Investment Property vs. Owner-Occupied Property: Key Distinctions Under IAS 40

Introduction

The classification of property as either investment property or owner-occupied property has significant implications for financial reporting. Under International Financial Reporting Standards (IFRS), these two categories are governed by different standards: IAS 40 Investment Property and IAS 16 Property, Plant and Equipment. The distinction determines how the property is measured, depreciated, and disclosed in financial statements.

IAS 40 defines investment property as property held to earn rentals or for capital appreciation, or both . This includes land or a building (or part of a building) that is not owner-occupied, not used in production or supply of goods or services, and not held for sale in the ordinary course of business . In contrast, owner-occupied property is property used in the production or supply of goods or services or for administrative purposes, which falls under IAS 16 .

This comprehensive guide examines the key distinctions between investment property and owner-occupied property under IAS 40, explores the classification criteria and measurement models, and provides practical examples for Nigerian businesses navigating these accounting standards.

The Pain Points: Why Property Classification Matters

The Financial Reporting Impact

The classification of property determines which accounting standard applies, with significant consequences for financial statements. Investment property under IAS 40 can be measured using either the fair value model or the cost model, while owner-occupied property under IAS 16 is measured using the cost model or revaluation model .

Under the fair value model, investment property is remeasured at the end of each reporting period, with changes in fair value recognised in profit or loss . This can introduce volatility to the statement of profit or loss . Under the cost model, investment property is measured at cost less accumulated depreciation and any accumulated impairment losses .

The Tax and Regulatory Implications

In Nigeria, the classification of property also has tax implications. Capital allowances are available on qualifying capital expenditure for owner-occupied properties used in business operations. Investment properties may have different tax treatments, particularly when held for rental income or capital appreciation.

The Judgement and Estimation Challenges

Application of IAS 40 requires different judgements and estimates that can have a significant impact on figures reported in the financial statements . Key judgement areas include:

Identification of investment property

Determining whether ancillary services are significant

Deciding whether dual-use property portions can be sold separately

Choosing the appropriate accounting policy

Obtaining reliable measures of fair value 

What is Investment Property?

Definition Under IAS 40

Investment property is land or a building (or part of a building) or both that is :

Held to earn rentals or for capital appreciation or both

Not owner-occupied

Not used in production or supply of goods or services, or for administration

Not held for sale in the ordinary course of business

What is Included in Investment Property?

Investment property includes :

Land held for long-term capital appreciation

Land held for indeterminate future use

Buildings leased out under an operating lease

Vacant buildings held to be leased out under an operating lease

Property being constructed or developed for future use as investment property 

A property interest held by a lessee under an operating lease may be classified and accounted for as investment property provided that the rest of the definition of investment property is met, the operating lease is accounted for as if it were a finance lease, and the lessee uses the fair value model for all investment properties .

What is Excluded from Investment Property?

Investment property does not include :

Property intended for sale in the ordinary course of business or for development and resale

Owner-occupied property, including property held for such use or for redevelopment prior to such use, and property occupied by employees

Owner-occupied property awaiting disposal

Property that is leased to another entity under a finance lease

Property held for use in the production or supply of goods or services or for administrative purposes (IAS 16 applies)

Property being constructed or developed on behalf of third parties

A factory or the corporate headquarters of an entity would qualify as owner-occupied property .

What is Owner-Occupied Property?

Owner-occupied property is property held by the owner for use in the production or supply of goods or services or for administrative purposes . This property is accounted for under IAS 16 Property, Plant and Equipment.

Examples of Owner-Occupied Property

Factory buildings used in manufacturing operations

Corporate headquarters

Office buildings used by the entity’s administrative staff

Property occupied by employees

Property held for redevelopment prior to owner occupation

Owner-managed hotels 

Key Distinctions Between Investment and Owner-Occupied Property

1. Intended Use

Investment Property: Held to earn rentals or for capital appreciation or both . The focus is on generating returns through leasing or price appreciation rather than using the property in the entity’s operations.

Owner-Occupied Property: Used in the production or supply of goods or services or for administrative purposes . The property is integral to the entity’s core business operations.

2. Applicable Accounting Standard

Investment Property: IAS 40 Investment Property 

Owner-Occupied Property: IAS 16 Property, Plant and Equipment 

3. Measurement Models

Investment Property: Entities may choose between the fair value model or the cost model, applied consistently to all investment properties . The selected method must be applied consistently to all investment properties held by the entity .

Owner-Occupied Property: Cost model or revaluation model under IAS 16 .

4. Depreciation

Investment Property: Under the fair value model, investment property is not depreciated . Changes in fair value are recognised in profit or loss . Under the cost model, the property is depreciated .

Owner-Occupied Property: Depreciated over its useful life under IAS 16 .

