9.4.3: Fair Value Model

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The fair value model is a specialized type of optional accounting treatment that may be applied to only one type of asset: investment properties. IAS 40 (IAS, 2003b) considers investment properties to be land or buildings that are held primarily for the purpose of earning rental income or capital appreciation, are not used for production or administrative purposes of the business, and are not held for resale in the ordinary course of business. This definition suggests that the asset will earn cash flows that are largely independent of the regular operations of the business, which is why a different accounting standard can be applied. The fair value model requires adjustment of the carrying value of the investment property to its fair value every reporting period. As well, no depreciation is recorded for investment properties under the fair value model. The key feature that differentiates this model from the revaluation model is that gains and losses in value with investment properties are reported directly on the income statement, rather than using a Revaluation Surplus (OCI) account. This can be illustrated with the following example.

ComLink Ltd. purchases a vacant piece of land that it feels will appreciate in value over the next ten years as a result of suburban expansion. The land is initially purchased for $5 million on January 1, 2019. The company has classified this land as an investment property and has chosen to use the fair value model. The appraised values of the land over the next three years are:

Appraisal Date	Appraised Value
December 31, 2019	$5,200,000
December 31, 2020	$4,600,000
December 31, 2021	$4,850,000

The adjustments will be recorded each year as follows:

It should be noted that this model is optional for reporting purposes. A company may choose to use the cost model for its investment properties. However, if the fair value model is chosen, all investment properties must be reported this way. As well, there are significant disclosure requirements under this model.

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