Accounting for self-constructed assets means capturing every cost necessarily incurred to build the asset and ready it for its intended use, holding those costs in a Construction in Progress account while work is underway, transferring the accumulated total to a fixed asset account once the asset is ready for service, and depreciating that capitalized amount over its useful life. Under ASC 360-10-30-1, the recorded cost includes everything “necessarily incurred to bring it to the condition and location necessary for its intended use.” That capitalized total becomes the depreciable basis for the life of the asset, so errors at the front end follow the financial statements for years.
What Goes Into the Capitalized Cost
Direct materials and direct labor are the easy calls. Materials are the raw goods and components that physically become part of the finished asset. Labor is wages, payroll taxes, and benefits for people actually working on the build: welders, electricians, and the foremen supervising them. Fees paid to outside engineers, permit and inspection fees, and temporary utilities installed specifically for the site all qualify as well.
Overhead is where the judgment happens. Many textbooks describe allocating a share of fixed and variable overhead to a project, and that approach is common. The more conservative reading of current GAAP, consistent with the ASC 350-40 guidance for internal-use software, capitalizes only costs directly identifiable to the project. Occupancy expense for the office space used by engineers on the project, general accounting salaries, executive compensation, campus security, the CFO’s time reviewing budgets, and depreciation on equipment used part-time for construction all stay on the income statement. The company would incur those costs regardless of the project, so they are not “necessarily incurred” to build the asset.
Unexpected costs to complete the work generally qualify. Additional excavation, new permitting requirements, resolution of technical problems: these were necessary to finish the asset. Penalties and fines are different. Code violations and regulatory penalties were avoidable and did nothing to prepare the asset for use, so they are expensed.
Tracking Costs in Construction in Progress
Capitalized costs accumulate in a temporary balance sheet account called Construction in Progress (CIP). Nothing depreciates while costs sit in CIP because the asset is not yet in service.
Capitalization of non-interest costs begins when two things are true at the same time: you have started spending money on the asset, and activities to prepare it for use are underway. “Activities” is defined broadly. It covers physical construction and preconstruction steps like developing plans, obtaining government permits, and resolving unforeseen obstacles such as technical problems or labor disputes.
When construction wraps up and the asset is ready for its intended purpose, the full CIP balance transfers to the appropriate fixed asset account. That transferred amount is the historical cost and the starting point for depreciation.
Capitalizing Interest During Construction
If an asset takes a substantial period to build, interest your company incurs during that period because of the construction spending becomes part of the asset’s cost rather than a current expense. This is the piece where the largest dollar errors tend to happen.
When Interest Capitalization Starts and Stops
Under ASC 835-20-25-3, interest capitalization begins when three conditions are all present at once: you have actually spent money on the project (cash basis, not accrual, unless your accruals bear interest); construction activities to prepare the asset for its intended use are underway; and your company has outstanding debt generating interest expense.
Capitalization continues as long as all three conditions hold. It stops when the asset is substantially complete and ready for use, whether or not you actually put it into service. An intentional, extended suspension of construction also stops the clock. Brief interruptions, delays from outside forces like weather, and pauses inherent in the construction process do not.
For assets completed in stages, capitalization stops on each portion as it becomes independently usable, even if work continues elsewhere on the overall project.
Calculating the Amount
The goal is to capitalize the interest your company could have avoided if it had never started the project. Start with average accumulated expenditures for the period, weighting each payment by the fraction of the capitalization period it was outstanding. An expenditure made on April 1 for a project running through December 31 is weighted by 9/12; one made on October 1 is weighted by 3/12. The sum of those weighted amounts is the base you apply an interest rate to.
The rate follows a two-tier approach. If your company borrowed specifically to finance this construction, apply that specific rate to the portion of accumulated expenditures the specific borrowing covers. Any excess of accumulated expenditures over the specific borrowing is treated as if funded by general borrowings, and you apply a weighted-average rate on all other outstanding debt (total general interest expense divided by total general principal) to the excess.
One cap applies without exception: total interest capitalized for the period can never exceed the total interest actually incurred that period.
Required Disclosure
Your financial statements must disclose both the total interest incurred during the period and the portion capitalized. That disclosure lets readers see how much reported interest expense was shifted to the balance sheet.
Section 263A: The Tax Layer
Book accounting and tax accounting diverge sharply here. Section 263A of the Internal Revenue Code imposes the Uniform Capitalization rules on any real or tangible personal property a taxpayer produces, with “produce” defined to include constructing, building, installing, and manufacturing.1Office of the Law Revision Counsel. 26 USC 263A – Capitalization and Inclusion in Inventory Costs of Certain Expenses
Section 263A requires capitalizing both direct costs and a proper share of indirect costs allocable to the property. The catch is that the indirect costs required for tax purposes are broader than what GAAP requires, and can include certain administrative costs, insurance, and taxes tied to the production activity. Overhead you legitimately expensed for book purposes may still need to be capitalized on the tax return, creating a book-tax difference.2Office of the Law Revision Counsel. 26 USC 263A – Capitalization and Inclusion in Inventory Costs of Certain Expenses
Small businesses get relief. Section 263A does not apply to taxpayers (other than tax shelters) that meet the gross receipts test under Section 448(c). That threshold is inflation-adjusted; for the 2024 tax year, it was $30 million in average annual gross receipts over the three preceding years, and it continues to increase in later years.1Office of the Law Revision Counsel. 26 USC 263A – Capitalization and Inclusion in Inventory Costs of Certain Expenses Below the line, you follow your regular accounting method without the extra 263A layer.
