Accounting for Self-Constructed Assets and Capitalization of Internal Costs

✦ Self-constructed assets are long-lived assets built by a company for its own use, requiring the accumulation of all direct and certain indirect costs during construction.

✦ Under US GAAP, capitalization includes materials, labor, and applicable overhead, while general administrative and selling costs are excluded.

✦ Interest costs during the construction period must also be capitalized under ASC 835-20 if the asset qualifies.

✦ Proper accounting ensures assets are not overstated and that related costs are matched to the asset’s useful life.

1. What Are Self-Constructed Assets?

✦ These are tangible or intangible assets that a company builds internally, rather than purchasing externally.

✦ Examples include:

 • Manufacturing facilities

 • Corporate offices

 • Custom software developed for internal use

✦ The accounting focus is on capturing and capitalizing all construction-related costs incurred until the asset is ready for use.

2. Costs to Be Capitalized

✦ Capitalizable costs include:

 • Direct materials and supplies used in construction

 • Direct labor, such as construction personnel wages

 • Incremental supervision or engineering costs

 • Applicable construction-related overhead (factory rent, equipment depreciation)

✦ Costs must be clearly attributable to the asset being constructed.

3. Costs to Be Expensed

✦ General corporate overhead and unrelated costs are not capitalized.

✦ These include:

 • Administrative salaries

 • Marketing and selling expenses

 • Idle equipment or inefficiencies

✦ All such costs must be charged to expense in the period incurred.

4. Journal Entry — Accumulating Costs

Example:

• Materials purchased = $100,000

• Direct labor = $75,000

• Capitalizable overhead = $25,000

Entry:

debit Construction in Progress – $200,000

 credit Accounts Payable / Wages Payable – $200,000

5. Capitalization of Interest Costs

✦ Under ASC 835-20, interest incurred on borrowings for construction must be capitalized during the active construction period.

✦ Conditions:

 • Construction must be ongoing and asset must require time to get ready for intended use

 • Capitalization ends when asset is substantially complete

✦ Only interest on debt related to the construction, or a portion of general debt, is included.

6. Journal Entry — Capitalized Interest

Example:

• Interest incurred on debt = $30,000

• Capitalizable portion = $18,000

Entry:

debit Construction in Progress – $18,000

 credit Interest Expense – $18,000

7. Completion and Transfer to Fixed Assets

✦ Once construction is complete, reclassify the asset from Construction in Progress (CIP) to the appropriate fixed asset account.

✦ Begin depreciation from the date the asset is placed into service.

Entry:

debit Building / Equipment – $X

 credit Construction in Progress – $X

8. Disclosure Requirements

✦ Disclose the nature and amount of capitalized costs, especially:

 • Interest capitalized during the period

 • Construction in progress balance at year-end

 • Estimated completion dates if material

✦ Explain accounting policy for capitalizing internal costs in the footnotes.

9. Common Errors

✦ Capitalizing general administrative or overhead expenses not tied to construction

✦ Continuing capitalization after asset is substantially complete

✦ Omitting interest capitalization for qualifying assets

✦ Not tracking costs separately by project or component

✦ Failing to initiate depreciation once asset is in use