5. Changes in Value

Investment Property: Under the fair value model, changes in fair value are recognised in profit or loss as they occur . This can introduce volatility to the statement of profit or loss .

Owner-Occupied Property: Revaluation increases are generally recognised in other comprehensive income (unless they reverse previous revaluation decreases). Revaluation decreases are recognised in profit or loss.

6. Disclosure Requirements

Investment Property: Entities must disclose whether they have followed the fair value model or cost model, criteria for classification, assumptions in determining fair value, rental income and expenses, and any restrictions or obligations . Under the fair value model, a reconciliation of the carrying amount at the beginning and end of the period is required . Under the cost model, entities must also disclose the fair value of the investment property .

Owner-Occupied Property: Disclosures under IAS 16 include depreciation methods, useful lives, and reconciliations of carrying amounts .

Practical Challenges in Classification

1. Properties with Ancillary Services

In some cases, an entity provides ancillary services to the occupants of a property it holds. An entity treats such a property as investment property if the services are insignificant to the arrangement as a whole .

Example 1 – Insignificant Services: The owner of an office building provides security and maintenance services to the lessees who occupy the building. Since the services provided are insignificant, the property would be treated as an investment property .

Example 2 – Significant Services: If an entity owns and manages a hotel, services provided to guests are significant to the arrangement as a whole. An owner-managed hotel is owner-occupied property, rather than investment property .

Difficulty in Determining: It may be difficult to determine whether ancillary services are so significant that a property does not qualify as investment property. For example, the owner of a hotel sometimes transfers some responsibilities to third parties under a management contract. Terms vary widely—at one end, the owner’s position may be that of a passive investor; at the other, the owner may have outsourced day-to-day functions while retaining significant exposure to variation in cash flows . Judgement is needed to determine whether a property qualifies as investment property .

2. Properties with Dual Use

A property might be partially owner-occupied, with the rest being held for rental income or capital appreciation .

If portions can be sold separately: If each of these portions can be sold separately (or separately leased out under a finance lease), the entity should account for the portions separately . The portion that is owner-occupied is accounted for under IAS 16, and the portion that is held for rental income or capital appreciation is treated as investment property under IAS 40 .

If portions cannot be sold separately: If the portions cannot be sold or leased out separately under a finance lease, the property is investment property only if an insignificant portion is owner-occupied, in which case the entire property is accounted for as investment property. If more than an insignificant portion is owner-occupied, the entire property is accounted for as owner-occupied property, plant and equipment under IAS 16 . There is no guidance under the standards as to what “insignificant” means; accordingly, entities should consider both qualitative and quantitative factors in determining whether the portion is insignificant .

Practical Examples:

Example 1: Sun Ltd owns a building having 15 floors, uses 5 floors for its office, and leases the remaining 10 floors to tenants under operating leases. The company could sell legal title to the 10 floors while retaining legal title to the other 5 floors. The remaining 10 floors should be classified as investment property since they are able to split the title between the floors .

Example 2: Moon Ltd uses 35% of the office floor space of the building as its head office. It leases the remaining 65% to tenants, but it is unable to sell the tenant’s space or to enter into finance leases related solely to it. The company should not classify the property as an investment property as the 35% of the floor space used by the company is significant .

Example 3: An entity owns a hotel which includes a health and fitness centre housed in a separate building that is part of the premises of the entire hotel. The owner operates the hotel and other facilities with the exception of the health and fitness centre, which can be sold or leased out under a finance lease to an independent operator. The entity has no further involvement in the health and fitness centre. Management should classify the hotel and other facilities as property, plant and equipment under IAS 16, and the health and fitness centre as investment property under IAS 40 .

If the health and fitness centre could not be sold or leased out separately on a finance lease, then because the owner-occupied portion is not insignificant, the whole property would be treated as owner-occupied property .

3. Property Leased to Other Group Members

Property leased to a parent, subsidiary, or fellow subsidiary is not investment property in consolidated financial statements that include both the lessor and the lessee, because the property is owner-occupied from the perspective of the group .

However, such property will be investment property in the separate financial statements of the lessor, if the definition of investment property is otherwise met .

Measurement of Investment Property

Initial Measurement

An investment property is initially measured at cost, including transaction costs . Cost does not include start-up costs, abnormal waste, or initial operating losses incurred before the investment property achieves the planned level of occupancy . An investment property held by a lessee as a right-of-use asset is recognised in accordance with IFRS 16 .

Subsequent Measurement

After initial recognition, entities must adopt either the fair value model or the cost model as their accounting policy for all investment properties .

