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IAS 16, IAS 38 and IAS 17 — Purchase of right to use land

Date recorded:

The Committee received a request from Indonesia to clarify whether the purchase of a right to land should be accounted for as a purchase of property, plant and equipment, a purchase of an intangible asset or as a lease of land.

In Indonesia, the local laws do not permit entities to own title to land, rather only individuals may own land. To facilitate entities acquiring rights to use land, the government can grant either rights to exploit or cultivate the land (agricultural usage) or rights to build upon the land (commercial usage). The initial transfer occurs between an individual and the entity through the government while extension and renewals occur directly between the entity and the government. Once the entity purchases the usage rights, the individual does not retain any rights over the land and the entity has to return the land only if the government revokes the entity´s right on the group of public interest or if there is a change in the allocation of use of the land. The Indonesian standard setter noted that different interpretations have developed in their jurisdiction as a result of this issue.

The staff considered whether the acquisition of use of land rights should be classified as purchase of property, plant and equipment under IAS 16, purchase of an intangible asset under IAS 38 or a lease of land under IAS 17. While acknowledging that the right is not land itself, the staff supported classification as a purchase of property, plant and equipment and suggested the Committee recommend an amendment to IAS 16 to the Board. They noted that the right is similar to a purchase and that substantial ownership is assumed to be transferred in this scenario.

However, some Committee members disagreed with the staff position of amending IAS 16. The felt the right either represents a lease or an intangible rather than a purchase of property. One Committee member noted concern with classification as property given the renewal option is not under the entity´s control. The Committee Chair questioned whether they would consider a government´s right of eminent domain as any different and the Committee member responded they would as under eminent domain the government has to seize land and compensate the holder whereas under the fact pattern in the submission the government has the right to not renew or extend the right of use. Another Committee member questioned if the Board´s leasing project is silent on whether a right of use asset is a tangible or intangible asset then why the Committee would be discussing the same issue. Another Committee member noted that a 999 year lease would be classified as a finance lease and didn´t understand why the acquisition of a right of use would not be classified similarly.

The Committee disagreed with the staff recommendation to amend IAS 16 and agreed not to add the item to the Committee´s agenda. The staff will work on drafting a rejection notice to be discussed during the next Committee meeting.

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