How should investment properties be initially measured according to IAS 40?

Investment properties should be initially measured at cost according to IAS 40, "Investment Property". This encompasses all expenditures that are necessary to bring the property to its current condition and location for use. This initial measurement includes not only the purchase price but also transaction costs such as legal fees, transfer taxes, and other related costs directly attributable to the acquisition of the property.

Subsequently, after the initial recognition, an entity has the option to either continue with the cost model or adopt the fair value model for measuring investment properties. Under the fair value model, investment properties are revalued periodically, and any changes in fair value are recognized in profit or loss. However, this fair value measurement does not apply during the initial measurement phase.

The other measurement bases, such as net realizable value and recoverable amount, are not relevant for the initial measurement of investment properties under IAS 40. The focus is strictly on cost at this stage. Thus, the correct answer emphasizes the principle of recognizing investment properties at the cost incurred, ensuring clarity in the accounting for such assets.