The following discussion captures a number of the more significant GAAP differences under both the impairment standards. It is important to note that the discussion is not inclusive of all GAAP differences in this area.
The significant differences and similarities between U.S. GAAP and IFRS related to accounting for investment property are summarized in the following tables.
Standards Reference
Introduction
The guidance under US GAAP and IFRS as it relates to investment property contains some significant differences with potentially far-reaching implications.
Links to detailed observations by subject
Overview
Unlike IFRS Standards, there is no specific definition of ‘investment property’; such property is accounted for as property, plant and equipment unless it meets the criteria to be classified as held-for-sale.
‘Investment property’ is property (land or building) held by the owner or lessee to earn rentals or for capital appreciation, or both.
Unlike IFRS Standards, there is no guidance on how to classify dual-use property. Instead, the entire property is accounted for as property, plant and equipment.
A portion of a dual-use property is classified as investment property only if the portion could be sold or leased out under a finance lease. Otherwise, the entire property is classified as investment property only if the portion of the property held for own use is insignificant.
Unlike IFRS Standards, ancillary services provided by a lessor do not affect the treatment of a property as property, plant and equipment.
If a lessor provides ancillary services, and such services are a relatively insignificant component of the arrangement as a whole, then the property is classified as investment property.
Like IFRS Standards, investment property is initially measured at cost as property, plant and equipment.
Investment property is initially measured at cost.
Unlike IFRS Standards, subsequent to initial recognition all investment property is measured using the cost model as property, plant and equipment.
Subsequent to initial recognition, all investment property is measured under either the fair value model (subject to limited exceptions) or the cost model.
If the fair value model is chosen, then changes in fair value are recognised in profit or loss.
Unlike IFRS Standards, there is no requirement to disclose the fair value of investment property.
Disclosure of the fair value of all investment property is required, regardless of the measurement model used.
Similar to IFRS Standards, subsequent expenditure is generally capitalised if it is probable that it will give rise to future economic benefits.
Subsequent expenditure is capitalised only if it is probable that it will give rise to future economic benefits.
Unlike IFRS Standards, investment property is accounted for as property, plant and equipment, and there are no transfers to or from an ‘investment property’ category.
Transfers to or from investment property can be made only when there has been a change in the use of the property.
Definition and classification
The ability to revalue assets (to fair value) under IFRS might create significant differences in the carrying value of assets as compared with US GAAP.
Unlike IFRS Standards, there is no specific guidance under US GAAP on accounting for investment property. Real estate (property) that meets the IFRS Standards definition of investment property is accounted for as:
Special requirements exist for investment companies, which are outside the scope of this publication except in relation to consolidation (see Investment company). Investments in real estate held by entities that follow specialised industry accounting practices for investment companies are measured at FVTPL.
The discussion that follows assumes that the property is accounted for as property, plant and equipment.
The investment property standard is not a specialised industry standard. Therefore, determining whether a property is an investment property depends on the use of the property rather than the type of entity that holds the property. ‘Investment property’ is property that is held to earn rental income or for capital appreciation, or both, rather than for:
Unlike IFRS Standards, there is no guidance on the classification of investment property from an entity vs a group point of view. However, this is less relevant because the property is accounted for as property, plant and equipment (see Property, plant and equipment).
In determining the classification of a property in consolidated financial statements, the definition is assessed from the point of view of the group as a single reporting entity. [IAS 40.15]
Unlike IFRS Standards, because there is no concept of investment property, the whole property is accounted for as property, plant and equipment.
Property often has dual purposes whereby part of the property is used for own activities and part of the property is held for earning rentals or for capital appreciation.
A portion of a dual-use property is classified as an investment property only if the portion could be sold or leased out separately under a finance lease. If this is not the case, then the entire property is classified as investment property only if the portion of the property held for own use is ‘insignificant’. [IAS 40.10]
Unlike IFRS Standards, an analysis of ancillary services is not relevant to the identification of investment property because such property is accounted for as property, plant and equipment. However, the owner of a property that provides ancillary services would identify the nature of the services and determine whether they should be accounted for separately (see Revenue from contracts with customers).
