Can I depreciate building on leased land over the lease term?

Question

We have leased a land from our parent company for 5 year but it can be extended by mutually consent. It is certain that the parent company will continue the lease as long as we want. We have built some office premises in the leased land and can we depreciate the building over 10 years?

Answer 1

Definitely No!!!

The life span and or useful life of a building is not determined by a lease term.

Unless if the building have to be demolished at the end of the lease term and you should apply the decommission and restoration provisions per IAS 16.

Answer 2

Because the office premises are built on a land classified as a finance lease, you may depreciate them over the shorter of 10 years or their estimated useful lives. This would be only valid if - at the inception of the lease - there is no reasonable certainty that you (as a lessee) will obtain ownership of the leased land by the end of the lease term, you have the option to continue to lease the land for additional 5 years (with or without further payment) and based on current circumstances and lease conditions it is reasonably certain that you will exercise this option. Thus, total lease term would be 10 years which comprises the original lease term of 5 years + extension period of 5 years.

Refer to IAS 17 paragraphs 4 and 27-28

Comments

Thanks Hesham, it is an operating lease for five years but It can be extended (this is not mentioned in the lease agreement but it is possible as lessor is our parent company). We will surly use the land for more than 10 years. So can I depreciate for 10 years?

Answer 3

According to IAS 16 land will not be depreciated.