Yes. Land a business owns is an asset, because an asset is a present right of an entity to an economic benefit and title to land is exactly that (FASB Concepts Statement No. 8, Chapter 4, paragraph E16). The question worth spending time on is which kind of asset, because where land sits is decided entirely by why the business holds it, and it is the balance most often assigned by habit rather than tested.
Those two places are property, plant and equipment and inventory. The classification changes what the land is measured at, whether anything is charged against income while it is held, and how a reader interprets the balance.
Why the Business Holds It Decides Where It Sits
Land held to operate on is a long-lived operating asset, carried in the property, plant and equipment caption, on which a registrant states the basis of determining the amounts (17 CFR 210.5-02, item 13). The rule supplies the caption; what puts a parcel there is that the business holds it to use. A firm’s office site, a plant’s grounds and a warehouse yard all sit here.
Land held to sell in the ordinary course of business is trading stock, not property. The reporting definition of inventory is written narrowly, for items of tangible personal property held for sale in the ordinary course of business (AICPA, Accounting Research Bulletin No. 43, Chapter 4, Statement 1), so it does not reach real estate on its face. Federal tax law states the same idea without that limit, taking out of the capital asset class both stock in trade of the taxpayer and property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business (26 U.S.C. 1221(a)(1)). The question a preparer is really answering is whether selling this is the business, or whether the business is something else that happens to own it.
The One Thing Land Never Does
Whatever caption it sits under, land is not depreciated. The depreciation allowance does not apply to land apart from the improvements or physical development added to it (26 CFR 1.167(a)-2-2)), which is why land has to carry its own line on the fixed asset schedule rather than be folded into a single record for the property. The full rule, the land preparation costs that are depreciable and the basis split on a lump-sum purchase, is in can you depreciate land.
Three Labels That Answer Different Questions
Land collects adjectives, and each is a different test. It is tangible because it has physical substance (tangible assets), fixed when the business holds it to use rather than to sell (fixed assets), and a capital asset only if the Section 1221 exclusion list leaves it in, which is a federal tax question where a developer’s lots and an operating company’s site land on opposite sides (capital assets).
Calling a parcel tangible, fixed and capital in one sentence is not three pieces of information unless each label was tested separately.
Common Questions
Is Land an Asset or a Liability?
An asset, on the books of whoever holds title to it. The holding costs, property taxes, insurance and maintenance on a parcel producing no income, are expenses of the period rather than a liability on the balance sheet, and a mortgage secured by the land is a separate liability that would exist whatever the collateral. Why a secured loan never converts the asset it bought is worked through in assets and liabilities.
Is Land a Current or Non-Current Asset?
Non-current, and the bulletin is blunter than the general test suggests. Current assets are those reasonably expected to be realized in cash, or sold or consumed, during the normal operating cycle (AICPA, Accounting Research Bulletin No. 43, Chapter 3A, paragraph 4), and the same chapter then names land and other natural resources among the resources excluded from that classification outright (AICPA, Accounting Research Bulletin No. 43, Chapter 3A, paragraph 6). That exclusion is written for land a business holds, not for land it turns over, and the chapter allows that there may be exceptions, in special cases, to certain of the inclusions and exclusions as set forth in this section (AICPA, Accounting Research Bulletin No. 43, Chapter 3A, paragraph 3). A developer reporting its lots below the current line is the reading nobody defends. The class and its boundary are in current assets.
Accountably places trained offshore accountants and tax preparers inside US CPA and EA firms, and a firm can grade that fixed asset classification work on its own files through a trial task before a client engagement depends on it.
