Explain Why the Combined Cost of Acquiring Land and Building

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The Answer is Where land and buildings are acquired together,IAS 16 paragraph 58 requires that the cost be apportioned between the land and the buildings,and that the buildings be systematically depreciated over time.Land itself would not usually be depreciated,given its usually indefinite life.Company directors have been known to complain about having to depreciate buildings on the grounds that buildings' value typically increases over time.This argument,however,is invalid.Generally,it is the land that increases in value,not the buildings.Buildings have a limited useful life and this must be recognised through depreciation charges.Again,it should be emphasised that directors must depreciate their buildings under existing accounting standards.Electing not to depreciate buildings (and therefore failing to act in compliance with IAS 16)will have the effect of increasing the profits and total assets of the firm.The recognition of building depreciation will increase expenses (depreciation expense)and therefore reduce profits.It will also lead to a reduction in net assets.Assets and profits are frequently used within some of the accounting-based ratios used in debt covenants.Building depreciation will increase debt-to-equity ratios,reduce times interest covered ratios and reduce profit available for dividends.Therefore,managers facing possible debt covenant violations are less likely to want to comply with IAS 16.

Explain Why the Combined Cost of Acquiring Land and Building

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