Can a leased land be part of PPE of the lessee's books of accounts in any way?

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Al-Mahamud
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Joined: 10 Feb 2021, 07:37

Can a leased land be part of PPE of the lessee's books of accounts in any way?

Post by Al-Mahamud »

A company has taken lease of a land for 99 years from a Govt authority for establishing industrial unit. The lease contract allows the lessee to transfer the the ownership of the industrial unit that indirectly also means that the lessee has the ability to transfer the right to use of the leased land. So now question comes, should the leased land be recognized as ROU asset or main asset under PPE ? I have gone through the conceptual framework's definition of asset and IFRS 16 and get confused as leased asset also meets the definition of asset as per the definition of Conceptual framework. Thanks in advance.
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Marek Muc
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Re: Can a leased land be part of PPE of the lessee's books of accounts in any way?

Post by Marek Muc »

I don't think that the ability to transfer the RoU to third party precludes the contract from being recognised as a lease

PS RoU assets can be shown together with owned assets in the primary financial statements
Integraoutsourcing
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Re: Can a leased land be part of PPE of the lessee's books of accounts in any way?

Post by Integraoutsourcing »

Under International Financial Reporting Standards (IFRS), leased land may be recognized as a Right-of-Use (ROU) asset or a Property, Plant, and Equipment (PPE) asset, depending on the nature of the lease.

Under IFRS 16, leases are classified into two types: finance leases and operating leases. For a finance lease, the leased asset is recognized as a ROU asset, while for an operating lease, the leased asset may be recognized as a ROU asset or remain off-balance sheet.

In your case, since the lease term is for 99 years, it is highly likely that it will be classified as a finance lease, which means that the leased land should be recognized as a ROU asset on the lessee's books of accounts. For more info please contact our accounting outsourcing services online [link removed]

However, it is important to note that the classification of the lease will depend on various factors such as the transfer of ownership, the lease term, the present value of lease payments, and the nature of the leased asset. Therefore, it is advisable to seek professional advice from a qualified accountant or auditor to determine the appropriate classification of the lease and the corresponding recognition of the leased land as a ROU asset or PPE asset.
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