Investment property

IAS 40 covers property held to earn rental income or for capital appreciation, as distinct from property a business occupies to run itself, which stays under IAS 16. The distinction matters because IAS 40 offers a choice the rest of the balance sheet does not: carry the asset at fair value, remeasuring it each reporting date with the movement running through profit, or carry it at cost and depreciate it.

Most European listed property companies elect fair value, and the consequence is that reported profit contains an unrealised revaluation that has nothing to do with rent collected. In a rising market earnings look spectacular without a euro of extra income, and in a falling one they can be deeply negative while every tenant pays on time. A price to earnings ratio on that figure is uninformative in both directions.

This is a genuine divergence from US practice, where a cost model is applied and buildings are depreciated. It is the reason funds from operations exists at all: the American add back reverses a depreciation charge that a European company applying fair value never took. Repeating that adjustment without checking the policy reverses nothing.

The cost model remains permitted under IAS 40, so the election has to be read rather than assumed, and a company using it will look far more like a US REIT in its reported numbers than its European peers do.