Accounting recognition of land in IFRS

Under paragraph 58 of IAS 16, land and buildings must be accounted for separately, even if jointly acquired.

Lands have an unlimited useful life and, for this reason, should not be depreciated.

That is, if an entity acquires a build for 2 million where 20% corresponds to land and 80% to buildings, the company must separate the part that does not correspond to land to calculate the depreciation for the period.

However, there are cases where a land should depreciate.

Paragraph 59 of IAS 16 establishes that if the cost of land includes dismantling, relocation, and rehabilitation, the portion that corresponds to the restoration of the land will be depreciated over the period in which the entity obtains the benefits from having incurred those costs.

Land recognized as investment properties:

Paragraph 8 of IAS 40 sets out some examples of land that is considered investment property:

  • Land held for long-term capital appreciation rather than for short-term sale in the ordinary course of business.

  • Land held for a currently undetermined future use.

  • A building owned by the entity (or a right-of-use asset relating to a building held by the entity) and leased out under one or more operating leases.

  • A building that is vacant but is held to be leased out under one or more operating leases.

  • Property that is being constructed or developed for future use as an investment property.

Land that is considered investment property is recognized in the first time at cost and then at fair value if it can be measured reliably, otherwise, it will be accounted for using the cost model.

Land recognized as assets held for sale:

The land expected to be sold in the long term may be investment properties recognized under IAS 40 or non-current assets held for sale under IFRS 5.

For a non-current asset to be classified as held for sale, it must meet all the requirements established in paragraph 7 of IFRS 5.

  • That the asset is available for immediate sale.

  • That the sales agreements between the parties conform to the usual and customary terms.

  • That its sale is probable. 

On the contrary, if all the previously indicated requirements are not met, they should continue to be recognized as investment properties. 

Land recognized as inventories

Land held for sale in the ordinary course of business meets the definition of inventory.

However, it is not so easy to identify whether a land meets the definition of inventory or investment property in some cases.

For example, a construction company has ten lots on which it plans to build 2,000 homes that will be available for sale within five years.

Suppose the entity does expect to start the housing constructions project in 2 years.

In this case, lands should not be recognized as inventories since the owner will benefit from their appreciation.

Therefore, the entity must recognize the effect of the value increase of these properties in the financial statements.

Long-term land lease

A long-term land lease can be considered in economic terms similar to a land purchase. (Basis of conclusion paragraph BC 78 IFRS 16)

There is no regulatory framework to differentiate long-term land leases from other leases.

If the contract does not transfer control of the land to the lessee but gives the lessee the right to have control over its use, the land must recognize according to IFRS 16

On the opposite, if the lessee obtains control of the asset, it will account for the lease as a purchase applying IAS 16 instead of IFRS 16.

The above only applies to lands.

In the case of buildings, the lessee must always recognize them as a right-of-use asset.

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