Is Land a Plant Asset & Why Isn’t It Depreciated?

Assets are economic resources expected to provide future economic benefits. Companies categorize these resources based on their nature and intended use. A significant class of assets for many businesses is Property, Plant, and Equipment (PP&E), representing tangible assets used in operations.

Defining Plant Assets

Plant assets, also known as Property, Plant, and Equipment (PP&E) or fixed assets, are tangible resources used by a business to produce goods or services, for rental, or for administrative purposes. These assets are characterized by their physical substance. A key feature of plant assets is their long-term nature, as they are expected to provide economic benefits for more than one year.

Common examples of plant assets include buildings, machinery, equipment, vehicles, and furniture. Most of these assets are subject to depreciation, which is the systematic allocation of their cost over their estimated useful life. This process recognizes that these assets wear out, become obsolete, or lose value over time.

Land’s Unique Accounting Treatment

Land is considered a plant asset because it is a tangible asset used in business operations. However, unlike most other plant assets, land is not depreciated. This stems from the principle that land has an indefinite useful life.

Land does not wear out, decay, or become obsolete in the same way that buildings or machinery do. Its service potential is not consumed over time, and it retains its value, or may even appreciate. Accounting standards, including Generally Accepted Accounting Principles (GAAP), state that land should not be depreciated. This contrasts with other tangible assets that are systematically expensed over their useful lives to match the cost of the asset with the revenues it helps generate.

Determining Land’s Cost

The initial cost recorded for land on a company’s balance sheet includes more than just its purchase price. It encompasses all expenditures necessary to acquire the land and prepare it for its intended use. These costs are “capitalized,” meaning they are added to the land account rather than being expensed immediately.

Costs added to the land’s value can include real estate commissions, legal fees for title searches and transfers, and title insurance premiums. Costs associated with preparing the land for use, such as surveying, clearing, grading, and drainage, are also capitalized. If an existing structure on the purchased land needs to be demolished to make way for a new building, the demolition costs, net of any salvage value from the old materials, are added to the cost of the land. Additionally, any unpaid property taxes assumed by the buyer up to the date of acquisition are included in the land’s cost.

Financial Reporting Considerations

Land is presented on the balance sheet as a non-current asset within the Property, Plant, and Equipment section. It is recorded at its historical cost, which includes all capitalized acquisition and preparation expenditures. Unlike other plant assets, the land account balance does not decrease over time due to depreciation.

The absence of depreciation for land significantly impacts a company’s financial statements. Since no depreciation expense is recognized for land, the income statement does not reflect a periodic charge related to its use, unlike buildings or equipment. This distinction is important for financial analysis, as it affects reported profitability and the overall asset base. When land is eventually sold, any difference between its selling price and its original capitalized cost is recognized as a gain or loss on the income statement, separate from regular operating activities.