Chapter 26

Land and Building

 Land Account
• Land used 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.
• Land held for long-term capital appreciation is treated as an investment
property.
• Land held for current sale by a real estate developer is treated as current
asset as part of inventory.
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 Costs Chargeable to Land
• Purchase price
• Legal fees and other expenditures for establishing clean title
• Broker or agent commission
• Escrow fees
• Fees for registration and transfer of title
• Cost of relocation or reconstruction of property belonging to others in order to acquire
possession
• Mortgages, encumbrances and interest on such mortgages assumed by buyer
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 Costs Chargeable to Land
• Unpaid taxes up to date of acquisition assumed by buyer
• Cost of survey
• 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
• Cost of permanent improvements such as cost of clearing, cost of grading,
leveling and landfill
• Cost of option to buy the acquired land (expensed outright if land is not acquired)

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 Land Improvements
• Not subject to depreciation (charged to land account)
- Examples: cost of surveying, cost of clearing, cost of grading, leveling
and landfill, cost of subdividing and other cost of permanent
improvement.
• Depreciable land improvements (charged to land improvements)
-Examples: fences, water systems, drainage systems, sidewalks,
pavements and cost of trees, shrubs and other landscaping.
-Depreciated over their useful life.
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 Other Considerations
• Special Assessments
-taxes paid by the landowner as a contribution to the cost of public
improvements and are treated as part of the cost of the land.
• Real Property Taxes
-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 (taxes subsequent to the date of acquisition should
be treated as expense).
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 Building Account
• If acquired by purchase, the ff expenditures are charged to building account:
Purchase price
Legal fees and other expenses incurred in connection with the purchase
Unpaid taxes up to date of acquisition
Interest, mortgage, liens and other encumbrances on the building assumed by the buyer
Payments to tenants to induce them to vacate the building
Any renovating or remodeling costs incurred such as lighting installations, partitions
and repairs
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 Building Account
• If acquired by construction, the ff expenditures are charged to building:
Materials used, labor employed and overhead incurred during construction
Building permit or license, architect fee and superintendent fee
Cost of excavation, cost of temporary buildings used as construction offices and tools or
materials shed
Expenditures during construction period such as interest on loans and insurance
Expenditures for service equipment and fixtures made a permanent part of the structure
Cost of temporary safety fence around construction site and cost of subsequent removal
Safety inspection fee
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Sidewalks, pavements, parking lot, driveways

• If expenditures are part of the blueprint for the construction of building,

charged to the building account.
• If expenditures are occasionally made or incurred not in connection with
the construction of building, charged to land improvements.

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 Claims for damages
• Where insurance is taken during the construction of building, the cost of
insurance is charged to the building.
• Where insurance is not taken and the entity is required to pay claims for
damages for injuries sustained during construction, the payment for
damages should be expensed outright.

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 Building Fixtures
• Expenditures for shelves, cabinets and partitions that are immovable
(attached to the building) should be charged to the building account.
• Expenditures for shelves, cabinets and partitions that are movable should
be charged to furniture and fixtures and depreciated over their useful life.

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 Ventilating system, lighting system,
elevator
• If installed during construction, the ventilating system, lighting system
and elevator should be charged to the building account.
• Otherwise, the expenditures should be charged to building improvements
and depreciated over their useful life or remaining life of the building,
whichever is shorter.

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 PIC Interpretation on Land and Building
• Land and an old building are purchased at a single cost:
If old building is usable, the single cost is allocated to land and building
based on relative fair value.
If old building is unusable, the single cost is allocated to land only.

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 PIC Interpretation on Land and Building
• Old building is demolished immediately to make room for construction of new building:
If new building is accounted for as PPE or investment property, any allocated carrying
amount of the usable old building is recognized as a loss.
If new building is accounted for as inventory, any allocated carrying amount of the usable old
building is capitalized as cost.
The demolition cost minus salvage value is capitalized as cost of the new building whether
the new building is accounted for as PPE, IP or inventory.
The net demolition cost is capitalized as cost of the land if the old building is demolished to
prepare the land for intended use but not to make room for construction of new building.

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 PIC Interpretation on Land and Building
• 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:
The carrying amount of the old building is recognized as a loss, whether the new
building is PPE, IP or inventory.
The net demolition cost is capitalized as cost of the new building whether the
new building is accounted for as PPE, IP or inventory.
If old building is subject to 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.

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