If a lessor provides ancillary services to tenants, then determining whether the property is investment property is based on whether the services provided are a ‘relatively insignificant component of the arrangement as a whole’. Judgement is required in assessing whether the definition of investment property is met and requires an entity to develop criteria that are consistently applied in making that assessment. [IAS 40.11–13]
Unlike IFRS Standards, all investment property is accounted for as property, plant and equipment (see Property, plant and equipment), regardless of the stage of completion.
Property under development or construction for future use as investment property is accounted for under the requirements of the investment property standard, using the measurement model elected for investment property. [IAS 40.8(e), IAS 40.65]
Unlike IFRS Standards, all investment property is accounted for as property, plant and equipment (see Property, plant and equipment), regardless of whether it is held for an undetermined future use.
If land is held for an undetermined future use, then it is classified as investment property because it is considered to be held for capital appreciation. [IAS 40.8(b)]
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IFRS vs US GAAP Initial measurement Investment property
Like IFRS Standards, investment property is initially measured at cost as property, plant and equipment. Unlike IFRS Standards, the treatment of transfers to or from the investment property category is not relevant. [360-10-30-1]
An owned investment property is initially measured at cost unless it is:
Like IFRS Standards, the cost of investment property includes the directly attributable expenditure of preparing the asset for its intended use. Because investment property is accounted for as property, plant and equipment under US GAAP, the principles discussed in respect of attributing cost to property, plant and equipment also apply to the cost of investment property; however, the determination of cost differs in certain respects from IFRS Standards (see Property, plant and equipment). [360-10-30-1 – 30-2]
The cost of owned investment property includes the directly attributable expenditure of preparing the asset for its intended use. The principles discussed in respect of property, plant and equipment (see Property, plant and equipment) apply equally to the initial recognition of investment property. [IAS 40.20–23]
Public entities: Unlike IFRS Standards, property held by a lessee as a right-of-use-asset is measured initially at cost in accordance with the leases Codification Topic (see Leases).
Non-public entities: Unlike IFRS Standards, property held by a lessee under an operating lease is not recognised in the statement of financial position; instead, it is accounted for as an operating lease. [840-10-25-1]
An investment property held by a lessee as a right-of-use-asset is measured initially at cost in accordance with the leases standard (see Leases). [IAS 40.29A, IFRS 16.23–25]
IFRS vs US GAAP Investment property IFRS vs US GAAP Investment property IFRS vs US GAAP Investment property
IFRS vs US GAAP Subsequent measurement investment property
Unlike IFRS Standards, investment property is accounted for using the principles for property, plant and equipment. Accordingly, all investment property is measured using the cost model.
Subsequent to initial recognition, an entity chooses an accounting policy, to be applied consistently, either to:
Unlike IFRS Standards, there is no requirement to disclose the fair value of investment property.
The investment property standard implies a preference for measuring investment property at fair value, noting that it would be very difficult to justify a voluntary change in accounting policy from the fair value model to the cost model (see Accounting policy change). In general, change in accounting policy from the fair value model to the cost model attributed solely to changes in market conditions is not justifiable. [IAS 40.31]
Disclosure of the fair value of investment property is required regardless of the basis of measurement. [IAS 40.79(e)]
IFRS vs US GAAP Investment property IFRS vs US GAAP Investment property IFRS vs US GAAP Investment property
IFRS vs US GAAP Fair value model Investment property
Unlike IFRS Standards, entities are not permitted to measure property, plant and equipment at fair value under US GAAP. [ARB 43.9B.1]
If an entity chooses to measure investment property using the fair value model, then it measures the property at fair value at each reporting date, with changes in fair value recognised in profit or loss. [IAS 40.33–35]
If a lessee uses the fair value model to measure an investment property that is held as a right-of-use asset, then it measures the right-of-use asset and not the underlying property at fair value. [IAS 40.40A, IFRS 16.34]
If a lessee uses the fair value model to measure an investment property that is held as a right-of-use asset, then it measures the right-of-use asset and not the underlying property at fair value. [IAS 40.40A, IFRS 16.34]
In exceptional cases, there will be clear evidence on initial recognition of a particular investment property that its fair value cannot be measured reliably on a continuing basis. In such cases, the property in question is measured using the cost model, except that the residual value is deemed to be zero in all cases. [IAS 40.53]