Fair Value Model:

Investment properties are measured at fair value at the end of each reporting period 

Changes in fair value are recognised in profit or loss as they occur 

Fair value is the price at which the property could be exchanged between knowledgeable, willing parties in an arm’s length transaction, without deducting transaction costs 

No depreciation is recorded on investment properties measured at fair value 

Investment property under construction is measured at fair value if this can be reliably measured; otherwise, it is measured at cost until completion 

Cost Model:

Investment property is measured at cost less accumulated depreciation and any accumulated impairment losses 

Fair value must be disclosed in the financial statements 

In rare exceptional circumstances if fair value cannot be determined, the cost model is used for that property for its entire life 

Choosing Between Fair Value and Cost Model

The choice between fair value and cost model has significant implications for financial statements . Research on European real estate companies shows that approximately 45% of the variance in the choice between fair value and cost can be explained by various factors :

Leverage: Firms with higher debt are less likely to use fair value, suggesting that debt holders tend to favor conservative accounting as it is perceived to reduce agency costs 

Significance of IP: Firms with significant investment property relative to total assets are more inclined to use fair value, as this method arguably better reflects performance variations for these core assets 

Firm Size: Larger firms are more inclined to select fair value, likely due to the distinct characteristics of the real estate industry where markets for investment property are typically more liquid 

Information Asymmetries: A negative association between the market-to-book value ratio and fair value choice suggests that fair value may contribute to mitigating information asymmetries 

Institutional Context: The country’s institutional context, particularly legal origin and capital market development, strongly influences the fair value choice 

Transfers Between Categories

Transfers to or from investment property can be made only when there has been a change in the use of the property .

Evidence of Change in Use

How Qeeva Advisory Helps with Investment Property Classification

At Qeeva Advisory, we understand that classifying and accounting for investment property can be complex. Our team of experienced professionals helps Nigerian businesses implement IFRS-compliant accounting policies for property assets, ensuring correct classification, measurement, and disclosure.

Our Core Services

Advisory Services Nigeria – Our advisory professionals help you determine the appropriate classification of your property assets, implement IFRS-compliant accounting policies, and ensure accurate financial reporting.

Tax Strategies and Planning – We help you understand the tax implications of property classification and structure your property holdings to optimise tax outcomes.

Regulatory Compliance – We ensure your property accounting meets all regulatory requirements and disclosure obligations under IFRS.

Bookkeeping Services – Accurate property records and valuation schedules are essential for compliance. Our bookkeeping services ensure your asset records are accurate and up to date.

Risk Management – We help you identify and manage risks associated with property classification, including valuation risks, classification errors, and disclosure deficiencies.

Our Service Methodology for Property Classification

Step 1: Property Classification Review – We review your property holdings and ensure they are correctly classified as investment property or owner-occupied property under IAS 40 and IAS 16.

Step 2: Measurement Model Selection – We help you choose between the fair value model and the cost model for investment property, considering your business objectives and regulatory requirements.

Step 3: Valuation Support – We provide support for fair value measurements, including engagement with professional valuers and review of valuation assumptions.

Step 4: Disclosure and Compliance – We help you prepare comprehensive disclosures that meet IFRS requirements, including reconciliations, assumptions, and fair value disclosures.

Step 5: Transfer Monitoring – We help you monitor changes in property use and ensure appropriate transfers between categories.

Frequently Asked Questions

Q: What is investment property under IAS 40?
A: Investment property is land or a building (or part of a building) held to earn rentals or for capital appreciation or both, not owner-occupied, not used in production or supply of goods or services, and not held for sale in the ordinary course of business .

Q: What is owner-occupied property?
A: Owner-occupied property is property held by the owner for use in the production or supply of goods or services or for administrative purposes, which is accounted for under IAS 16 .

Q: Can a property be partially investment property and partially owner-occupied?
A: Yes. If the portions can be sold separately (or separately leased out under a finance lease), the entity should account for the portions separately. The portion that is owner-occupied is accounted for under IAS 16, and the portion that is held for rental income or capital appreciation is treated as investment property under IAS 40 .

Q: What are the measurement models for investment property?
A: Entities may choose between the fair value model (remeasured at fair value, changes in profit or loss) or the cost model (cost less depreciation and impairment losses) .

Q: How are ancillary services treated in investment property classification?
A: If ancillary services (e.g., security or maintenance) are insignificant to the arrangement as a whole, the property qualifies as investment property. If services are significant (e.g., owner-managed hotel), it is owner-occupied property .

Q: What is the difference between the fair value model and the cost model for investment property?
A: Under the fair value model, investment property is remeasured at fair value at each reporting date, with changes recognised in profit or loss, and no depreciation is recorded. Under the cost model, it is measured at cost less accumulated depreciation and impairment losses .

Q: How is property leased to other group members treated?
A: In consolidated financial statements, property leased to a parent, subsidiary, or fellow subsidiary is not investment property because it is owner-occupied from the perspective of the group. However, it may be investment property in the separate financial statements of the lessor .

