Ias 40 Investment Property Fair Value Model vs Cost Model: How It Compares for Value Investors
IAS 40 investment property fair value model vs cost model is a genuine accounting policy choice, not a technical nuance. Under International Accounting Standards, companies holding investment property must pick one approach and apply it consistently to their entire portfolio. The fair value model marks property to market at each reporting date, with changes flowing through profit or loss. The cost model carries property at depreciated historical cost, with fair value disclosed in notes but never on the face of the balance sheet.
For value investors analyzing IFRS-reporting companies with real estate on their books, understanding which model a company applies changes every line of analysis: reported earnings, book equity, price-to-book interpretation, and the enterprise value you plug into your multiples work.
Key Takeaways
- Under IAS 40, the fair value model and cost model are mutually exclusive. A company must apply one policy to all investment property and cannot switch freely between them.
- The fair value model produces volatile reported earnings (because unrealized property gains and losses hit P&L) but a balance sheet that reflects current economic reality.
- The cost model produces stable reported earnings (depreciation is predictable) but a balance sheet that can diverge significantly from market values over time.
- Most large REITs and listed property companies use the fair value model. Smaller companies, industrial groups with incidental property, and some regional developers use the cost model.
- Price-to-book analysis changes fundamentally between the two: cost-model companies often have genuinely understated book equity; fair-value companies have book equity that already reflects current market conditions.
- Berkshire Hathaway (BRK.B) reports under U.S. GAAP, not IFRS, and applies cost accounting to its substantial real property portfolio. Its P/B of 1.5x partly reflects this understatement of economic book value.
What IAS 40 Covers
IAS 40 applies to investment property, defined as land or buildings held to earn rentals or for capital appreciation (or both), rather than for owner-occupation, use in production, or sale in the ordinary course of business.
Typical investment property under IAS 40 includes: a shopping center owned by a company that leases it to retailers, an office building held for rental income, land held for long-term capital appreciation where no specific development is planned.
IAS 40 does not apply to owner-occupied property (which falls under IAS 16 Property, Plant and Equipment) or property held for sale (covered by IFRS 5). Property used partly by the owner and partly rented out is bifurcated: the rented portion may qualify as investment property; the owner-occupied portion does not.
The Fair Value Model in Detail
Under IAS 40.33-55, a company applying the fair value model must:
- Measure all investment property at fair value at each reporting date.
- Recognize changes in fair value in profit or loss for the period in which they arise.
- Obtain a fair value from an independent valuation by a professionally qualified valuer with relevant experience and knowledge of the relevant property market, at least annually (though more frequent valuations are encouraged).
The income statement impact is significant. In rising property markets, companies using the fair value model report large unrealized gains that boost reported earnings. In falling markets, they report large unrealized losses that can turn profitable companies into apparent loss-makers. This volatility in reported earnings is the main practical criticism of the fair value model from analysts who focus on operating cash flow.
The balance sheet benefit: reported equity tracks economic reality. If a company bought a London office block for £50 million in 2015 and it is worth £90 million in 2026, the balance sheet shows £90 million, not £50 million minus depreciation.
The Cost Model in Detail
Under IAS 40.56, a company applying the cost model measures investment property at its cost (including transaction costs) minus accumulated depreciation and accumulated impairment losses.
The depreciation calculation follows IAS 16: the company estimates the useful life of the building component (land is not depreciated), assigns a residual value, and systematically charges the net cost over that life. For commercial property, useful lives of 25-50 years are common. A £50 million building with a 40-year useful life generates approximately £1.25 million per year in depreciation charges.
The cost model does not recognize unrealized gains. A property that has doubled in value since acquisition still sits at historical cost minus accumulated depreciation. Fair value of investment property under the cost model must still be disclosed in the notes to the financial statements (IAS 40.79(e)), but the disclosed value never appears in equity or earnings.
