Are you accounting for land correctly?

Have you been recognising land only when you are the title deed holder? This accounting may be incorrect!

IGRAP 18 on Recognition and Derecognition of Land was issued in March 2017 and is effective from 1 April 2019. It explains when land should be recognised – or not – in the financial statements.

So, what principles should you use to account for land?

As with all other assets, land should be recognised when it is controlled by an entity. This means that an entity should be able to demonstrate that it controls the economic benefits or service potential of the land by applying substance over form. An entity may be able to demonstrate control through:

  • legal title (i.e. by being the registered title deed holder); and/or
  • the right to direct access to land, and/or to restrict or deny the access of others to land through
  • a lease;
  • another arrangement to use land; and/or
  • rights in legislation or similar means.

What is the impact of these principles?

Based on the principles in IGRAP 18, there are at least five scenarios that entities should consider.

Scenario 1 – An entity has legal title

If an entity has the legal title to land, it should assess whether it has concluded an arrangement with another party that gives the other party the right to use the land that the entity owns. If there are no arrangements for the use of the land by another party, the entity will likely be able to demonstrate control and should recognise the land.

Scenario 2 – An entity has legal title, but has concluded an agreement with another party to use the land it owns

An entity should assess the terms and conditions of the arrangement. In assessing the terms and conditions of the arrangement, an entity should examine the following:

  • What rights and obligations does the entity and the other party have in the arrangement?

Rights can be either protective or substantive.

  • Protective rights protect an entity’s interest/rights in the asset, e.g. approval must be sought from the entity by the other party before undertaking a certain activity with the land.
  • Substantive rights give the entity, or the other party, the power to make decisions about how the economic benefits or service potential are accessed, used and/or restricted. This includes decisions about how the land will be used (for what, potential beneficiaries, and at what price), and whether to sell the land (to whom, and at what price). Only substantive rights are considered in assessing whether control exists.

An entity should be able to demonstrate that its rights are presently exercisable – whether these rights are currently exercised by the entity is irrelevant.

  • For what period is the right of use?

As land has an unlimited life, for an entity to demonstrate that it has control of the economic benefits and service potential, the right to use the land should be for an unlimited time. Note: there is a difference between ‘indefinite’, i.e. the period is not known, versus ‘unlimited’, i.e. there is no end to the period.

If the entity has given away its substantive rights to control the economic benefits or service potential of the land for an unlimited time, it should not recognise the land.

The Guideline on Accounting for Arrangements Undertaken in terms of the National Housing Programme provides guidance on the recognition of land used in these schemes [http://www.asb.co.za/wp-content/uploads/2019/04/Guideline-on-Accounting-for-Arrangements-Undertaken-i.t.o-the-National-Housing-Programme-1-April-2019-clean.pdf]

Scenario 3 – An entity has the right to use land, but another entity is the custodian of the land in legislation

In the public sector, custodial rights and obligations related to land are conferred on specific entities through legislation or similar means. An example of such a Department is Public Works. Under the current legal framework, the rights in legislation or similar give the custodian the right to control the economic benefits or service potential of the land.

In this situation, although the entity is the legal owner of land, the custodian has control through its rights in legislation or similar, and the entity should not recognise the land.

Scenario 4 – The entity has joint control of land

An entity may enter into an arrangement with more than one party, and the parties jointly control the land, i.e. decisions about how the economic benefits or service potential of the land will be accessed, used and/or restricted, are taken jointly by the parties.

In these instances, the relevant Standard of GRAP on joint ventures is applied.

Scenario 5 – An entity does not have legal title, but has the right to use another party’s land

Where an entity has the right to use land, it will need to apply a similar assessment to that outlined for scenarios 2 and 3.

If an entity has a right to use land, but the other party is the custodian of the land in legislation or similar, then it should not recognise the land.

In other arrangements, an entity would need to assess if (a) it has substantive rights to direct the economic benefits or service potential of the land, and (b) the period over which the land is used is unlimited.

What are the transitional arrangements for IGRAP 18?

IGRAP 18 is effective for financial years commencing on or after 1 April 2019.

This means that entities will need to account for land using its principles for financial statements prepared for the period ending on 31 March 2020, 30 June 2020 or 30 December 2020 (depending on the type of entity).

IGRAP 18 will need to be applied to all arrangements relating to land (whether through legal title, lease or ‘right of use’ arrangement, or legislative or other rights) that exist on the initial adoption. The date of adoption will be 1 April 2019, 1 July 2019 or 1 January 2020.

An entity need not restate comparative information. Any adjustments that are needed to align current accounting policies with IGRAP 18 are made against the opening accumulated surplus or deficit in the year of adoption.

Assets are recognised initially at their acquisition cost. If information is not available about cost, the fair value of the land at the date of adoption may be used as the deemed cost.

What do entities need to do to prepare for implementation?

While this is not a complete list of possible actions, an entity should consider doing the following:

  • Review the land register of the entity on the date of adoption to identify land where it has legal title.
  • The entity should assess whether it has entered into any arrangements with external parties to use the land. If yes, it will need to assess the terms and conditions of the arrangements to determine if it controls the land.
  • Consider if the Guideline on Accounting for Arrangements Undertaken in terms of the National Housing Programme is applicable.
  • Consider if the Standard of GRAP on Leases or another Standard should be applied.
  • Review the contracts register on the date of adoption to identify where it has entered into arrangements to use the land of an external party.
  • If it has entered into arrangements to use another party’s land, it will need to assess the terms and conditions of the arrangements to determine if it controls the land. The Guideline on Accounting for Arrangements Undertaken in terms of the National Housing Programme may be relevant in deciding how to account for land used by another entity.
  • Consider if the Standard of GRAP on Leases or another Standard should be applied.
  • If the entity needs to recognise land, it should assess whether the acquisition cost is available for the land. If not, the entity will need to establish a process to determine the fair value of the land on the date of adoption. Fair value should be determined by someone competent to carry out the valuation in accordance with the valuation principles in the Standards.
  • An entity will need to review its existing accounting policies and align them with the principles in IGRAP 18. Any significant judgements related to the application of the principles or in determining the fair value of land, should be explained in the financial statements.
  • An entity will need to review its existing processes and systems to align with the new principles in IGRAP 18 to ensure that the information can be generated on an ongoing basis.

Note: the list above assumes that the asset and contract registers are complete and accurate.

Jeanine Poggiolini

8 October 2019

The views in this article are those of the author and are not official positions of the Accounting Standards Board.



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