Depreciation of ROU related to land
Question
We entered into a contract to lease a plot of land. We will be using the land for 20 years and then we will vacate it and return it to its legal owner.
We are aware that under IFRS 16, we need to account for the right of use asset. How shall we treat its depreciation since the land has an infinite useful life and is not depreciated at all?
Answer
Here, you do not have the land, just the right to use it – that’s the different asset. Thus yes, you do depreciate it.
Over which period?
It depends.
If you will return the land to its legal owner after 20 years, then you have the right to use the land for 20 years. Thus the depreciation period is 20 years.
So, if the ownership is not transferred, then depreciation of ROU is over shorter of the useful life and the lease term (that is – lease term in this case since useful life is infinite).
However if the rental contract transfers the ownership to the land to the lessee at the end of the lease term (not this case though), then you should not depreciate the right-of-use asset related to the land. At the end of the lease term, you would transfer it from ROU to the land (or reclassify it).
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Hi Sylvie,
Thank you for information.
I understand that the asset has to be depreciated if the lessee will return the land to the lessor.
But what about the lease (and the depreciation) if the company has a purchase option at the end of a the lease ? (with the 2 scenarios : the company is not certain to exercise the option and the compnay is certain to exercise the option)
Do we have to depreciate the RoU and the purchase option ?
Thanks for your answer.
That is where the management needs to say its best intentions and estimates at the end of the reporting period.
lessor giving land at operating lease for earning rental income
from lessor point of view shouldn’t land be classified under IAS 40?
and logically thinking of the matching concept, shouldn’t rental income generated by land must be matched with expenses used to generate that rental income?
yes, I am talking about land depreciation in this case.
This question is from the lessee’s viewpoint, not the lessor’s. The person asking was actually taking the land under the lease, not providing it for rental, and they incurred expenses, not rental income.
From the lessor’s point of view you are partially right (unless the land’s ownership title passes to the lessee at the end of the lease term). IAS 40 should be applied, that’s true. However, land is not depreciated since it has infinite useful life (with exceptions). So no, no depreciation of land in lessor’s books.