Investment property: fair value versus cost model

The fair value/cost election is applied to the entire investment property portfolio and cannot be changed opportunistically; under fair value, unrealized valuation swings of SAR hundreds of millions hit profit every year with no depreciation charge, while under cost the P&L is smoother but the balance sheet understates value unless fair value is disclosed, so the choice materially shapes reported earnings volatility, leverage ratios and covenant headroom.

Is the fair value or cost model elected consistently for the entire class of investment property, not property-by-property? Under the fair value model, is the full change in fair value recognized in profit or loss with no depreciation charged? Under the cost model, is fair value still determined and disclosed in the notes using the same valuation rigor as if it were the primary basis? Are valuation inputs (yields, ERVs, occupancy) benchmarked against current market transaction evidence by a suitably qualified valuer?

1) Elect either the fair value model or the cost model as an accounting policy for the entire class of investment property (not property-by-property). 2) Apply the elected model consistently to all investment property held, including future acquisitions, unless the asset cannot be reliably fair valued (rare, and only permitted at initial recognition for a specific property). 3) Under the fair value model, do not charge depreciation; recognize the full change in fair value at each reporting date directly in profit or loss. 4) Under the cost model, depreciate over useful life and test for impairment under IAS 36, and separately determine and disclose fair value in the notes using the same valuation rigor as if it were the primary measurement basis. 5) Once the fair value model is adopted, do not switch to the cost model unless a switch would produce more relevant information - in practice this is treated as effectively barred, since a move away from fair value is very hard to justify as more relevant. 6) Engage a suitably qualified, ideally independent valuer, and confirm the valuation date aligns with the reporting date.

Fair value model: measure at fair value (highest and best use, exit price under IFRS 13) at each reporting date; recognize the entire gain or loss in profit or loss immediately; no depreciation is charged. Cost model: measure at cost less accumulated depreciation and any accumulated impairment losses under IAS 16 principles; still determine fair value for disclosure purposes only (this does not affect the carrying amount). Valuation inputs (capitalization/discount rates, estimated rental values, occupancy and void periods) should be benchmarked against market transaction evidence and updated each period; fair value under either model is typically Level 3 in the IFRS 13 hierarchy given the use of unobservable inputs.

State the model elected (fair value or cost) and apply it consistently across the notes; under fair value: reconciliation of opening to closing carrying amount showing additions, disposals, and fair value gains/losses; valuation techniques and key unobservable inputs (yields, ERVs, void periods) with sensitivity analysis; valuer's qualifications and independence; fair value hierarchy level (usually Level 3); under cost model: depreciation method and useful lives, accumulated depreciation and impairment, and the disclosed fair value with basis of estimation.

1) Applying the fair value model to some properties and the cost model to others within the same portfolio, instead of one policy for the whole class. 2) Charging depreciation on investment property carried at fair value. 3) Recognizing fair value gains in other comprehensive income by analogy with IAS 16 revaluation, instead of in profit or loss as IAS 40 requires. 4) Treating unrealized fair value gains as distributable cash profit when assessing dividends or covenant compliance. 5) Under the cost model, failing to disclose fair value at all, or disclosing a stale or unsupported estimate instead of a current professional valuation.