IFRS 16 for underdeveloped land

[kashif.ahmed]

Hi everyone
Require your help here. My company is a lessor who has leased out an underdeveloped land to a tenant to develop it in phases. They paid us $5M in advance two years ago and because the agreement was at PDA stage, the $5M were staying in deferred revenue account. Starting 2023, they paid us $1M and also asked for extension of PDA.
We have now given them extension for another six months to determine if they will be moving forward with the lease or exiting the contract (in that case $6M will not be refunded). $1M is currently recognized in revenue while $3.8M is in B/S
Our auditors have asked us to recognize the all the revenue based on Straight line basis. Pls suggest. Remember it is 0 value land until developed.

[Marek Muc]

Please provide a detailed explanation of the terms of this arrangement, they aren't clear to me.

[kashif.ahmed]

Hi Marek
Its a phased lease where we gave access to a tenant to develop a land in Oct 2022 and they paid us 3.8m dollars upfront. Per terms, they will have until Dec 31 to get the land pre works ready and we will then sign a lease agreement onwards. They were supposed to run some pre ground clearing etc in 2023 which they didnt and asked us to extend the PDA to July 2024. During 2023 they paid us $1m more and then pay 2m 3m 4m each of next years.
However one important point to note is that they can still exit in july 2024 and not continue with the lease and in this case we will not refund them what they already paid us.
If they do carry on with the lease, the 3.8m that they paid us initially will be used as credits starting 2026.

My question is should we recognize the revenue based on straight line method as recommended by ifrs but the examples there quote retail lease while in this case it is a barren land with no value. Have you heard of any cases of revenue recognition by lessor on an underdeveloped land because right now it holds no value to tenant and their benefit is diminished to later pwriod if they decide to go ahead with the lease after july 2024 and invest in the land further

[Marek Muc]

I'm not familiar with arrangements like these. Based on your description, it seems that straight-line P/L recognition for non-refundable lease payments would be the best approach. Ultimately, it's the responsibility of the lessee to utilise the land efficiently. Considering the development potential of the land, its value is certainly not zero!

[kashif.ahmed]

Thank you Marek. Really appreciate your time