The IAS 40 Property Playbook: How Correct Classification Unlocks Hidden Value

A REIT proudly reported investment properties at fair value—showing healthy gains every year. Then auditors asked one question: “Why does your head office occupy three floors?” Suddenly, $50 million in fair value gains reversed. The stock crashed 30%.

The Classification Crisis

Investment property or owner-occupied? The answer changes everything:

Investment property (IAS 40): Can use fair value through P&L
Owner-occupied (IAS 16): Cost model or revaluation through OCI

The dual-use disaster: 20-floor building. Company uses 3 floors, rents 17. They fair-valued everything as investment property. IAS 40 says: Split it! Those 3 floors? Not investment property. Years of gains reversed.

The Fair Value Fantasy Land

Choosing fair value model? Every tiny assumption flows straight to profit:

Discount rate changes 0.5%? Massive impact
Vacancy assumption off by 2%? Profit swing
Market rent estimates high? Inflated gains

Valuation manipulation exposed: A property company showed 15% annual gains for five years. Investigation revealed:

Used 5% discount rate (market was 7%)
Assumed 100% occupancy (actual 85%)
Projected rent increases double the market Real value: 40% lower. Restatement destroyed credibility.

The Transfer Timing Trap

When does property become (or stop being) investment property? Timing matters:

Start owner-occupation? Transfer at fair value, gain through P&L
Start development for sale? Transfer at fair value, becomes inventory
End owner-occupation? Careful—fair value gains might be locked in OCI

The gaming attempt: Company moved from owner-occupied building (carried at cost) to new HQ. Old building’s fair value: $30 million above book. They tried to record the gain. IAS 40: Not so fast—that’s a revaluation under IAS 16, goes to OCI, not P&L.

The Development Dilemma

Building on vacant land? During construction, is it:

Investment property under development? (maybe)
Inventory if you might sell? (possibly)
PPE if undecided? (could be)

The intention investigation: Developer built offices claiming “to rent” (investment property at fair value). Market turned, they sold instead. Auditors found marketing materials from day one showing sale intentions. Should have been inventory at cost. Fair value gains reversed.

The Cost Allocation Abyss

Using cost model? Don’t celebrate yet. You still need:

Fair value disclosure
Component depreciation
Impairment testing
Proper cost allocation

The depreciation disaster: Company used cost model, depreciated building over 50 years straight-line. Auditors noted:

Land wasn’t separated (infinite life)
Components ignored (HVAC, elevators need faster depreciation)
Major renovation capitalized when it just restored original condition Depreciation understated by 60%.

Your Takeaway as an Accountant

Document property intentions before acquisition, not after. If using fair value, get independent valuations—don’t rely on “management estimates.” Track actual vs. projected metrics to validate assumptions. Review classification every time usage changes.

Remember: In investment property, your intention matters as much as your action. And changing your story later never ends well.

Master property accounting complexities with ACCOUNTANT MINDSET—where classification clarity prevents costly mistakes.