Dear Reader,
A company pays for Land which is on a lease for 99 years. As per the norms available, most of the lands are on 99 years lease. Should depreciation/amortization= 1/99 years be provided on the same per IAS 16 or IAS17.
Under which para this is covered in IFRS……….regards eish taneja
you will first have to move to IAS 17 to classify the lease
You are very much clear to recognize your land as OPERATING LEASE
for the land, specifically as defined in para 14-IAS17, the title of ownership has to pass at the end of lease term for classifying the lease of Land as FINANCE LEASE
so being an operating lease you will not be recognizing your land in your balance sheet and there will be no need to depreciate it.
Any periodical rents which are payable to lessor(govt) will be charged directly to P & L
If you have paid any amount “at the time of acquiring lease” it will have to be treated at “Pre-Paid Lease Payments” and amortized over the leased term.
this concludes the answer
ok i have a question if any one can clarify
can you clarify the concept of “deferred cost” while differentiating it from “pre-paid expenses”
Thank you
Hi, Thanks for your response. Actually in this case, company has paid the full amount at the begining only. The amount paid is the fair value of land. secondly, there is also a condition given by the authority who had given the land which is that you pay x amount as conversion charges (not a very big sum as compared to the amount earlier paid) and the same can be converted to freehold meanig, you become the owner. Will this change the thoughts earlier expressed by you In terms of second point, its like this :-defer cost- cost where you pay the amount in defer payment basis meaning installments example. you buy a product for say $100 and you have a agreement signed with your vendor that you will pay in 10 installments of $10 each.This is a defer cost prepayments – cost where you pay in advance say 6 months avance rental. This is to be amortized in 1/6 of the value, every month……. Hope this clarifies a bit regardseish
the condition that authorities have given you the option to purchase the land at a small amount then above answer will have to crossed out, i will give you the new answer once you give me the informations that:
1. Does the company at this time (meaning the inception of the lease) intends to purchase that land.
2. When are you likely to purchase the asset.
3. Are there any payments periodic payments?
Dear writer,
Thanks for the response. My points are as under :-
1. Does the company at this time (meaning the inception of the lease) intends to purchase that land.
Ans- Yes as off now, purchase meaning here is converting it to freehold and have complete rights
2. When are you likely to purchase the asset.
Ans- That part is not decided yet. The freehold conversion is not yet decided
3. Are there any payments periodic payments?
Ans. No, there are no periodic payments
ok so now i can propose two treatments
The basic assumption for both the treatments is that you can today get the title of ownership of land by giving the required amount.
1. Assuming that the Fair value of land equals the “amount paid and amount to be paid“.
in this situation theses will be the entries
Land: amount paid + to be paid (dr)
Cash(cr)
Liability: (amount to be paid)(Cr)
2. In case if it is quite evident that the cost of land will be increased substantially from its fair value by adding the “amount to be paid” in cost of land then following will be the entries
Land: Amount paid (Dr)
Expense: Amount to be paid (Dr)
CAsh (Cr)
Liability:Provision of amount to be paid (cr)
Ok one more entry applicable to both situations,
any directly attributable costs that were incurred for arranging the said lease such as document charges etc should be added to the cost of asset
Land(dr)
Cash/payable (cr)
If any of the above entries or assumption are not clear i will be happy to reply.
Dear asadlarik3,
you had the following query:
can you clarify the concept of “deferred cost” while differentiating it from “pre-paid expenses”
Ans: In case of prepaid expenses, services are rendered in future by the vendor to whom the amount has been prepaid whereas under Deferred expenses, that is not the case.
Prepaid expenses are in the nature of ‘advances to suppliers’.