Side-by-Side Comparison
| Feature | Fair Value Model | Cost Model |
|---|---|---|
| Balance sheet carrying value | Current market value | Historical cost minus depreciation |
| Earnings volatility | High (unrealized gains/losses in P&L) | Low (predictable depreciation only) |
| Depreciation charge | None | Annual charge based on useful life |
| Required disclosure of fair value | Balance sheet amount is fair value | Fair value disclosed in notes only |
| Equity reflects economic reality | Yes | Not without adjustment |
| Common users | Listed REITs, property investment companies | Industrial groups, smaller developers |
| Price-to-book interpretation | Straightforward | Requires adjustment for hidden surplus |
| IAS 40 paragraph reference | 33-55 | 56 |
Which Companies Choose Each Model
The fair value model dominates among listed property companies and REITs that operate under IFRS. Companies like British Land, Unibail-Rodamco, and most European property investment trusts apply the fair value model as a matter. Their equity is straightforwardly the market value of their property portfolio minus net debt. Their price-to-NAV (net asset value) ratio is the standard valuation multiple.
The cost model appears more often in these scenarios: an industrial conglomerate that owns its own factories (IAS 16) and also holds some surplus land as investment property; a smaller company without the resources for annual independent valuations; entities in markets where liquid comparable transaction data is scarce; and companies where the management board believes fair value volatility would distort the earnings narrative they present to shareholders.
Under either model, the economic substance is identical. What differs is the presentation.
How to Adjust Your Analysis
When analyzing a company using the cost model, three adjustments help:
Adjust book equity. Take the fair value of investment property disclosed in the notes. Subtract the carrying value. Multiply the difference by (1 minus the applicable deferred tax rate, typically 25-30%). Add the net figure to reported book equity. This gives you economic book equity.
Remove depreciation from operating income. For a company with significant investment property on the cost model, the depreciation charge is not a true economic expense (the property is likely appreciating, not deteriorating in value). Strip it out of operating income to get closer to cash earnings. Compare the adjusted earnings against the building's estimated market value to assess the earnings yield on the deployed capital.
Use EV/EBITDA with care. Standard EV/EBITDA calculations often include depreciation in the denominator add-back. For cost-model investment property, that depreciation should be excluded when benchmarking against fair-value peers whose EBITDA includes no such charge.
The Berkshire Hathaway Reference Point
BRK.B reports under U.S. GAAP, not IFRS, but the conceptual parallel is exact. Berkshire's real property is carried at historical cost under U.S. GAAP's ASC 360. Its P/B of roughly 1.5x reflects, in part, real property and other assets carried well below current market value.
Warren Buffett has been explicit in annual letters that book value increasingly understates Berkshire's intrinsic value as the portfolio of owned businesses ages and the gap between accounting cost and economic value widens. The IAS 40 fair value model would, by design, close that gap annually, which is why analysts who cover European property companies use EPRA Net Tangible Assets (which starts from fair value of property) rather than reported book equity.
Use our screener to filter IFRS-reporting companies by their stated IAS 40 policy and compare disclosed property fair values against carrying values to identify where cost-model accounting is creating the most significant hidden value gaps.
Further reading: SEC EDGAR · Investopedia
Why IAS 40 accounting policy Matters
This section anchors the discussion on IAS 40 accounting policy. The detailed treatment, formula, and worked examples appear in the body of this article above. The points below summarize the most important takeaways for value investors who want to apply IAS 40 accounting policy in real portfolio decisions. ValueMarkers exposes the underlying data on every covered ticker via the screener and stock profile pages, so the concepts in this article translate directly into actionable filters.
Key inputs for IAS 40 accounting policy
See the main discussion of IAS 40 accounting policy in the sections above for the full treatment, including the inputs, the calculation methodology, the typical sector benchmarks, and the most common pitfalls to avoid. The ValueMarkers screener lets value investors filter the full universe of 100,000+ stocks across 73 exchanges using IAS 40 accounting policy alongside the rest of the 120-indicator composite, with sector percentiles and historical trends shown on every stock profile.
