How to account for investment property under IFRS and US GAAP: Recognition, fair value model, and disclosure requirements

Graziano Stefanelli
Sep 12
4 min read

Investment property is a distinct class of real estate assets that generate rental income or capital appreciation rather than being used in operations. IFRS (IAS 40) provides a standalone standard for investment property accounting, offering entities a choice between the fair value model and the cost model, with significant presentation and measurement implications. US GAAP, by contrast, does not have a dedicated standard for investment property; such assets are generally accounted for under ASC 360 (Property, Plant, and Equipment) unless specific industry guidance applies. The result is a notable divergence in how real estate assets held for investment purposes are recognized, measured, and disclosed across the two frameworks.

Investment property includes land or buildings held to earn rentals or for capital appreciation.

Under IFRS (IAS 40), investment property is defined as:

"Property (land or building—or part of a building—or both) held to earn rentals or for capital appreciation or both."

This includes:

Land held for long-term appreciation in value
Buildings leased out under operating leases
Property being constructed or developed for future use as investment property

It excludes:

Owner-occupied property (IAS 16)
Property held for sale in the ordinary course of business (IAS 2)
Property leased under a finance lease (accounted for by lessee under IFRS 16)

US GAAP does not define “investment property” as a distinct category for general use. Real estate held for rental income or appreciation is usually accounted for as property, plant, and equipment (ASC 360) unless the reporting entity is:

An investment company (ASC 946)
A real estate investment trust (REIT) applying specialized industry guidance

Initial recognition is at cost under both frameworks.

For both IFRS and US GAAP, investment property (or rental real estate) is initially recognized at cost, including:

Purchase price
Directly attributable costs (e.g., legal fees, property taxes incurred during acquisition, transaction costs)
Estimated costs of dismantling/removal or site restoration if applicable

If acquired as part of a business combination, fair value at acquisition is used.

Under IFRS, property can be reclassified to or from investment property (e.g., when owner occupation begins or ends), and such reclassifications are carefully controlled.

Measurement after recognition differs significantly due to the fair value model under IFRS.

Under IFRS (IAS 40), after initial recognition, entities may choose between:

Cost model: Same accounting as IAS 16—depreciation and impairment testing apply.
Fair value model: No depreciation. Property is remeasured to fair value at each reporting date. Changes in fair value are recognized in profit or loss, not in OCI.

The model must be applied consistently to all investment property. Once chosen, a change in model is permitted only if it results in more reliable and relevant information.

Under US GAAP, fair value is not permitted for general-purpose financial statements unless the entity is an investment company or REIT subject to specific guidance. Instead:

Investment real estate is carried at cost less accumulated depreciation and impairment.
Fair value is often disclosed, but not used in measurement.

Aspect	IFRS (IAS 40)	US GAAP (ASC 360)
Measurement models allowed	Cost or fair value	Cost only (fair value limited to certain entities)
Fair value changes	Recognized in profit or loss	Not recognized (disclosed if applicable)
Depreciation	Required under cost model	Always required
Disclosure of fair value	Required even if cost model is used	Optional unless required by industry rules

Transfers to and from investment property must follow strict criteria under IFRS.

IFRS permits transfers between investment property and other categories (PPE, inventory, owner-occupied) only when:

There is a change in use, evidenced by:
- Start of owner-occupation (investment → PPE)
- Start of development for sale (investment → inventory)
- End of owner-occupation (PPE → investment)
- Commencement of leasing to third party (inventory → investment)

The reclassification must reflect fair value at the date of transfer if moving to/from the fair value model.

US GAAP generally does not allow asset category reclassification between operating and investment categories unless part of an accounting policy change or business restructuring.

Impairment testing and depreciation rules differ depending on the model used.

Under IFRS:

Fair value model: No depreciation or impairment testing is required.
Cost model: Asset is depreciated over useful life. Impairment tested under IAS 36 if indicators of impairment arise.

Under US GAAP:

Assets are always depreciated using a systematic method.
Impairment tested using the two-step model under ASC 360 (undiscounted cash flows, then fair value comparison).
Impairment losses are not reversible.

Disclosure requirements emphasize transparency, even when fair value is not used.

IFRS (IAS 40) requires more robust disclosures than US GAAP, especially when the cost model is applied:

Disclosure area	IFRS (IAS 40)	US GAAP (ASC 360 / REIT guidance)
Chosen measurement model	Required	Not applicable
Fair value of all investment property	Required, even under cost model	Optional (required only for REITs or investment firms)
Rental income and operating expenses	Required	Not specifically required
Restrictions on sale/use	Required	Not always required
Reconciliation of carrying amounts	Required	Not specifically required

Entities under IFRS must disclose the valuation method used (e.g., market approach, income approach) and whether it was conducted by an external appraiser.

Key differences between IFRS and US GAAP for investment property.

Area	IFRS (IAS 40)	US GAAP
Definition of investment property	Specific definition under IAS 40	No general definition (industry-specific guidance)
Fair value model	Permitted and encouraged	Not permitted for most entities
Impact of fair value gains	Reported in profit or loss	Not applicable
Depreciation	Not required under fair value model	Always required
Impairment reversal	Permitted under cost model	Not permitted
Required disclosures	More comprehensive	Less prescriptive

For multinational entities, the choice or requirement to use the fair value model under IFRS can result in major differences in net income, asset valuation, and volatility when compared to US GAAP. Investors, auditors, and regulators must be attuned to these differences, especially when evaluating REITs, real estate developers, or entities with large portfolios of non-operating property. ____________

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