IAS 16 : Land and buildings

Land and buildings

Land and buildings are separable assets, and are accounted for separately, even when they are acquired together.

Though there are some exceptions, such as quarries and sites used for landfill, land has an unlimited useful life and therefore is not depreciated.

Buildings have a limited useful life, and therefore are depreciable assets. An increase in the value of the land on which a building stands does not affect the determination of the depreciable amount of the building.

EXAMPLE land and building You buy a building including the land. The price is split between the land $1 mln. and the building $0,2 mln. You depreciate the building over 20 years, at $10.000 per year. The land is not depreciated. 4 years later, the land is revalued at $1.4. The building continues to be depreciated, despite the land’s revaluation surplus.
	I/B	DR	CR
Property, plant & equipment (land)	B	$1 mln
Property, plant & equipment (building)	B	$0,2 mln
Cash	B		$1,2 mln
This records buying the property
Depreciation	I	10.000
Accumulated depreciation	B		10.000
Annual depreciation of the building

Land cost

If the cost of land includes the costs of site dismantlement, removal and restoration, the restoration cost portion of the land asset is depreciated over the period of benefits obtained by incurring those costs.

EXAMPLE non-depreciation of land You buy a piece of land for a security complex. The price is $1 mln.
	I/B	DR	CR
Property, plant & equipment (land)	B	$1 mln
Cash	B		$1 mln
This records the buying of the property

The preparation for the security complex costs $0.1 mln, and the restoration at the end of the project will cost $0.3 mln.

	I/B	DR	CR
Property, plant & equipment (land)	B	$0,4 mln
Cash	B		$0,1 mln
Provision for restoration	B		$0,3 mln
This records the preparation and provision for restoration of the property

The calculation for the provision is covered in IAS 37 and will be the net present value of the liability.

The security complex will have an economic life of 20 years, after which the land will be redeveloped for other purposes. The preparation and restoration costs totaling $0,4 mln should be depreciated over the 20 year life of the security complex.

	I/B	DR	CR
Depreciation	I	5.000
Provision for restoration	B	15.000
Accumulated depreciation	B		20.000
Annual depreciation of the preparation and provision for restoration of the property

The $1 mln. cost of the land should not be depreciated, if its value is sustained over that period, and it will be worth $1 mln. at the end of the period, after restoration.

In some cases, the land itself may have a limited useful life, in which case it is depreciated in a manner that reflects the benefits to be derived from it.

If the land is leased, under a finance lease, its useful life is limited to that of the lease. (If there is a purchase option at the end of the lease, the same approach will apply only if the purchase option will not be exercised.

EXAMPLES depreciation of land You buy a piece of land for shredding and storing confidential documents. The cost price is $1 mln. The land will have an economic life of 10 years, after which the land will be reduced in value to $0,0 (nil) as the restoration costs will be equal to the value of the land. The $1mln. depreciable amount of the land should be written off over the 10 year life of the mine.
	I/B	DR	CR
Property, plant & equipment (land)	B	$1 mln
Cash	B		$1 mln
This records buying the property
Depreciation	I	$0,1 mln
Accumulated depreciation	B		$0,1 mln
Annual depreciation on $1 mln

EXAMPLES depreciation of leased land You lease some land for a building for a period of 15 years, with no option to buy it. The value of the lease is $450.000. The first year’s capital repayment is $10.000. The land will need to be depreciated over the 15-year period.
	I/B	DR	CR
Property, plant & equipment (land)	B	450.000
Finance lease creditor - current	B		10.000
Finance lease creditor – non-current	B		440.000
This records the lease of the property
Depreciation	I	30.000
Accumulated depreciation	B		30.000
Annual depreciation (450.000/15)