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Project costs-Land lease

4 November 2009 233 views 2 Comments

Dear all,

This is my first participation in this forum. i have questions regarding the land as an operating lease.

We have a leased land used for a project. Currently the lease rent is being capitalised as land costs- Property Under Development, on the basis that this cost was incurred to bring the assets into operations.

My questions are:

1- Can the above treatment considered correct in anyway?

2- We want to transfer the land and building from PUD to Investment Property- what options do we have?

3- Are there any conditions to have the combination of land and building as Investment Property e.g land comprise more 20% of the total project value..etc

Regards

2 Comments »

riyer said:

Hey hi,Welcome to the club

1) As per IAS 16, The cost of an item of property, plant and equipment comprises:

any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management.

Lease rentals of land are not directly attributable to build you project.These are indirectly attributable and thus cannot be capitalised. Your logic can be compared to capitalising dinner cost incurred in convincing your mother to buy you a cellphone, in the cost of the cell phone.

2)Land and Building can be treated as investment property only if they are held to earn rentals or for capital appreciation or both.However, for the land (since its under operating lease) fair valuation model has to be followed (Refer para 6 of IAS 40).

3) There are no such conditions in IAS 40.

Hope, this clarifies

Regards,

Rama

# 5 November 2009 at 10:03 am

hussainkhalaf said:

Hi,

1. This can’t be right

2. Land should be separated from the development cost, and you have two options

a. “Lease” under IAS 17, and most likely lands will fall under operating lease as they have indefinite useful life, unless:
i. Ownership will be passed at the end of the lease agreement to the lessee
ii. The PV of the minimum lease payments considered substantial to the fair value of the leased asset (90%)
iii. The lessee has the option to buy the asset at a price sufficiently lower than the expected fair value of the leased asset at the end of the lease.

b. Only if the asset meets the definition of “ Investment Property” and the lessee uses fair value model, IAS 40 permits lands held under an operating lease to be treated as investment property, in this case the initial cost of the asset should be recognized in accordance with IAS 17 as if it is held under Finance Lease. That is to be recorded at the lower of the PV of minimum lease payments or the fair value.

3. I guess this has been awnsered above, it must be separated.

Hope that is useful.

Regards
Hussain

# 5 November 2009 at 12:25 pm