This my short write-up is in response to the ongoing discussion on LinkedIn inspired by the Accounting Yard . Here is my submission on the subject.

Although depreciation helps recognise the depletion in value of an asset (otherwise called wear and tear), however, this is not the only reason we carry out depreciation. The main objective of depreciation is to spread the cost associated with a capital asset over it’s economic useful life. That’s why the standards says even when an asset is not in use, but as long as it is available for use, it should be depreciated. For example, if your backup office generator is not in use because the active one if functioning efficiently, will you or will you not charge depreciation? You must charge depreciation because it’s already available for use even if you haven’t used it once. Therefore, depreciation is more or less a systematic allocation of cost over an extended period of time known as the economic useful life of an asset.

Regarding whether land can be depreciated or not. In my opinion and from my experience, various issues have to be considered:

1. If it is a leasehold land, depreciation should be charged over the period of the lease agreement because ownership will eventually revert to the original owner.

2. For a freehold land, you must ask yourself this question: Can you predict with certainty the pattern and length of consumption of the value of the land? If NO, it is treated as an asset with indefinite lifespan, hence no depreciation should be charged. If your answer is YES, maybe due to natural phenomena like erosion, tsunami, climate change etc. that might render the land unfit for it’s intended purpose in the future, if you can assess this correctly, hence, land should be treated as asset with a definite lifespan and depreciation should be charged to Prifit or loss on a systematic basis over the years it will be in use.

Generally, you have to look at the underlying contract or natural phenomena to conclude whether to charge depreciation on land or not. In some European countries, land would eventually revert to government after certain number of years, hence, in this case, it’s logical to depreciate the land over those years. In Nigeria, at least for now, there is permanent ownership of land (except leasehold land), hence no depreciation should be charged.