Construction on rented land

Question

Our company has rented a land for 10 years and we are building an office premises there. After 10 years we have to return the land with the building to the owner, which he will be renting out to others (rental is less than the market rate considering this arrangement). My question is whether we can depreciate the building we construct over 10 years?

Answer 1

According to IAS 16 Property, plant, and equipment should be recognized as asset when two criteria met;

• It is probable that probable that the future economic benefits related with the asset will flow to the entity, and
• Cost of the asset can be measured reliably

 This recognition principle is applied to all property, plant, and equipment costs at the time they are incurred.

In this case both of criteria are not met for the building as the future economic benefits from the building will not flow to your entity but to the upcoming owner and further until the building is completed cost is not measurable, that is 10 years requires for the completion of building. Hence no depreciation should be charged on building as it is not recognized as asset.

To clarify the depreciation issue further, IAS 16 stated that Depreciation begins when the asset is available for use and continues until the asset is derecognized. Hence it further clarifies that no depreciation shall be charged on building in this case.

Comments

Construction will be done in 03 months and we will be using the building for the rest of the ten year period. So future economic benefits will flow to us.

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You can depreciate over 10 year in that case.

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In this situation, after completion of building it will be capitalized in your books as asset. Building is depreciable asset in accordance with IAS 16 and so depreciation will be charged soon when building is in condition for use. Preferably straight line basis is use for charging the depreciation.

Answer 2

As per IAS 16,You can claim depreciation over the useful life of assets.In this case 10 years.

Depreciation of an asset begins when it is available for use i.e. when it is in the location and condition necessary for it to be capable of operating in the manner intended by the management.