(paragraphs B55-B57)

BCZ245 In 2003, the IASB introduced into IAS 17 the requirement for a lessor to assess the classification of the land element of a lease separately from the buildings element. The Exposure Draft of the 2003 amendments had further proposed that, whenever necessary for the purposes of classification, the lease payments should be allocated between the land and building elements in proportion to their relative fair values at the inception of the lease. However, respondents to that Exposure Draft had questioned whether the relevant fair values were the fair values of the underlying land and buildings or the fair values of the leasehold interests in the land and buildings.

BCZ246 In redeliberating that Exposure Draft, the IASB noted that an allocation of the lease payments by reference to the relative fair values of the underlying land and buildings would not reflect the fact that land often has an indefinite economic life, and therefore would be expected to maintain its value beyond the lease term. In contrast, the future economic benefits of a building are likely to be used up, at the least to some extent, over the lease term. Therefore, it would be reasonable to expect that the lease payments relating to the building would be set at a level that enabled the lessor not only to make a return on initial investment, but also to recoup the value of the building used up over the term of the lease. In the case of land, the lessor would not normally need compensation for using up the land.