Full explanation
Overview
One building. Three different accounting standards. And only one of them puts the gain straight into your profit.
Two companies own identical office blocks, worth exactly the same. One reports three hundred thousand euros of profit. The other reports a cost. The difference is IAS 40.
It's not what it is. It's why you hold it .
Investment property is land or a building held to earn rentals, or for capital appreciation, or both. And the definition turns on one question that has nothing to do with the bricks: why do you hold it? Not what it looks like. Not where it is. Why you own it. Answer that, and the standard follows automatically.
One building, three standards
So the same office block can land in three different places. Hold it to earn rent or for capital growth — IAS 40, investment property. Occupy it yourself, to run your own business from — IAS 16, property, plant and equipment. Build it or hold it to sell in the ordinary course of business — IAS 2, inventories. A property developer's finished flats are inventory. A landlord's identical flats are investment property. Same asset, three standards, decided entirely by intent.
How you got it . And whether it's finished .
Two scope points the standard picked up along the way. First, how you ACQUIRED it. Buying an investment property might be a simple asset purchase — or it might be a business combination under IFRS 3, if what you bought includes processes and not just the building. IAS 40 tells you what the property IS; IFRS 3 tells you how the acquisition is accounted for. You have to judge both, separately. Second, property you are still building. Since two thousand and nine, a property being constructed or developed for future use as investment property IS investment property — it no longer sits under IAS 16 while the scaffolding is up. And if you're on the fair value model but genuinely cannot measure fair value reliably while it's under construction, you carry it at cost until you can, or until construction completes — whichever comes first.
Once it IS investment property, you pick a measurement model. And this is where the profit differences appear.
Two models. Pick one, apply to all.
Meridian Limited buys an office block on the first of January for two million euros, purely to rent out. Under IAS 40 there are two choices. The cost model: carry it at cost less depreciation, exactly like IAS 16. Or the fair value model: carry it at fair value at every reporting date. Pick one and apply it to all of your investment property — you can't cherry-pick building by building.
The gain goes straight to profit
By the thirty-first of December the block is worth two million three hundred thousand. Under the fair value model, you write it up to two million three hundred thousand — and the three hundred thousand euro gain goes straight to profit or loss. Not to reserves. Not to other comprehensive income. Straight into this year's profit. And there is no depreciation at all under the fair value model, because you're already remeasuring to market every year.
IAS 40 hands the job to IFRS 13
But who decides what fair value actually is? Not IAS 40 — it hands that job to IFRS 13. Fair value is the price you'd receive to sell the asset in an orderly transaction between market participants at the measurement date. It's an exit price: not what you paid, and not what the building is worth to you specifically. IFRS 13 also makes you measure property at its highest and best use — the most valuable use a market participant would put it to, even if that isn't what you're doing with it today. And you must disclose which level of the fair value hierarchy you used. Property is almost always level three, significant unobservable inputs, which is precisely why that disclosure matters.
IAS 16 sends the gain somewhere else
Now the contrast that makes this standard matter. Suppose Meridian occupied that same building instead. It would be IAS 16, and under the revaluation model you'd first depreciate it — say forty thousand a year over fifty years — taking the carrying amount to one million nine hundred and sixty thousand. Then revalue to two million three hundred thousand: a gain of three hundred and forty thousand. But that gain goes to other comprehensive income, into a revaluation surplus. It never touches profit.
So look at what just happened to the bottom line. Same building. Same value. Same year.
A €340,000 swing in reported profit
As investment property at fair value: profit is three hundred thousand euros better off. As owner-occupied property under IAS 16: profit is forty thousand euros worse off, because of depreciation, and the three hundred and forty thousand uplift sits quietly in equity. That's a three hundred and forty thousand euro swing in reported profit — from nothing but the reason the company holds the building. This is why the classification question isn't academic.
You can't hide the market value
A word on the cost model, because it's still allowed. If Meridian chooses cost, it depreciates the building exactly as under IAS 16 — but IAS 40 still requires it to disclose the fair value in the notes. So the market value reaches the reader either way. On the face of the statements under fair value; in the notes under cost. The standard makes sure you can't hide what the property is actually worth.
Buildings don't stay in one category forever. So what happens when the use changes?
Only on a genuine change of use
Transfers happen only when there is an actual change in use — evidenced, not merely intended. A tenant moves out and Meridian moves in: investment property becomes owner-occupied, IAS 16. Meridian moves out and lets it: IAS 16 becomes investment property. Development starts with a view to sale: it becomes inventory under IAS 2. And the treatment on transfer depends on which model you were using and which direction you're going — under the fair value model, you revalue to fair value at the date of transfer first, and that gain or loss follows the rules of the standard you're leaving.
Mixed use · services · group companies
Three practical wrinkles. First, mixed use: if part of a building is rented out and part is owner-occupied, split it — but only if the parts could be sold or leased separately. If they couldn't, it's investment property only if the owner-occupied portion is insignificant. Second, ancillary services: providing security and maintenance to tenants is fine, it stays investment property. Run a hotel and you're providing so much service that it becomes owner-occupied IAS 16. Third, property leased to another group company is investment property in the individual accounts, but owner-occupied in the consolidated ones.
And one modern twist that catches people out — you don't even have to own the building.
You don't even have to own it
A right-of-use asset — a property you lease in under IFRS 16 — can itself be classified as investment property, if you hold that right to earn rentals or for capital appreciation. Think of a company that leases a floor and sublets it. And if it does qualify, and you've chosen the fair value model, you must apply fair value to that right-of-use asset too. Leasing and investment property, meeting in the same balance sheet line.
IFRS 18 — which line does the gain sit on?
One more change, and it lands in January 2027. IFRS 18 replaces IAS 1 and splits the income statement into three categories: operating, investing and financing. So where does that three hundred thousand euro fair value gain actually go? The default is the investing category. But if investing in assets is your main business activity — a property investment company — it goes in operating instead. Same gain, same standard, same building, a different line of the income statement. Decided by what the company is actually for. Which is the very same question that decided the classification in the first place.
Buy it · value it · test it · sell it
So the asset family is nearly complete. Physical and used in the business — IAS 16. No physical substance — IAS 38, last episode. Held to earn rent or for capital growth — IAS 40, here. Held to sell in the ordinary course — IAS 2. And next, the standard that tests every one of them when values fall: IAS 36, impairment. Buy it, value it, test it, sell it.
Volatile profit, no cash moving
What should an investor take from this? Two things. First, a property company on the fair value model will show volatile profits — big gains in a rising market, real losses in a falling one — with no cash actually moving. Strip those revaluations out before you judge operating performance. Second, always check which model is used, because two identical property portfolios can report completely different profits, and only one of them is showing you the market's opinion on the face of the accounts.
The same building , both ways
On Meridian's own accounts under the fair value model: investment property, two million three hundred thousand on the balance sheet. In profit or loss, a fair value gain of three hundred thousand — and no depreciation charge at all. Had that same building been owner-occupied, profit would instead carry a forty thousand euro depreciation charge, with three hundred and forty thousand sitting in a revaluation surplus in equity.