Fair value reporting for investment properties under US GAAP

management makes a policy election to either carry an investment property at fair value, or at cost (less depreciation
and impairment).
In practice, the vast majority of companies in most jurisdictions that apply IFRS have elected to carry their investment
properties at fair value. In certain jurisdictions, there has been less use of fair value because of a lack of valuation
infrastructure or for competitive reasons. However under IFRS, when a company elects the cost model, they must still
disclose fair value information. In addition, the adoption of IAS 40 took place during a period when real estate values
were generally increasing, and this undoubtedly created a bias toward the use of the fair value model. It is not clear,
however, how the percentage for those electing fair value would have changed if the adoption of IAS 40 had occurred
in a poor economic environment with declining real estate values. The policy chosen is applied consistently to all of the
investment properties that the entity owns (i.e., it cannot be applied selectively), and a change from one model to the
other can be made only if it will result in a more appropriate presentation. As noted specifically in IAS 40, however, a
change from fair value to cost is not likely to be considered a more appropriate presentation and is generally not
acceptable. Once elected, there is effectively no going back.
Definition of investment property under IAS 40
Investment property is defined under IAS 40 as:
• Property held by the owner; held on a finance lease to earn rentals or for capital appreciation; or both
• Existing investment property that is being redeveloped for continued use as an investment property in the future
Effective in 2008, investment properties in the course of construction or development are also within the scope of IAS
40 (previously they were accounted for as Property, Plant, and Equipment ("PPE") at historical cost until the completion
of the construction). Where fair value is elected under IAS 40, such a property is generally measured at fair value;
however, if the value of the investment property under construction is not reliably measurable, it is measured at cost
until the earlier of the date construction is completed or the date at which fair value becomes reliably measurable.
The following are examples of investment property under IAS 40:
• Land held for long-term capital appreciation rather than for short-term sale in the ordinary course of business
• Land held for a currently undetermined future use If an entity has not determined that it will use the land as owneroccupied
property or for short-term sale in the ordinary course of business, the land is regarded as held for capital
appreciation.
• A building owned by the entity (or held by the entity under a finance lease) and leased out under one or more
operating leases
• A building that is vacant but is expected to be leased out under one or more operating leases
• Property that is being constructed or developed for future use as investment property
The definition specifically excludes the following:
• Owner-occupied property
• Property intended for sale in the ordinary course of business
• Property being constructed on behalf of third parties
Fair value reporting for investment properties 4 PricewaterhouseCoopers