How to account for land improvements

May 23, 2010

Account for land improvements.

1. Nature of land related expenditures

Expenditures related to land may fall in two broad categories. One category includes expenditures related to land upon its acquisition; these are expenditures to prepare land for its intended use. The other category includes improvements to land subsequent to its acquisition.

Examples of land related expenditures in the first category – those to prepare land for its intended use – are grading, filling, draining, cleaning, and removing old constructions.

Examples of land improvements in the second category – those to happen after the initial land acquisition – are walkways, parking lots, irritation systems, and landscaping.

2. Land improvements as part of land cost

Land related expenditures in the first category are usually included in the cost of land acquired. This treatment is consistent with the generally accepted accounting principles stating that costs related to preparing an asset for its intended use are to be included in the cost of that asset. Thus, when a company buys land and needs to remove an old building from it, the removal costs (less any salvageable items) are added to the cost of land acquired.

Note that land is recorded on the balance sheet in a separate account called Land. Land is a separate asset within Property, Plant, and Equipment. Land is not depreciated because it does not have an expected useful life. Therefore, any land related expenditures in this category will stay on the balance sheet and will not be depreciated.

3. Land improvements as a separate asset (and cost)

Land improvements in the second category are usually recorded as a separate asset on the balance sheet in an account called Land Improvements.  Therefore, such expenditures represent separate costs.  As such land improvements have definite lives (e.g. sidewalks can have a useful life of 20 years), these costs are depreciated over the period of the land improvements’ lives.  As depreciation takes place, the cost of land improvements is removed from the balance sheet and is included as an expense on the income statement.

Note that landscaping will qualify as a separate asset if the project is significant and includes relatively large expenditures.  Nevertheless, landscaping which has a maintenance nature (e.g. grass cutting) should be treated as a period expense and should not be capitalized.

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