However, if the fair value of an investment property under construction cannot be determined reliably but the entity expects the fair value of the completed property to be reliably measurable, then the investment property under construction is accounted for using the cost model until the earlier of the date that the fair value of the property can be measured reliably and the date that the construction is completed. [IAS 40.53–53B]
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IFRS vs US GAAP Cost model Investment property
Unlike IFRS Standards, a cost model is used for all investment property. Like IFRS Standards, the cost model used is the one used for other property, plant and equipment, with assets measured at cost less accumulated depreciation (see Property, plant and equipment) and less any accumulated impairment losses (see Impairment of non-financial assets). However, there are certain differences in the application of the cost model and impairment testing, and therefore differences from IFRS Standards may arise in practice. [360-10-35-20]
If an entity chooses to measure owned investment property using the cost model, then it accounts for the property using the cost model for property, plant and equipment – i.e. at cost less accumulated depreciation (see Property, plant and equipment) and less any accumulated impairment losses (see Impairment of non-financial assets). However, the property continues to be classified as investment property in the statement of financial position. [IAS 40.56]
An entity that chooses the cost model for subsequent measurement accounts for an investment property that is held as a right-of-use asset in accordance with the leases standard (see Leases), unless it is held for sale. [IAS 40.56(b), IFRS 16.30–33]
IFRS vs US GAAP Investment property IFRS vs US GAAP Investment property IFRS vs US GAAP Investment property
Subsequent expenditure
Like IFRS Standards, expenditure incurred subsequent to the completion or acquisition of an investment property is generally capitalised if it meets the general asset recognition criteria – i.e. it is probable that future economic benefits associated with the item will flow to the entity and the cost of the item can be measured reliably.
However, because US GAAP does not include a requirement for component depreciation of property, plant and equipment and permits the costs of planned major maintenance to be expensed as they are incurred, parts of investment property acquired through replacement may not necessarily be capitalised and included in the carrying amount of the property if the general asset recognition criteria are met.
In addition, if they are, the carrying amount of the part replaced is not necessarily derecognised, unlike IFRS Standards (see Property, plant and equipment). Expenditure related to the day-to-day servicing of the property is expensed as it is incurred, like IFRS Standards. [970-340-25-17]
Expenditure incurred subsequent to the completion or acquisition of an investment property is capitalised only if it meets the general asset recognition criteria – i.e. it is probable that future economic benefits associated with the item will flow to the entity and the cost of the item can be measured reliably.
Parts of investment property acquired through replacement are capitalised and included in the carrying amount of the property if the general asset recognition criteria are met; the carrying amount of the part replaced is derecognised. Expenditure related to the day-to-day servicing of the property is expensed as it is incurred. [IAS 40.16–19]
IFRS vs US GAAP Investment property IFRS vs US GAAP Investment property IFRS vs US GAAP Investment property
Transfers to or from investment property
Timing of transfers
Unlike IFRS Standards, investment property is accounted for as property, plant and equipment, and therefore there are no transfers to or from the ‘investment property’ category. However, property, including investment property, is transferred between the held-and-used and the held-for-sale classifications under US GAAP when the relevant criteria are met (see Non-current assets held for sale). [360-10-45-6, 45-10]
Although an entity’s business model plays a key role in the initial classification of property, the subsequent reclassification of property is based on an actual change in use rather than on changes in an entity’s intentions. [IAS 40.57–58]
To reclassify inventories to investment property, the change in use is generally evidenced by the inception of an operating lease to another party. [IAS 40.57(d)]
In some cases, a property (or a part of a property) classified as inventory (see Inventories) is leased out temporarily while the entity searches for a buyer. In general, the inception of such an operating lease, by itself, does not require the entity to transfer the property to investment property provided that the property continues to be held for sale in the ordinary course of business.
An entity may no longer have the intention or the ability to develop property classified as inventory for sale in the ordinary course of business as originally planned due to fluctuations in property and capital markets. Depending on the facts and circumstances, it may be appropriate to reclassify a property originally classified as inventory to investment property if there is a change in the business model of the entity that evidences a change in the use of the property.
