Site Improvements

This is the third post in a series discussing the basic components of a purchase price allocation study under ASC 805 or IFRS 3 accounting guidance.

Site improvements, also known as land improvements, are all the horizontal improvements made on the land such as parking lots, landscaping, swimming pools, paving, signage, etc.  This category of assets is generally small, representing only 3 to 4 percent of the total property value on average.  Never-the-less, it requires some attention and has an effect on depreciation expense since these assets typically have shorter lives than building improvements.

The industry-standard methodology for establishing the value of these assets is the depreciated replacement cost.  This analysis requires that you consider the current cost to replace the assets (as opposed to the actual historical cost when they were built) and then to reduce that amount by the level of physical depreciation that has occurred.  Keep in mind that physical depreciation is not the same as the depreciation accountants generally think about.  Look for evidence of the current condition of the asset and the level of maintenance that has been done when deciding how depreciated it is.

Here is what the typical math looks like for a 100-space parking lot:

Say the cost to build a new parking lot is $1,400/space x 100 spaces = $140,000 in your local area.  This is considered the "replacement cost new."

The parking lot is 5 years old versus a 20 year useful life and hasn't had any significant work done to it since installation, so physical depreciation is roughly 25% (5yrs/20yrs) or $35,000.  Deducting the depreciated amount leaves $105,000 -- which is referred to as the "depreciated replacement cost new" and is the value that would be reported as the current fair value.

Most preparers and reviewers utilize Core Logic's Marshall & Swift building cost data, so this is your best source to limit the time required in your audit review, especially if you don't have your own in-house construction cost estimators.