A company owns a commercial building that it leases out to unrelated third-party tenants under operating leases, and it wants to carry this building at fair value with changes in fair value recognized directly in profit or loss each period, rather than depreciating it. Under IFRS, and separately under US GAAP, is this treatment available for such a property?
- US GAAP has a dedicated investment property standard that mandates the fair value model for all leased-out buildings; IFRS requires the cost model for such property
- Neither IFRS nor US GAAP permits fair value accounting for property leased out to third parties under any circumstances
- Both IFRS and US GAAP require this property to be classified and measured as inventory once it is leased to tenants
- IAS 40 permits an entity to elect the fair value model for investment property, with fair value changes recognized in profit or loss; US GAAP has no equivalent standard and generally accounts for such property under the cost-based property, plant and equipment guidance
Why D? And why not the others?
Correct answer: D. IAS 40 permits an entity to elect the fair value model for investment property, with fair value changes recognized in profit or loss; US GAAP has no equivalent standard and generally accounts for such property under the cost-based property, plant and equipment guidance
IAS 40 defines investment property as land or a building held to earn rentals or for capital appreciation rather than for use in production or administration, and it permits an entity to choose the fair value model as its accounting policy for all such investment property, under which fair value changes are recognized directly in profit or loss each period, with no depreciation charged. US GAAP has no separate standard dedicated to investment property; a building leased out to third parties is generally accounted for like any other item of property, plant and equipment under cost-based guidance, measured at depreciated historical cost and tested for impairment, with fair value changes not recognized through profit or loss. The option describing US GAAP as having a dedicated fair-value-mandating standard and IFRS as requiring the cost model is wrong because it reverses which framework actually offers the fair value election, and IAS 40's fair value model is elective rather than restricted to IFRS-only cost treatment. The option claiming neither framework permits fair value accounting here is wrong because IAS 40 explicitly allows it as a policy choice. The option requiring inventory classification is wrong because a building generating rental income and held for the long term does not meet the definition of inventory under either framework.
Source: IFRS Foundation, IAS 40 Investment Property, paragraphs 5 and 33 (definition of investment property; fair value model policy choice); US GAAP has no separate investment property standard, so such property is generally accounted for under FASB Accounting Standards Codification ASC 360 Property, Plant, and Equipment