An entity that adopts the cost model shows investment property at cost less accumulated depreciation and any accumulated impairment losses. This is consistent with the cost model in IAS 16.

An investment property under the cost model is impaired if its carrying amount exceeds its recoverable amount.

Component accounting for in-place leases If an entity acquires an investment property with operating leases already in place, the amount paid for the property will reflect the effect of those in-place leases (above and below market rentals, direct costs associated with obtaining new tenants etc.). IAS 16 states that, in the circumstances described, “it may be appropriate to depreciate separately amounts reflected in the cost [of the property] that are attributable to favourable or unfavourable lease terms relative to market terms”. If, for example, an entity determines, through the exercise of judgement, that the components of cost attributable to favourable or unfavourable lease terms are significant, those components should be depreciated separately. This will result in a higher (if the lease terms are favourable) or lower (if they are unfavourable) total depreciation charge over the period for which the in-place lease terms apply (see below for a numerical example). However, IAS 16 is silent with respect to other amounts related to the value of in-place leases that may be reflected in the cost of the property. Therefore, whether an entity recognises such amounts as separate components for depreciation purposes is an accounting policy choice to be applied consistently for all similar transactions. For example, Entity A acquires a building for CU200,000. The building has an existing tenant with a remaining lease term of five years. The rentals from that in-place lease are unfavourable when compared with the current market. If Entity A had been able to secure vacant possession, it would have been willing to pay CU240,000 for the building. Entity A applies the cost model for investment property under IAS 40 (i.e. Entity A measures the property in accordance with IAS 16’s cost model). The remaining useful life of the building is estimated to be 20 years, with nil estimated residual value. Entity A should identify two separate components reflected in the price paid for the building – a ‘gross cost’ of CU240,000 offset by the component attributable to the unfavourable lease of CU40,000 (which is determined to be significant in relation to the total cost). The former is depreciated over 20 years, the latter over five years. The annual depreciation charges recognised over the life of the building are therefore as follows. Years 1 – 5 Years 6 – 20* Depreciation on ‘gross cost’ 12,000 12,000 Depreciation on unfavourable lease component (8,000)      – Net charge   4,000 12,000 *Assuming no change to the building’s useful life or residual value. In this example, the component approach results in a lower total depreciation charge over the period for which the in-place lease terms apply.