A reclassification of an investment property to inventory, property, plant and equipment or right-of-use asset is performed only if an entity’s use of the property has changed. For example, the commencement of construction for sale or own use would usually mean that the property is no longer available for rent to third parties. Therefore, a change in use occurs on commencement of redevelopment and reclassification is appropriate at that point. [IAS 40.57, IAS 40BC26]
IFRS vs US GAAP Investment property IFRS vs US GAAP Investment property IFRS vs US GAAP Investment property
Transfers to or from investment property
Measurement of transfers
Unlike IFRS Standards, the issue of the measurement of transfers to and from the investment property category is not applicable because investment property is accounted for under the general principles for property, plant and equipment. Transfers between the held-and-used and the held-for-sale classifications are accounted for under the guidance for assets held for sale (see Non-current assets held for sale).
If an entity chooses to measure investment property using the cost model, then transfers to and from investment property do not alter the carrying amount of the property. Revaluations recognised for owner-occupied property measured at fair value (see Property, plant and equipment) are not reversed when the property is transferred to investment property. [IAS 40.59]
If an entity chooses to measure investment property using the fair value model, then investment property transferred from another category in the statement of financial position is recognised at fair value on transfer. The treatment of the gain or loss on revaluation at the date of transfer depends on whether the property was previously held for own use. [IAS 40.61–65]
If the property was previously held for own use, then it is accounted for as property, plant and equipment if it is owned, and as a right-of-use asset if it is held by a lessee, up to the date of the change in use. Any difference at the date of the change in use between the carrying amount of the property and its fair value is recognised as a revaluation in accordance with the standard on property, plant and equipment (see Property, plant and equipment). [IAS 40.61]
If the property is inventory that is being transferred to investment property, then the gain or loss on revaluation, based on the asset’s carrying amount at the date of transfer, is recognised in profit or loss. [IAS 40.63–64]
When a property is transferred from investment property measured at fair value (whether to own-use properties or to inventories), the transfer is accounted for at fair value. The fair value at the date of transfer is then deemed to be the property’s cost for subsequent accounting.
Any difference between the carrying amount of the property before transfer and its fair value on the date of transfer is recognised in profit or loss in the same way as any other change in the fair value of investment property. [IAS 40.60]
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Redevelopment
Unlike IFRS Standards, the issue of the redevelopment of investment property is not applicable because investment property is accounted for under the general principles for property, plant and equipment (see Property, plant and equipment).
When an entity redevelops an existing investment property, the property is not transferred out of investment property during redevelopment. This means that an investment property undergoing redevelopment continues to be measured under the cost model or at fair value (depending on the entity’s accounting policy). [IAS 40.58]
IFRS vs US GAAP Investment property IFRS vs US GAAP Investment property IFRS vs US GAAP Investment property
Disposals
Unless the transaction is a sale and leaseback, like IFRS Standards, when an investment property is sold, a gain or loss is recognised. The gain or loss is determined as the difference between:
For non-public entities, gain recognition may be deferred, limited or adjusted based on the specific facts of the disposal transaction. Such situations typically arise in sales that involve leasebacks, if the seller retains an equity interest or provides guarantees and other forms of post-sale continuing involvement with the property, or the arrangement contains a put or call on the property.
Unless the transaction is a sale and leaseback (see Leases), the gain or loss on the disposal of investment property that is sold is recognised for the difference between:
Like IFRS Standards, the date of disposal of a non-financial asset is the date on which the recipient obtains control of the asset under the guidance in the revenue Codification Topic (see Revenue from contracts with customers). Additionally, the requirements apply to the transfer of an entity that is an in-substance non-financial asset, unlike IFRS Standards. [610-20-25-1, 25-5, 32-3, 32-6]
The date of disposal of an investment property is the date on which the recipient obtains control of the asset under the guidance in the revenue standard on the satisfaction of performance obligations under contracts with customers (see Revenue from contracts with customers). [IAS 40.67, IAS 40.70]
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IFRS vs US GAAP Investment property IFRS vs US GAAP Investment property IFRS vs US GAAP Investment property
IFRS vs US GAAP Investment property IFRS vs US GAAP Investment property IFRS vs US GAAP Investment property
IFRS vs US GAAP Investment property IFRS vs US GAAP Investment property IFRS vs US GAAP Investment property
IFRS vs US GAAP Investment property IFRS vs US GAAP Investment property IFRS vs US GAAP Investment property
