STATEMENT CLASSIFICATION

The classification of the land in the financial statement of financial

position depends on the nature and purpose of the land.

Land use as a plant site shall be treated as property, plant and

equipment.

Land held for a currently undetermined use is treated as an investment

property

However, if the land is held definitely as a future plant site, it is classified

as owner-occupied property and not an investment property and
therefore shall be included in property, plant and equipment. This
accounting treatment is accordance with paragraph 9 of Pas 40.

Land held for long-term capital appreciation is treated as an investment

property.
Land held for current sale by a real estate developer as in the case of
subdivided lots is treated as a current asset as part of inventory .
a. Purchase Price
b. Legal Fees and other expenditures for establishing
clean title
c. Broker or agent commission
d. Escrow fees
e. Fees for registration and transfer of title
f. Cost of relocation or reconstruction of property
belonging to others in order to acquire possession
g. Mortgages, encumbrances and interest on such
mortgages assumed by buyer
h. Unpaid taxes up to date of acquisition assumed by
buyer
i. Cost of survey
j. Payments to tenants to induce them to vacate
the land in order to prepare the land for the
intended use but not to make room for the
construction of new building

k. Cost of permanent improvements such as cost

of clearing, cost of grading, leveling and landfill

l. Cost of option to buy the acquired land.

If the land is not acquired, the cost of option is

expensed outright.
The treatment of land improvements depends on whether the
improvements are subject to depreciation or not.
If the land improvements are additions to cost not subject to
depreciation they are charged to the land account.
Example of these expenditures are cost of surveying, cost of
clearing, cost of grading, leveling and landfill, cost of
subdividing and other cost of permanent improvement.

On the other hand, if land improvements are depreciable, they

are charged to special account “land improvements”.
Examples of these improvements are fences, water systems,
drainage systems, sidewalks, pavements and cost of trees,
shrubs and other landscaping. Land improvements of this
type should be depreciated over their useful life.
Special assessments are taxes paid by the
landowner as a contribution to the cost
of public improvements. Special
assessments are treated as part of the
cost of the land.
The reason for this is that public
improvements increase definitely the
value of land.
As a rule, real property taxes are treated
as outright expense.
However, if unpaid real property taxes are
assumed by the buyer in acquiring land,
the taxes are capitalized but only up to
the date of acquisition.
Cost of building when purchased
The following expenditures are normally charged to building
account when building is acquired by purchase:
a. Purchase price
b. Legal fees and other expenses incurred in connection with
the purchase
c. Unpaid taxes up to the date of acquisition
d. Interest, mortgage, liens and other encumbrances on the
building assumed by the buyer
e. Payments to tenants to induce them to vacate the building
f. Any renovating or remodeling costs incurred to put a
building purchased in a condition suitable for its intended
use such as lighting installations, partitions and repairs.
Cost of the building when constructed
The following expenditures are normally charged to the
building when acquired by means of construction:

a. Materials used, labor employed and overhead incurred

during the construction
b. Building permit or license
c. Architect fee
d. Superintendent fee
e. Cost excavation
f. Cost of temporary buildings as construction offices and
tools or materials shed
g. Expenditures incurred during the construction period such
as interest on the construction loans and insurance.
h. Expenditures for service equipment and
fixtures made permanent part of the structure.

i. Cost of temporary safety fence around

construction site and cost of subsequent
removal thereof.

However, the construction of a permanent

fence after the completion of the building is
recognized as land improvement .
j. Safety inspection fee
A question often arises as to the treatment of
expenditures for the sidewalks, pavements, parking
lot and driveways.
The problem is whether such expenditures should be
charged to the land improvement or building.
a. If the said expenditures are part of the blueprint for
the construction of a new building, they are
charged to the building account.

b. On the other hand, if the expenditures are

occasionally made or incurred not in connection
with the construction of a new building, these are
charged to land improvements.
Where insurance is taken during the construction of a building,
the cost of insurance is charged to the building because it is
a necessary and reasonable cost of bringing the building into
existence.

However where insurance is not taken, an accounting problem

arises when the entity is required to pay claims for damages
for injuries sustained during the construction.

In this regard, it is believed that the payment for damages

should be expensed outright because the damages represent
management failure or negligence in procuring insurance and
are not a reasonable and necessary cost of construction.
To charge the damages to the building would be tantamount to
concealment of the management failure or negligence.
Expenditures for shelves, cabinets, and partitions may
be charged to building or furniture and fixtures
depending upon the nature of the expenditures.

If such expenditures are immovable in the sense that

they are attached to the building in such manner that
the removal thereof may destroy the building, they are
charged to the building account.

On the other hand, if such expenditures are movable,

they are charged to furniture and fixtures and
depreciated over their useful life.
 The following rules should be observed for the
accounting treatment of the expenditures for
ventilating system, lighting system and elevator:

a. If installed during construction, the ventilating

system, lighting system and elevator are charged to
building account.

b. Otherwise, they are charged to building

improvements and depreciated over their useful life
or remaining life of the building, whichever is
shorter.
1. Land and an old building are purchased at a
single cost:
a. If the old building is usable, the single cost
is allocated to land and building based on
relative fair value.
b. If the old building is unusable, the single
cost is allocated to land only.
2. The old building is demolished immediately to make room
for construction of a new building:

a. Any allocated carrying amount of the usable old building

is recognized as a loss if the new building is accounted
for as property, plant and equipment or investment
property.
b. Any allocated carrying amount of the usable old building
is capitalized as cost of the new building if the new
building is accounted for as inventory.
c. The demolition cost minus salvage value is capitalized
as cost of the new building whether the new building is
accounted for as property, plant and equipment,
investment property or inventory.
d. Needless to say, the net demolition cost is capitalized as
cost of the land if the old building is demolished to
prepare the land for the intended use but not to make
room for the construction of new building
3. A building is acquired and used in a prior period
but demolished in the current period to make
room for construction of a new building:

a. The carrying amount of the building is

recognized as a loss, whether the new building
is property, plant and equipment, investment
property or inventory.
b. The net demolition cost is capitalized as cost
of the new building whether the new building
is accounted for as property, plant and
equipment, investment property or inventory.
c. If the old building is subject to a contract of
lease, any payments to tenants to induce them
to vacate the old building shall be charged to
the cost of the new building.