Real estate: rental income and investment property

Harbourline Property Holdings owns office buildings and leases them to businesses. It doesn't use the buildings itself; it holds them to earn rent and for capital growth. That makes them investment property under IAS 40, not property, plant and equipment.

1. Initial measurement. Investment property is first measured at cost, including directly attributable transaction costs such as legal fees and property transfer taxes (IAS 40.20–21).

2. Fair value or cost model. After recognition, Harbourline chooses one model for all its investment property (IAS 40.30). Under the fair value model the property is remeasured at each reporting date and gains and losses go to profit or loss (IAS 40.35), with no depreciation. Under the cost model it is depreciated like PPE (land isn't depreciated) and fair value is disclosed. Don't confuse this with the IAS 16 revaluation model for owner-occupied property, where gains go to other comprehensive income.

3. Tenant deposits. Tenants pay a security deposit, refundable at the end of the lease if the premises are returned in good condition. It's money Harbourline holds and must repay: a financial liability, not rental income. Our learning chart has no separate deposits line, so this lesson records deposits in Refund liabilities; in published statements they are shown as tenant deposits (often non-current, matching the lease term).

4. Lease incentives. To win a tenant for Building B, Harbourline gave six months rent-free on a five-year lease at 180,000 a year. As lessor of an operating lease, it recognises lease income on a straight-line basis over the lease term (IFRS 16.81), so incentives are spread over the whole term. Total payments are 900,000 − 90,000 = 810,000: 13,500 a month for 60 months. During the rent-free months Harbourline recognises 13,500 of income and builds up an accrued rent asset; when cash rent of 15,000 starts, 1,500 a month unwinds that asset.

Double counting. A valuer's fair value already reflects all the rent the building will earn. If Harbourline also carries an accrued straight-line rent asset, it must deduct that asset from the valuation so the same cash flows aren't counted twice (IAS 40.50(c)).