In accounting, when one speaks of assets and valuations, the unique case of land always stands out.
Land remains steadfast, unlike its counterparts—machinery, buildings, or vehicles, which bear the burden of time, wear, and tear.
This immutable quality of land, where it doesn’t deteriorate with time or usage, renders it with what we term as an ‘indefinite useful life.’ It’s this perpetual usability that exempts land from the customary depreciation practices.
Now, delving deeper into the economic fabric of our society, land is a rarity. Its inherent scarcity often positions it as a prized possession.
While tangible assets like machinery become obsolete or buildings crumble and demand repairs, land value frequently follows an upward trajectory, buoyed by its limited availability.
If we depreciate land, as we do with other assets, we could skew its true value, understating what might well be an appreciating asset on a company’s balance sheet.
Rooted in these realities is the strict adherence to established accounting principles.
These guidelines underscore the importance of depreciating tangible assets over their anticipated lifespan.
However, owing to its undeterminable useful life, land sits outside this framework.
Bringing it within would disrupt the essence of financial reporting, creating discrepancies in asset valuation.
Imagine a scenario: A corporation strategically purchases a parcel of land, investing $100,000. With visions of growth, they erect a factory on this land, estimating its operational life at 20 years.
Year after year, as the factory’s machinery hums and whirs, its value is prudently depreciated, accounting for the inevitable wear and tear.
But as this unfolds, the land beneath, untouched by the march of time, remains constant in the company’s books, a silent testament to its enduring value.
However, like all rules, exceptions hover on the periphery. In cases where land serves as a reservoir for natural resources, be it minerals or oil, a different form of accounting comes into play: depletion.
As these resources are extracted, reducing the intrinsic value of the land, this reduction is accounted for.
But, this isn’t depreciation in its traditional sense, but a recognition of the land’s diminishing resource value.
Thus, in the intricate dance of assets and valuations, land moves to its rhythm, ensuring its unique nature is always respected in the accounting annals.
Measurement of Land Under IAS 16
IAS 16 refers to the International Accounting Standard that pertains to Property, Plant, and Equipment.
This standard provides guidelines on recognizing property, plant, and equipment, determining their carrying amounts, and the depreciation charges and impairment losses.
When it comes to land, IAS 16 has specific guidelines regarding its measurement:
Initial Measurement:
Land is initially measured at its cost. The cost includes purchase price, directly attributable costs such as legal fees or site preparation (if any), and 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.
Subsequent Measurement:
Once recognized, an entity can choose between two models for the subsequent land measurement: the Cost Model and the Revaluation Model.
- Cost Model: Under this model, the land is carried at its cost, less any accumulated impairment losses. No depreciation is subtracted from the cost because land doesn’t depreciate. However, if there’s an impairment in value, it needs to be accounted for.
- Revaluation Model: Under the revaluation model, the land is carried at a revalued amount, its fair value at the revaluation date, less any subsequent accumulated impairment losses. Revaluations should be made regularly to ensure that the carrying amount does not differ materially from that determined using fair value at the end of the reporting period. Suppose the land’s value increases due to revaluation. In that case, such an increase is credited to a revaluation surplus, part of equity, unless it reverses a revaluation decrease for the same asset previously recognized in profit or loss.
Derecognition:
It should be derecognized when the land is disposed of or is expected to provide no future economic benefits.
Gains or losses arising from the derecognition of land should be included in profit or loss when the land is derecognized.
Special Consideration:
It’s essential to recognize that if the land has an unlimited useful life, it should not be depreciated.
However, any buildings or structures on the land typically have a limited useful life and should be depreciated separately.
Journal entry for land purchase with example
Journal entries are used in accounting to document and track all transactions of an entity.
When a company purchases land, it needs to record the transaction in its books of accounts.
Here’s the basic journal entry for purchasing land:
Dr. Land (Asset)
Cr. Cash/Bank or Accounts Payable (Liability/Equity)
The debt to the Land account represents an increase in an asset, and the credit to Cash or Bank represents a decrease in another asset (as cash is paid out) or an increase in liabilities (if the land purchase is made on credit).
Example:
Let’s say ABC Company purchases a plot of land for its new office building. The land costs $500,000, and ABC Company pays cash.
The journal entry would be:
Dr. Land $500,000
Cr. Cash/Bank $500,000
Description: To record land purchases for cash.
If ABC Company had instead agreed to pay for the land in 60 days (i.e., bought the land on account), the journal entry would be:
Dr. Land $500,000
Cr. Accounts Payable $500,000
Description: To record land purchases on credit.
It’s also essential to remember that other costs directly attributable to the land purchase, like commissions, legal fees, and title fees, would also be added to the land cost and debited to the Land account.
