Leasehold Land Accounting
Why the land beneath a company's own factory, which it has used and controlled for decades and will keep using for decades more, might not actually count as land the company 'owns' at all, under strict accounting rules.
In plain English
Across India, a huge number of factories, refineries, and industrial facilities don't actually sit on land the company owns outright — they sit on land LEASED, often for 30, 60, or even 99 years, from a state industrial development corporation, a port trust, or another government body. From a practical, day-to-day operating standpoint, this feels almost identical to ownership: the company has exclusive, long-term control of that land, has often built enormously valuable, permanent structures on it, and has no realistic prospect of the land being taken back mid-lease. But accounting draws a firm, technical line here — however long and secure the arrangement, leasehold land is fundamentally a LEASE, not owned land, and it gets accounted for using lease accounting rules, not the straightforward 'freehold asset' treatment a company would use for land it genuinely owns.
Words you'll need first
Land a company owns outright, with no expiry date on its ownership and no ongoing rental obligation to anyone. Freehold land is a genuinely unique asset in accounting: unlike almost every other Property, Plant & Equipment item, it is NOT depreciated at all, since land itself is generally considered to have an indefinite useful life.
Land held under a long-term lease arrangement — even a genuinely very long one, like 99 years — rather than owned outright. Since Ind AS 116 came into effect, leasehold land is treated exactly like any other lease: the company recognises a Right-of-Use asset and a corresponding Lease Liability, with the ROU asset then DEPRECIATED over the lease term — a genuinely important contrast to freehold land, which is never depreciated at all.
A worked example, with numbers
| Item | If FREEHOLD (hypothetical) | ACTUAL treatment (leasehold, 99-year) |
|---|---|---|
| Balance sheet classification | Freehold Land (PP&E), at cost | Right-of-Use Asset, at present value of lease payments |
| Annual depreciation | ₹0 — land is never depreciated | ≈₹0.5 crore/year (₹50 cr ÷ 99 years) |
| P&L impact | None from the land itself, ever | Ongoing depreciation expense every year for 99 years, plus interest on the Lease Liability |
- Even though a 99-year lease is, in almost every practical sense, indistinguishable from ownership, the accounting treatment is genuinely, materially different: the leasehold land gets DEPRECIATED, roughly ₹0.5 crore a year across the full 99-year term, while equivalent freehold land would show zero depreciation, ever.
- Over the very long term, this means the leasehold land's carrying value gradually shrinks toward zero as the 99-year term runs down, even though the land itself obviously isn't physically 'wearing out'.
- The company also recognises a Lease Liability for the discounted value of the ongoing nominal ground rent, though this is often small given the rent itself is usually nominal compared to the large upfront premium already paid.
- Two companies with operationally identical, decades-long secure land rights can show very different balance sheet TREATMENT of that land depending on whether it happens to be freehold or leasehold, even though the underlying operational reality is essentially the same.
What it does to the financial statements
Impact on the P&L
- Leasehold land creates an ongoing depreciation charge that freehold land never does — a real, if often small in any single year, drag on reported profit that persists for the entire, sometimes very long, lease term.
- Two operationally similar manufacturing companies, one on freehold land and one on long-term leasehold land, can show genuinely different reported profit purely from this specific accounting distinction.
- For very long leases, the annual depreciation charge on the land itself tends to be relatively modest given the long amortisation period, but it is a real, permanent, recurring feature of the P&L.
- If a leasehold arrangement is ever renewed or extended, this typically requires a reassessment of the Right-of-Use asset and Lease Liability, similar to a lease modification under the broader Lease Accounting rules.
Impact on the Balance Sheet
- Leasehold land sits within Right-of-Use assets rather than within Freehold Land, and its carrying value declines over time through depreciation, unlike freehold land's permanently undepreciated carrying value.
- A company's total reported land value can genuinely understate the ECONOMIC value of the land it operationally controls if a large portion is leasehold and has been substantially depreciated over a long lease term.
- For companies with significant leasehold land holdings, the notes typically disclose the specific lease terms and the split between freehold and leasehold land within the total reported land figure.
- Fixed Asset Turnover and other asset-intensity ratios can be affected by whether a company's land base is predominantly freehold or leasehold, a genuine structural factor worth checking when comparing capital-intensive industrial companies.
Which standard covers this
In India, since the adoption of Ind AS 116 – Leases, long-term leasehold land arrangements are generally brought within the standard lease accounting framework, recognised as a Right-of-Use asset and Lease Liability, distinct from the treatment of freehold land under Ind AS 16 – Property, Plant and Equipment.
How it's recognised globally
Globally, the equivalent principle sits within IFRS 16, and Ind AS 116 mirrors its treatment of long-term land leases as leases requiring Right-of-Use asset recognition and depreciation, closely — this specific issue has historically been debated in accounting standard-setting circles internationally, given how economically close a 99-year lease can feel to outright ownership, but the current global consensus treats it firmly as a lease requiring this specific accounting. Under US GAAP's ASC 842, a broadly similar approach applies to long-term land leases.
Real example — Indian listed company
Maruti Suzuki India, whose major manufacturing plants at Gurugram and Manesar in Haryana sit on land allotted and leased by Haryana state industrial development authorities rather than land the company owns outright in freehold, is a natural, real Indian illustration of leasehold land accounting at meaningful industrial scale. This kind of arrangement — a large manufacturer operating on long-term leasehold industrial land allotted by a state government body, a very common structure across Indian industrial estates, SEZs, and dedicated manufacturing zones — is precisely the scenario this article describes, where land that feels, operationally, indistinguishable from outright ownership is nonetheless accounted for through the Right-of-Use asset and depreciation framework this article sets out, rather than as permanently undepreciated freehold land.
Where you'll see this
Related concepts
Inventory Valuation
Why two companies holding the exact same 1,000 sacks of rice in their warehouse can report two different profit numbers — just from how they count the cost of what was sold.
Depreciation Methods
Why the exact same ₹10 crore machine can show a different profit impact every year for a decade, depending on nothing more than which depreciation method a company picked on day one.
Borrowing Costs Capitalisation
Why the interest a company pays on a loan taken to build a new factory doesn't always show up as an 'interest expense' in the P&L — sometimes it quietly becomes part of the factory's cost instead.