OGH on the accounting for building demolition costs
The costs of demolishing buildings that have been in the company's assets for a longer period of time cannot be capitalized in the balance sheet as subsequent production costs of land, but represent an expense.
The plaintiff - a construction, housing and settlement cooperative - erected a new residential complex next to one of its outdated residential buildings. The respective dilapidated older buildings were occupied by the old tenants until the new buildings were completed. After the existing tenants moved into the new building, the old buildings were demolished. The demolition costs of the old buildings were capitalized as incidental land costs on the valuations of the land of the respective properties. Because of this capitalization, the defendants - as auditors of the financial statements - issued only a qualified audit opinion.
The plaintiff then requested a declaration that such demolition costs were to be capitalized as subsequent production costs of the new asset "land". They were not considered to be incidental acquisition costs.
The defendants opposed this decision on the grounds that the demolition costs would have had to be expensed immediately - in the respective financial year. The demolition costs could not constitute subsequent production costs. By capitalizing the demolition costs, the applicant would report too high an equity capital.
After the lower courts had rejected the application, the Austrian Supreme Court (Oberster Gerichtshof, OGH) had to clarify the question of whether the demolition costs in question were to be recognized as an expense or as a production cost for land under accounting law. The OGH first cited the case law of the Supreme Administrative Court (Verwaltungsgerichtshof, VwGH), which rejected the capitalization of such demolition costs under tax law (!). This must also apply to accounting under company law, because the "creation of the undeveloped state" of the property through the demolition of the old buildings only restored the original state of this asset. The asset "land" had not been affected at all by the demolition, which meant that the demolition had to be recognized as an expense.
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