Depreciation Once the Asset Is in Service
When the asset moves out of CIP into a fixed asset account, depreciation begins. The full capitalized cost, including any capitalized interest, is the depreciable basis.
Book Depreciation
Management picks a useful life, a salvage value, and a method. Straight-line is the most common: subtract salvage from cost, divide by useful life, expense the same amount each year. Accelerated methods like double-declining balance shift more of the expense into early years and can better match revenue patterns for assets that lose productivity over time.
Complex assets like buildings may warrant component depreciation. Rather than treating the whole structure as one unit, you break it into major components: roof, HVAC, structural shell, elevator. Each component gets its own useful life and schedule. A roof with a 20-year life wears out much faster than a concrete foundation with a 50-year life, and separating them produces a more accurate expense pattern.
Tax Depreciation Under MACRS
For tax purposes, depreciation follows the Modified Accelerated Cost Recovery System. MACRS assigns property to a recovery class: 7-year property, 15-year property, 39-year nonresidential real property, and so on. The placed-in-service date, when the property is ready and available for a specific use, starts the depreciation clock, and it does not have to be the date you actually begin using the asset.3Internal Revenue Service. Publication 946 – How To Depreciate Property MACRS recovery periods and methods frequently differ from the useful lives and methods chosen for book purposes, producing another common book-tax difference.
Costs After the Asset Is in Use
Money spent on the asset after it enters service falls into one of two buckets. Routine maintenance and repairs that keep the asset in its current operating condition are expensed immediately. Replacing air filters, repainting walls, and fixing a broken window are all period costs.
Capitalization is appropriate only when the spending extends the asset’s remaining life or increases its functionality. Adding a second production line to a manufacturing facility qualifies. So does a major overhaul that adds years of useful life. Converting an asset from one use to another, such as retooling a tire machine to make a different model, typically does not.
Asset Retirement Obligations Baked Into Cost
Some self-constructed assets carry a legal obligation to dismantle, remove, or remediate the site at the end of their lives. A manufacturing plant on contaminated land, a wind turbine with a decommissioning requirement, or a leased building with a contractual restoration clause are common examples. Under ASC 410-20, these asset retirement obligations must be recognized as a liability at fair value when the obligation is incurred and can be reasonably estimated.
The initial fair value of the obligation is added to the carrying amount of the related asset, increasing the depreciable basis. That added cost depreciates over the asset’s useful life along with everything else capitalized. The liability accretes over time using an expected present value technique until the retirement date, when the actual costs are incurred. Skipping this step at the outset understates both the asset and the long-term liability.
Watching for Impairment
A self-constructed asset can lose value like any other. Under ASC 360-10, a long-lived asset must be evaluated for impairment whenever a triggering event suggests the carrying amount may not be recoverable. Common triggers include:
- A significant drop in the asset’s market price
- A major adverse change in how the asset is used or in its physical condition
- An unfavorable shift in the legal or business environment
- Construction costs that significantly exceeded the original budget
- Ongoing operating or cash flow losses tied to the asset
US GAAP uses a two-step process. First, compare the asset’s carrying amount to the total undiscounted future cash flows you expect it to generate through use and eventual disposal. If undiscounted cash flows exceed carrying amount, no write-down is needed.4Deloitte Accounting Research Tool. Measurement of an Impairment Loss
If carrying amount exceeds undiscounted cash flows, measure the impairment loss as the difference between carrying value and fair value. Write the asset down to fair value and recognize the loss on the income statement. Once recorded, an impairment loss on a long-lived asset cannot be reversed under US GAAP, even if the asset’s value recovers.4Deloitte Accounting Research Tool. Measurement of an Impairment Loss
Pay particular attention to the cost-overrun trigger for self-constructed assets. A significant budget overrun is itself a signal the asset may already be impaired before it ever enters service. Testing early prevents carrying an inflated value forward for years.
Internal-Use Software: A Variant
Software built for internal use follows a parallel but different framework under ASC 350-40. Costs are grouped by the stage of development, and treatment depends on the stage:
- Preliminary project stage (research, planning, feasibility): expense as incurred.
- Application development stage (coding, design, installation, testing): capitalize directly identifiable costs like developer payroll for time spent on the project, third-party service fees, and applicable interest. General overhead and training are not capitalized.
- Post-implementation stage (training users, routine maintenance, minor updates): expense as incurred.
Where IFRS Numbers Diverge
If your organization reports under both US GAAP and IFRS, several rules produce different numbers for the same self-constructed asset. IAS 16 uses the same general capitalization principle but expressly excludes abnormal waste (unusually high amounts of wasted materials, labor, or other resources) and prohibits capitalizing any internal profit; a markup charged by an in-house division must be stripped out.5IFRS Foundation. IAS 16 Property, Plant and Equipment
Under IAS 23, if you borrow specifically for a project and temporarily invest the unused funds, you offset investment income against borrowing costs; US GAAP generally does not permit that offset. IAS 23 also treats exchange rate differences on foreign currency borrowings as eligible borrowing costs, while US GAAP excludes them.
Component depreciation is mandatory under IFRS: every significant part of an asset with a different useful life is depreciated separately.5IFRS Foundation. IAS 16 Property, Plant and Equipment US GAAP permits it but does not require it. IAS 36 skips the undiscounted cash flow screen and compares carrying amount directly to recoverable amount (the higher of fair value less costs of disposal and value in use), and IFRS allows the reversal of impairment losses on long-lived assets other than goodwill if conditions later improve.