Sector benchmarks for IAS 40 accounting policy
See the main discussion of IAS 40 accounting policy in the sections above for the full treatment, including the inputs, the calculation methodology, the typical sector benchmarks, and the most common pitfalls to avoid. The ValueMarkers screener lets value investors filter the full universe of 100,000+ stocks across 73 exchanges using IAS 40 accounting policy alongside the rest of the 120-indicator composite, with sector percentiles and historical trends shown on every stock profile.
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- Fair Value — related ValueMarkers analysis
- Yelp Fair Value Price — related ValueMarkers analysis
- Enterprise Value Formula — related ValueMarkers analysis
Frequently Asked Questions
what is book value
Book value is the net asset value of a company as stated on its balance sheet: total assets minus total liabilities. For investment property companies, book value calculated under IAS 40 fair value model reflects current market prices of properties, giving an accurate picture of liquidation value. Under the cost model, book value reflects historical costs minus depreciation and can be significantly below economic reality in rising markets. Book value per share is book value divided by diluted shares outstanding and is the base for price-to-book ratio analysis.
what is a fair value gap
A fair value gap for investment property is the difference between the property's current market value and its carrying value on the balance sheet. Under the IAS 40 fair value model, this gap is zero by definition at each reporting date because properties are marked to market. Under the cost model, this gap grows over time as property values rise while the carrying value declines through depreciation. The gap represents unrealized value that shareholders own but that does not appear in reported equity, making cost-model companies appear more expensive on price-to-book than they truly are.
what is intrinsic value
Intrinsic value for an investment property, or for a company that holds investment property, is the present value of all future economic benefits the property will generate: rental income, capital appreciation at eventual sale, and any optionality on development. For a property investment company, intrinsic value closely approximates EPRA Net Tangible Asset value when properties are professionally valued and the company does not carry significant overpriced goodwill. The IAS 40 fair value model is the accounting closest to intrinsic value measurement on an ongoing basis, though professional valuations always carry estimation uncertainty.
how to calculate intrinsic value of share
To estimate the intrinsic value of a share in an investment property company, start with the EPRA Net Tangible Asset Value per share (for fair-value model companies) or calculate your own adjusted NAV per share (for cost-model companies). For the adjusted NAV: take the disclosed fair value of all properties, subtract net debt (including derivative liabilities), subtract any deferred tax on unrealized property gains, and divide by diluted shares outstanding. Compare this adjusted NAV per share to the current market price. A discount of 15-25% to adjusted NAV is typical during periods of uncertainty; a premium of 10-20% is typical for the best-managed portfolio companies in rising markets.
how does value investing work
Value investing applied to property companies involves comparing the market price per share to the per-share value of the underlying assets, primarily properties, minus the associated debt. The analytical tools are NAV analysis, EBITDA yield on portfolio value, and dividend yield sustainability. Benjamin Graham's core principle applies: buy when the price is below a conservative estimate of net asset value, with a margin of safety to absorb valuation errors and cyclical risks. For IAS 40 fair-value companies, the NAV is disclosed. For cost-model companies, you must estimate it, which is where the analytical edge exists.
what is an inverse fair value gap
An inverse fair value gap in investment property occurs when the carrying value of a property exceeds its current market value. For fair-value model companies under IAS 40, this triggers an immediate write-down in the income statement (an unrealized loss). For cost-model companies, the same circumstance triggers an impairment test under IAS 36: if the recoverable amount (higher of fair value less costs to sell and value in use) falls below the carrying amount, the company must recognize an impairment charge. Both models require eventual recognition of downward value movements; the fair value model recognizes them immediately and continuously, while the cost model recognizes them only when the carrying value is definitively exceeded by the decline.
Compare investment property companies on fair value model versus cost model accounting, adjusted NAV, and earnings yield through our screener.
Written by Javier Sanz, Founder of ValueMarkers. Last updated April 2026.
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