Q: What disclosures are required for investment property?
A: Entities must disclose whether they have followed the fair value model or cost model, criteria for classification, assumptions in determining fair value, rental income and expenses, and any restrictions or obligations . Under the cost model, fair value must also be disclosed .

The Bottom Line

The distinction between investment property and owner-occupied property has significant implications for financial reporting, tax planning, and business decision-making.

Key Takeaways:

Understand the Definition: Investment property is held to earn rentals or for capital appreciation, not for use in production, supply of goods or services, or administration .

Consider Ancillary Services: If services provided to occupants are insignificant, the property qualifies as investment property. Significant services indicate owner-occupied property .

Apply Dual-Use Rules: When a property is partially owner-occupied and partially held for rental, account for portions separately if they can be sold separately. If not, the entire property is investment property only if the owner-occupied portion is insignificant .

Choose the Right Measurement Model: Select either the fair value model or the cost model for investment property, applied consistently to all investment properties .

Understand Disclosure Requirements: Provide comprehensive disclosures including accounting policy, fair value measurements, reconciliations, and restrictions .

Monitor for Transfers: Transfers between categories can only occur when there is a change in use. Ensure transfers are appropriately documented and accounted for .

Use Judgement Carefully: Application of IAS 40 requires significant judgement in areas such as classification, significance of ancillary services, and fair value measurement. Entities should develop criteria for consistent application .

Your job is to be prepared. Understand the principles of IAS 40. Classify your property assets correctly. Choose the appropriate measurement model. Maintain proper records. Seek professional guidance.

With the right approach and the right partner, you can turn investment property accounting from a compliance exercise into a strategic advantage for accurate financial reporting.

Suggested Reading from Our Blog

Tangible Non-Current Assets: IAS 16, IAS 20, IAS 23, IAS 40, IFRS 5 & IFRS 16 Guide – Comprehensive guide to accounting for tangible non-current assets under IFRS.

IFRS vs. Nigerian GAAP: Key Differences Every Business Should Know – Understand the critical differences between IFRS and Nigerian GAAP, including asset accounting treatments.

Understanding Depreciation: Methods, Calculations, and Financial Statement Impact – Explore the various depreciation methods allowed under IAS 16 with practical examples.

Lease Accounting Under IFRS 16: What Nigerian Businesses Must Know – Understand the new lease accounting requirements and right-of-use asset recognition.

• Regulatory Compliance In Nigeria – Comprehensive overview of financial reporting and regulatory compliance requirements for Nigerian businesses.

• Tax Strategies and Planning – Structure your business to optimize your tax position while ensuring IFRS compliance.

Reference Links / Sources

PwC Viewpoint – IAS 40 Definition and Classification Principles – Comprehensive guidance on IAS 40 definition, classification criteria, and exclusions

IFRS Foundation – IAS 40 Investment Property Official Text – Official text of IAS 40 including definition, recognition, and measurement requirements

PwC Viewpoint – Properties with Dual Use – Guidance on partial own use, separability, and significance assessment

ICAI – IAS 40 Investment Property Study Material – Comprehensive examples including dual-use properties, ancillary services, and judgements

IFRS Foundation – IAS 40 Paragraph 15 (Group Leases) – Treatment of property leased to other group members

Moore Global – IAS 40 Investment Property Guide – Overview of definition, measurement models, and practical application

BDO Canada – IAS 40 Investment Property Guidance – Detailed guidance on classification, measurement, and inter-company rentals

Emerald Publishing – IAS 40 Fair Value or Cost Analysis – Research on factors influencing the choice between fair value and cost model

ICAB – IAS 40 Disclosure and Transfer Requirements – Summary of disclosure requirements and transfer rules

ICAN – IAS 40 Judgements and Disposals – Judgements required, gain and loss recognition, and policy choices

Legislation.gov.uk – Transfers to and from Investment Property – EU adoption of IFRS with transfer rules

Let’s Talk About Your Investment Property Accounting Needs

Implementing and maintaining IFRS-compliant accounting for investment property can be complex. At Qeeva Advisory, we understand the challenges faced by Nigerian businesses in correctly classifying and measuring property assets under IAS 40.

Whether you need help with property classification, measurement model selection, or financial statement presentation, we are here to support you.

📞 Call us: (+234) 802 320 0801, (+234) 807 576 5799

📧 Email: info@qeeva.com

📍 Visit us: 5, Ishola Bello Close, Off Iyalla Street, Alausa, Ikeja, Lagos, Nigeria

Contact us today to schedule a consultation. Let us help you navigate investment property accounting with confidence.

Your journey to IFRS-compliant property accounting starts with a conversation. Let’s talk.