Accounting Standards Board Newsletter #2

Accounting Standards Board
Newsletter #2 - June 2022

In this edition of the Newsletter:

When should an entity recognise land?

Stakeholders have raised uncertainties recently about who should recognise land, for many types of entities including municipalities and TVET Colleges. The issue arises when one entity is the legal owner of land, while another entity occupies the land and has certain rights to use the land.

What are the requirements in the Standards of GRAP?

The Interpretation of the Standards of GRAP on Recognition and Derecognition of Land (IGRAP 18) provides the requirements for recognising land. Land is recognised based on control, which is assessed by applying the principle of economic substance over legal form. An entity controls land in one of two scenarios:

A legal owner of land may grant the right to direct access and restrict or deny access of others to the future economic benefits and/or service potential of land to another entity. The entity with this right will control land when the legal owner grants it the right:

in a binding arrangement (contract, legislation or similar means);
for an unlimited period of time; and
that is presently exercisable.

When an entity has a right to use land but the right does not meet these requirements, it should account for the right in accordance with the applicable Standard of GRAP, e.g. GRAP 13 on Leases.

Applying the requirements…

An entity’s assessment of whether it controls land should consider the following.

If an entity is not the legal owner, there must be a binding arrangement which gives the entity the right to direct access and restrict or deny access of others. A binding arrangement does not need to be in writing but to meet the qualitative characteristics of financial reporting, there should be evidence of the arrangement.
Since a binding arrangement can exist in legislation, the entity should understand the legislative environment. This is particularly important for land where legislation often provides rights and responsibilities to custodians of land which results in the custodian controlling land. For example, where legislation designates the department of public works as custodian over certain land, the department controls that land and should recognise it.
The assessment of control of land is separate from the assessment of control of buildings and other structures on land. An entity may control and recognise a building on land, without controlling or recognising the land.

An entity that occupies land and is not the legal owner, without evidence of a binding arrangement, is unlikely to demonstrate that it controls the land. The entity should seek clarity on the rights it has from the legal owner.

Resources available

Access the following resources on the ASB website:

IGRAP 18, which includes a decision tree and examples: https://www.asb.co.za/igrap-18/
A recording on IGRAP 18: https://www.asb.co.za/asb-webcast-updates/

Disclaimer

The Newsletter has been prepared by the Secretariat of the ASB for information purposes only. It has not been reviewed, approved or otherwise acted on by the Board.