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Treatment of Demolition cost

Hi Expert,
I am bit confusion on treatment of Demolition cost.
As per US GAAP
• If land and building are purchased with the initial intent to use the land and demolish the building, capitalize the cost to demolish the building as land improvement.
• If land and building are purchased with the initial intent to use the land, demolish the building and build a new building, capitalize the cost to demolish the building as part of the cost of the new building if the demolition occurs soon thereafter.
• If land and building are purchased with the initial intent to use the land and the building, expense the costs to demolish the existing building at a later date. The demolition costs are an expense associated with the cost of using the existing asset and are not capitalized in the cost of the new asset.
I have Two question
If its a own building and the owner of the building demolishes few floor and builds a new floors whether the demolition cost be treated as capex or Opex.
If the buiding is purchased on lease and the leasee demolishes the existing Interiors in building and does few leasehold improvement works as per his business convenience will the demolition cost treated as Capex or Opex
its a own building and the owner of the building demolishes existing interiors and builds new interior will the demolition cost treated as Capex or Opex.

Hello advice seeker,

Unfortunately, US GAAP only provides rudimentary guidance for PP&E acquisition costs and no guidance on demolition costs.

In the absence of authoritative guidance (ASC 105-10-05-3, see below), the next place to look is the SEC. 

In the US GAAP context, the SEC is the only regulator that matters.  Fortunately, the FASB publishes the SEC's (relevant) guidance as part its ASC.  Unfortunately, the SEC does not provide any guidance on this issue.  

BTW, the Texas Comptroller of Public Accounts (the source you are citing) does not regulate private companies, so cannot be considered a regulatory agency in the ASC 105 context.

Next comes IFRS.  I like to use it before the other nonauthoritative sources because it's readily available, widely used and accepted by (practically) all auditors.

Unfortunately, while IAS 16 is more detailed than ASC 360, it does not specifically discuss removal costs. In practice, IFRS is generally interpreted to allow their capitalization, but that is a bit too far removed to be useful in the US GAAP context.

Next would come general practice (technically, it's first on the list, but its more nonauthoritative than either the SEC or IFRS).

Here we do find an answer.

In general practice, if a demolition or removal is intentional (the property was acquired with the aim of removing a structure or its part), those costs are capitalized. Otherwise, they are expensed.

So, as to your first question, unless the owner acquired the structure with the intent of replacing it or a part, the demolition cost is OPEX.

If the owner acquired the structure with the intent of demolishing it or portion, the owner would first derecognize the structure or portion being removed (the cost of the portion is known because the owner's intent was to remove it) and recognize a disposal gain or loss.  Next, it would capitalize the demolition cost to the new or renovated structure.

If the owner cannot determine the cost of the portion being removed, it indicates that the owner never intended to remove that portion, so the removal costs would be expensed.

The same logic would apply to leasing.

If the lessee intended to remove a portion of the leasehold then (when initially measuring the right to use asset) it would have allocated a portion of the cost to the portion to be removed.

Further evidence of intent would be if the original lessee agreement discussed the demolition.

In the opposite case, if the demolition was discussed in an amendment to the original agreement, it is an indication that the lessee never intended to make that change.

Your third case would practically always be OPEX.

However, I must emphasize; since ASC 360 does not specifically address demolition costs, practice can vary.

In actual practice, I have run into auditors that have no problem with demolition costs always being recognized as CAPEX (even in the absence of intent). I have also run into those that always consider them to be OPEX.

In other words, proper accounting is determined ad hoc, on a case by case basis.  

Sorry I could not be more helpful.


105 Generally Accepted Accounting Principles

10 Overall

05 Overview and Background

05-3 Accounting and financial reporting practices not included in the Codification are nonauthoritative. Sources of nonauthoritative accounting guidance and literature include, for example, the following:

a. Practices that are widely recognized and prevalent either generally or in the industry

b. FASB Concepts Statements

c. American Institute of Certified Public Accountants (AICPA) Issues Papers

d. International Financial Reporting Standards of the International Accounting Standards Board

e. Pronouncements of professional associations or regulatory agencies

f. Technical Information Service Inquiries and Replies included in AICPA Technical Practice Aids

g. Accounting textbooks, handbooks, and articles.

The appropriateness of other sources of accounting guidance depends on its relevance to particular circumstances, the specificity of the guidance, the general recognition of the issuer or author as an authority, and the extent of its use in practice.

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