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IAS 16 vs IAS 40 — Same Building, Different Accounting | CALC SERIES #15

Two identical buildings. One used by the company, one leased to tenants. IAS 16 depreciates; IAS 40 fair value model doesn't — and gains go to P&L, not OCI. Here's the five-year comparison: €900k vs €1,300k on the balance sheet, and why the P&L treatment is opposite to what many expect.

Explained by Maya, your IFRS Tutor presenter · Calc Series

IAS 16 vs IAS 40 — Same Building, Different Accounting | CALC SERIES #15

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In this video

0:00 Introduction — classification determines everything
0:20 The scenario — two identical buildings €1M, 50yr life, FV after Y5 = €1.3M
0:55 IAS 16 para 7 — own use → Building A
1:18 IAS 40 para 5 — investment property → Building B (fair value model)
1:45 Building A after 5 years: CA €900k, depreciation €100k to P&L
2:15 Building B after 5 years: FV €1,300k, gain €300k to P&L (not OCI)
2:50 Five-year balance sheet comparison: €900k vs €1,300k
3:20 Critical distinction: IAS 40 gains → P&L · IAS 16 revaluation → OCI
3:55 Common mistake — putting IAS 40 gains through OCI
4:20 Recap — same building, classification changes everything

Key terms in plain English

Investment property: Property held to earn rentals, for capital appreciation, or both — rather than for use in the production or supply of goods and services or for administrative purposes. Defined in IAS 40 paragraph 5.
Fair value model (IAS 40): One of two IAS 40 measurement options: the property is remeasured to fair value at each reporting date, with all gains and losses recognised directly in profit or loss. No depreciation is charged.
Cost model (IAS 16): Carry the property at cost less accumulated depreciation and accumulated impairment losses. The IAS 16 cost model produces a declining balance sheet value; the IAS 40 cost model retains a separate disclosure of fair value in the notes.
IAS 16 revaluation surplus vs IAS 40 fair value gain: A critical distinction: upward revaluations under IAS 16 go to other comprehensive income (the revaluation surplus). Fair value gains under IAS 40 go directly to profit or loss. They look similar but flow through different income statement lines.

Full explanation

Why the same building can have different accounting

The applicable standard is determined by the use of the property, not its physical characteristics. IAS 16 paragraph 7 defines the scope of IAS 16 as property held for use in the production or supply of goods or services, or for administrative purposes. IAS 40 paragraph 5 defines investment property as property held to earn rentals or for capital appreciation. Once the use is established, the entity applies the corresponding standard to the entire asset class.

Building A is the company's headquarters — it is held for administrative use and falls under IAS 16. Building B is fully leased to third parties — it is held to earn rentals and falls under IAS 40. The company chooses the fair value model under IAS 40 paragraph 30.

Building A after five years (IAS 16 cost model)

Cost: €1,000,000. Useful life: 50 years. Annual depreciation: €1,000,000 / 50 = €20,000. After five years: accumulated depreciation €100,000; carrying amount €900,000. Five-year P&L impact: depreciation expense of €100,000. The increase in fair value to €1,300,000 is ignored — under the cost model, fair value is not recognised unless IAS 36 requires an impairment write-down.

Building B after five years (IAS 40 fair value model)

Opening value: €1,000,000. No depreciation is charged under the IAS 40 fair value model. The building is remeasured to fair value at each reporting date. Fair value at the end of Year 5: €1,300,000. The total fair value gain of €300,000 is recognised directly in profit or loss (not OCI) under IAS 40 paragraph 35. The P&L impact over five years: gain of €300,000. The carrying amount equals the current fair value: €1,300,000.

The critical P&L vs OCI distinction

The most common error in this area is confusing IAS 40 fair value gains with IAS 16 revaluation gains. Both involve restating property to fair value. But the income statement treatment is opposite.

Under IAS 16's revaluation model, upward revaluations go to other comprehensive income, accumulating in the revaluation surplus in equity. They bypass profit or loss entirely on initial recognition.

Under IAS 40's fair value model, all fair value movements — both gains and losses — go directly to profit or loss in the period they occur. They are income items, not equity items. IAS 40 paragraph 35 is unambiguous on this point.

Putting IAS 40 fair value gains through OCI instead of P&L understates reported profit by €300,000 over the five-year period. It also creates a phantom revaluation surplus in equity that should not exist for investment property under the fair value model.

Five-year balance sheet comparison

Building A (IAS 16): cost €1,000,000 minus accumulated depreciation €100,000 = carrying amount €900,000.
Building B (IAS 40): fair value = carrying amount €1,300,000.

The two buildings are economically identical. The financial statements present them at €900,000 and €1,300,000 respectively — a difference of €400,000 — driven entirely by the classification of use.