Assets Under Construction

Accounting for Assets Under Construction

Capital projects can be fairly small, running for just a few weeks, or involve huge resources and run for years with multi-million pound budgets. Many types of organisations run capital projects, whether it is to construct a new wing for a hospital building, a retail company refurbing a retail property, or a construction project to set up a new production facility. No matter what size a capital project is, it is always important to manage the expenses involved in these projects and account for the fixed asset element in a timely and appropriate way. The capital expense involved in these projects is often referred to as Assets Under Construction (AUC), Work in Progress (WIP), or Construction in Progress (CIP).

Types of Assets Under Construction

Even within a single project, there may be a large number of types of AUC. Anything ranging from one-off invoices for a computer or piece of furniture, to many invoices over a period of time relating to building a new property, such as surveyors fees, roofing materials, timber, labour and inspection fees. The thing they have in common is that they are deemed to be ‘not in use’ until the project, or a least a portion of the project, is no longer incomplete.

When to capitalise?

There is sometimes confusion as to when the fixed asset elements of your project should be capitalised. When you decide to capitalise an expense should not dictate when you start depreciating the assets. These are two different things. Capitalisation is when you want this capital expense to appear on your balance sheet, usually under a separate AUC or CIP account. This may often be as soon as the invoices are received. After all, you have incurred the cost and own the items and they usually add value to the business, even in their rawest form and before they start being used. Typically, these AUC assets will be capitalised but not start depreciating until they go into use. At this point, the fixed assets should be transferred out of their AUC category and into their live category, triggering the start of depreciation.

Moving AUC to Live

In an ideal world, when invoices start to flow in against a project they would be neatly allocated to a specific subcategory, for instance, computers, furniture, buildings etc, even if their main category is AUC. Invoices would also be identified as relating to a specific fixed asset, rather than a general pool. If this happens, the task of moving these into a live category upon project completion is simple. The subcategory helps identify which main category they go to and no further analysis is needed. Of course, things aren’t always that simple. General expenses built up under an AUC or WIP account may need to be reviewed in detail, either at specific project completion stages or when the entire project goes live and then allocated out to a variety of different asset types, departments etc. This can be quite a time-consuming task if the right information isn’t available.

Other considerations

This article has focused on how to account for AUC in your fixed asset register, however, there needs to be a good control of overall project expenses from the start. From the planning and commitment stage, through to actual spend, the correct control should be in place early on, using appropriate systems to provide good quality, timely information. This will help ensure budgets are adhered to and spending doesn’t spiral out of control.

Some fixed asset registers will help you set basic budgets for projects, breaking them down maybe by asset types or cost centres. This will help you keep an eye on the total capital spend compared to original budgets. However, all organisations will need to ensure they have controls in place at the earlier, commitment stage too.