In this article, let us have a closer look at the right of superficies and its accounting treatment to be applied by both the structure owner and the land owner under Czech accounting legislation. The right of superficies was incorporated into the Czech legal system by way of Act No. 89/2012 Coll., the Civil Code (hereinafter “NCC”) effective from 1 January 2014.
As part of general property law, the right of superficies is stipulated in Chapter “Right in Rem”, Sections 1240 – 1260 of NCC. The right of superficies was introduced in connection with the superficies solo credit principle, pursuant to which land prevails over a structure. In the event that the owner of a structure is the same as the owner of land, the structure “unites” with the land. The purpose of the right of superficies is to enable both the construction and ownership of structures for persons that are different from the owner(s) of land.
The right of superficies is established against land for the following purposes:
- Construction of new structures;
- Repair or technical improvement of existing structures;
- Blocking: the owner of the right of superficies makes construction on a piece of land impossible; and
- Acquisition for the purpose of resale.
Pursuant to NCC, the right of superficies is an immovable asset that is recorded in the land cadastre and originates when the record is made. The right of superficies represents a temporary limitation of disposal of land for up to 99 years, unless agreed otherwise. At the point the right of superficies ceases to exist, its value is nil.
The land owner may agree with the structure owner that, at the point the right of superficies expires as a result of lapse of time for which the right was provided, the structure owner shall either transfer the structure to the land owner or remove the structure. In the event that that the structure gets transferred, the structure owner shall be entitled to compensation under NCC that equals a half of the structure’s value, unless agreed otherwise.
Accounting Implications of the Right of Superficies
As the Czech accounting regulations do not stipulate a precise treatment of the right of superficies, the legal treatment stipulated in NCC is taken into consideration. The right of superficies is stipulated by the following accounting regulations: Regulation No. 500/2002 Coll., which provides implementation guidance on certain provisions of Accounting Act No. 563/1991 Coll., as amended, for reporting entities maintaining double-entry accounting records (hereinafter the “Regulation”); and correspondingly also Regulation No. 504/2002 Coll., for reporting entities the principal activities of which do not include business. The treatment stipulated by the Regulations is described below.
The treatment of the right of superficies stipulated by the relevant regulation is as follows:
Section 7 Tangible Fixed Assets
(2) Item “B.II.1.2. – Structures”, includes the following, regardless of the valuation amount and the useful life:
a) Structures including buildings, mining structures and subterranean mining structures, water structures, and other construction structures under special legislation; and
b) The right of superficies, unless it represents goods.
(3) The valuation of the right of superficies does not include the structure that satisfies the right of superficies. In the event that upon the acquisition of the right of superficies that is valued at one certain amount and that includes a structure, which satisfies the right of superficies and which was constructed by another reporting entity or person, the value of the right of superficies shall be divided into a portion corresponding with the structure and another portion corresponding with the right of superficies, under the materiality principle and under the principle of a true and fair view of both portions of the right of superficies.
(5) Structures that satisfy the right of superficies under Section 47 (3) which are accounted for in standalone accounts shall be depreciated separately.
Accounting Treatment Applied by the Structure Owner
Accounting Act No. 563/1991 Coll. (hereinafter “AA”) determines the method of valuation, recognition and depreciation (if relevant) of immovable assets, that is land, structures, and the right of superficies, regardless of how they are stipulated by the Civil Code. This means that, just as land and structures shall always be reported and valued on a standalone (separate) basis, so shall the right of superficies as such and the structure satisfying the right of superficies be reported separately. Thus, in valuating the right of superficies, the value shall not include the structure itself. The right of superficies shall be reported and valued separately. Also, the right of superficies shall be depreciated separately, pursuant to the time over which the right exists.
The right of superficies shall be reported in balance sheet line B.II.1.2. – “Structures”, regardless of its value.
Upon acquisition, the right of superficies is either valued at acquisition cost (if acquired for compensation), or at replacement cost (if acquired without consideration, such as inheritance or donations).
The acquisition cost can be comprised as follows:
- The agreed price including incidental costs related to the acquisition, such as costs of contract conclusion, fees paid for recording the right of superficies in the cadastre, and the like; or
- The sum of individual consideration payments to be made including the incidental costs related to the acquisition.
In the event that the valuation is determined based on the sum of individual consideration payments, the valuation amount is an amount to be regularly paid, in which no indexation is included as it is uncertain at the point the right of superficies is acquired. Thus, in line with the prudence concept, the indexation shall not be included in the acquisition cost.
The structure owner shall record the right of superficies as part of its assets at cost including the incidental costs related to the acquisition. In the event that the right of superficies is valued in an amount equalling the agreed compensation, the valuation shall be made in the amount of the compensation and the amount of the relating costs (such as costs of the fees for recording in the land cadastre, costs of legal counsel, and the like). In the event that the valuation is made based on the compensation payments to be made, the value shall be determined based on the sum of the agreed compensation payments (ie without “uncertain” indexation).The point of recording the right of superficies under an entity’s assets is the point at which the right was recorded in the land cadastre. Also, the date of recording in the land cadastre is the date at which depreciation starts. Depreciation for accounting purposes shall be made regularly, over the existence of the right of superficies. Both the right of superficies and the structure itself are depreciated separately.
Individual consideration payments to be made will be reported with a corresponding entry in the relevant payable account. Indexation shall be treated as an expense for the relevant period to which it relates; at the same time, the corresponding payable will increase by this amount. The (increased) consideration payment made will be accounted for with a corresponding record of the increased payable.
For financial reporting purposes, the reporting entity shall differentiate the short-term and long-term portion of the payable arising from the acquisition of the right of superficies.
Accounting Treatment Applied by the Land Owner
The land owner shall report the relevant piece of land in a special sub-ledger account so as to separate land with limited disposal options, in line with Czech Accounting Standard No. 001 (2.2.1.a).
The land owner shall report the compensation for providing the right of superficies (regardless of the method of determining the compensation, that is, either as one-off compensation, as compensation instalments, or as regular compensation payments) in income on an accrual basis, over the time for which the right of superficies was provided. For the event of a one-off compensation, instalments, or partial regular compensation payments, the summarised agreed amount for the provided right of superficies will be accounted for on an accrual basis, over the existence of the right of superficies, regardless of the amount of payments actually made. In the event of a regular compensation payment made annually, the compensation payment will be reported in the reporting period to which it relates. Also, indexation will be reflected in line with the accrual principle.
If it has been agreed that subsequent to the expiry of the right of superficies, the structure owner shall remove the structure, there are no other accounting implications for the land owner. As such, the land owner shall solely reclassify the land back from the separate sub-ledger account to another sub-ledger account reflecting pieces of land for which no right of superficies was established. If it has been agreed that subsequent to the expiry of the right of superficies, the structure shall be transferred back to the land owner, the land owner shall make a compensation payment to the structure owner in an amount that is to be treated as the acquisition cost by the land owner. Alternatively, the transfer can be made without consideration (valuation at replacement cost). As this transaction has tax implications, it is recommended that the set-up of such an agreement be discussed with tax advisors.
The article is part of dReport – August 2019, Accounting news.