Depreciation on building on rented land

Question

We are building an office complex for our company on a rented land. The land is rented to us for 12 years. Building's life time would be around 30 years but we will have to give back the land and the building to the owner at the end of the 10 year period. I just want to know who should be able to depreciate the cost of the building?

Can we depreciate over 12 years? Can the owner of the land also depreciate as he is the owner of the land or should he start depreciating in his books after 12 years only?

Thanks in advance.

Comments

According  to IAS 16, The cost of an item of property, plant and equipment shall be recognised
as an asset if, and only if:
(a) it is probable that future economic benefits associated with the item will flow to the entity; and
(b) the cost of the item can be measured reliably.

In  above mentioned case , the Future Probable benefits will only last for 10 years  ( Not 12 or 30 years ). So instead of actual useful life of 30 years , IAS 16 requires to take it 10 years ( Remaining time for lease term ) 

Also there will be recognition of " dismantling provision " ( IAS 37 )  required as the land will be returned to owner  in orignal position. 

As far Owner is concerned , he will not depreciate the building in his books. he will just account for land as Lessor ( IFRS 16 ) 

In practical scenario , this case is common for Telecom companies. They build their signal towers on rented land ( leased land ) and end of lease term , just restore the land and handover to owner in orignal position 

Hope you understand it now completely

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This is an arrangement containing Lease and falls into IFRIC 4. The asset will be treated as finance lease receivable where you are the lessor. We call this as Build Own, Operate and Transfer (BOOT). You will need to create an amortization schedule showing the present value.

Answer 1

Depreciation is cost of using the asset over time. Depreciation over rental properties works differently. According to the IRS, you can depreciate a rental property if it meets all of these requirements:

• You own the property (you are considered the owner even if the property is subject to a debt).
• You use the property in your business or as income-producing activity.
• The property has a determinable useful life (meaning it is something that wears out, decays, gets used up, becomes obsolete or loses its value from natural causes).
• The property is expected to last more than one year.

Since you didn't own the property so you cannot depreciate it. The owner will start depreciating it asset as soon as he given you his property or building to use. 

Answer 2

You can depreciate your building over 12 years. Cost of the building can be taken into your balance sheet as PPE. I don't see any provision in IAS 16 or 17 prohibiting this. If fact your 20 year land lease is an operating lease. Any asset you build on it can be capitalized if they can be used for more than one year.