How should an entity account for servitudes?

Servitudes are rights granted by a property owner to another person or entity to use land for certain purposes. In the public sector, servitudes are usually acquired in connection with infrastructure such as roads, water reticulation systems, power lines, substations etc. How servitudes arise may impact their accounting treatment.

Through exercise of legislation

Servitudes that arise from rights granted in legislation are excluded from GRAP 31 on Intangible Assets as they are “internally generated rights”. Usually no compensation is paid to the landowner for the acquisition of these rights. Costs incurred to register these servitudes (if any) are expensed.

Through acquisition

When servitudes are acquired, the landowner is usually compensated. An entity would assess if the servitude can be recognised as an intangible asset by determining if the recognition criteria of an asset are met.

Although intangible in nature, servitudes are associated with a physical asset (land). GRAP 31 states that an entity uses judgement to assess which element is more significant. For example, an entity may conclude that even though a servitude meets the definition of an intangible asset, it is essential to the operation of a tangible asset and therefore includes the cost of the servitude in the cost of the tangible asset.

Refer to FAQ 2.10 on how entities should account for servitudes. Access FAQs here: link.