and provides a reconciliation between opening and closing values. However, if it uses the cost model, disclosures are similar to those for owner-occupied PPE. One additional disclosure relates to the fair value of the investment property.
US GAAP accounting for investment property
Under US GAAP, there is no specific accounting guidance for investment property. Hence, most companies use the historical cost method.