How Investment Property Is Measured and Shown on the Balance Sheet (IFRS)

Investment property refers to land or buildings held to earn rentals or for capital appreciation, rather than for use in production, administration, or sale in the ordinary course of business. Under IFRS (IAS 40), investment property is recognized initially at cost and subsequently measured either at fair value or cost model, depending on the entity’s chosen policy. Proper classification and measurement of investment property ensure that the balance sheet reflects the true value of income-generating real estate assets.

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How investment property arises

Investment property typically arises when a company purchases or constructs real estate to generate rental income, hold for appreciation, or both. It may also result from portions of owner-occupied property being leased to third parties or from property under construction for future investment use.

Examples include:

• An office building leased to external tenants.

• A shopping center held for long-term appreciation.

• Land acquired for capital gain rather than operational use.

For instance, if a company purchases an office building for 2,500,000 to rent to tenants, the asset is recorded as investment property rather than property, plant, and equipment (PPE), since it generates income rather than serving internal operations.

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Presentation on the balance sheet

Investment property is presented as a separate line item within non-current assets, distinct from both PPE and intangible assets.

Example:

• Non-Current Assets:

  • Property, Plant, and Equipment: 8,000,000

  • Investment Property (Fair Value Model): 2,500,000

  • Intangible Assets: 1,200,000

  • Deferred Tax Assets: 300,000

When using the fair value model, changes in fair value are recognized directly in the income statement. Under the cost model, the property remains at cost less accumulated depreciation and impairment.

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Journal entries for investment property

At acquisition:

• Debit: Investment Property 2,500,000

• Credit: Cash 2,500,000

To record fair value increase:

• Debit: Investment Property 200,000

• Credit: Gain on Fair Value Adjustment (Income Statement) 200,000

To record depreciation under cost model:

• Debit: Depreciation Expense 80,000

• Credit: Accumulated Depreciation – Investment Property 80,000

To record fair value decrease:

• Debit: Loss on Fair Value Adjustment 150,000

• Credit: Investment Property 150,000

These entries ensure the balance sheet and income statement reflect updated property valuations or depreciation charges, depending on the chosen model.

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Standards under IFRS and US GAAP

• IFRS (IAS 40):

  • Allows two models:

    • Fair Value Model: Measure at fair value with changes recognized in profit or loss.

    • Cost Model: Measure at cost less accumulated depreciation and impairment.

  • Transfers between PPE, inventory, and investment property are permitted only when use changes.

• US GAAP:

  • Does not permit a fair value model for investment property. All investment real estate is classified as property, plant, and equipment, measured at cost and subject to depreciation.

  • Fair value disclosure is required, but gains and losses are not recognized until disposal.

This difference means IFRS entities can show more volatile but market-reflective property values, while US GAAP entities show smoother, cost-based values.

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Impact on financial performance and ratios

Under the fair value model, investment property can significantly influence profit due to unrealized gains or losses recognized in income. This leads to greater volatility in earnings but higher transparency about market trends.

For example, if fair value increases by 10 percent, the gain boosts both total assets and net income, improving return on assets (ROA). Conversely, a market downturn decreases reported earnings.

Under the cost model, income is recognized gradually through depreciation, producing more stable but less market-sensitive results. Analysts often adjust ratios like return on invested capital (ROIC) and debt-to-equity depending on the valuation model used.

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Disclosures required for investment property

IAS 40 requires disclosure of:

• The chosen measurement model (cost or fair value).

• The fair value of properties measured using the cost model.

• Rental income, direct operating expenses, and restrictions on property use.

• Reconciliation of carrying amounts at the beginning and end of the period.

• Significant assumptions used in fair value measurement.

These disclosures allow stakeholders to assess both the income potential and valuation risks of investment properties.

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Operational considerations

Investment property management bridges accounting, valuation, and real estate strategy. The chosen measurement model impacts not only financial results but also investor perception and tax treatment. Firms favoring transparency and active asset management often adopt the fair value model, while conservative entities prefer cost-based reporting for stability.

For analysts, understanding whether reported gains stem from operational performance (rental income) or market revaluation is essential. Transparent presentation of investment property enhances comparability across companies and provides a more complete picture of long-term asset performance and value creation.

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