In short
When several assets are bought together for one price, such as land and a building, the total cost is allocated to each asset in proportion to its relative fair value.
Key takeaways
- The allocation matters because land isn't depreciated while buildings are.
- Appraisals or tax assessments are common evidence of relative values.
- If only one asset's fair value is known, the rest of the price may go to the other asset.
Example
$900,000 paid for land worth $300,000 and a building worth $700,000: land gets 30% ($270,000) and the building 70% ($630,000).
Where it's tested
FAR: Property, Plant & Equipment — study notes, a five-minute revision sheet and practice questions.
Practise: 3 questions
Question 1 of 3 · 0 answered
Under US GAAP, a long-lived asset held for use is tested for impairment. The carrying value is $500,000, undiscounted future net cash flows are $520,000, and fair value is $460,000. What impairment loss, if any, should be recognized?