Assets under construction

What it means

Assets under construction are long-term assets that a company is acquiring but has not yet started to use. Examples are a hall being built, a production line being installed or software under development. They are recorded on account 041 for intangible and 042 for tangible fixed assets.

All costs connected with the acquisition are collected on these accounts: the purchase price, transport, installation, design and professional services. Together they make up the acquisition cost, which is transferred to the relevant asset account once the work is complete.

Assets under construction are not depreciated. Depreciation starts only when the asset is put into use, that is, when it is in a condition fit for use and has met its technical functions and the requirements of specific regulations.

How it works in practice

On larger projects we keep each investment on a separate analytical account so that it is clear what belongs to it. Advances to suppliers are recorded separately on accounts 051 and 052 and moved into the investment only once the delivery has been invoiced.

A company may include interest on an investment loan up to the date the asset is put into use in its acquisition cost, if its accounting policy says so. We proceed the same way with the technical improvement of an existing asset, which is accumulated as work in progress while it is carried out.

Before the financial statements we go through the list of assets under construction with the client and ask whether work on them is really continuing. If a project has stalled or been cancelled, we create an impairment allowance or write the investment off to expenses.

What to watch out for

The most common mistake is an asset that has been in use for years but still sits on account 042. The company forgoes depreciation it is entitled to, and in an audit the tax office examines when the asset was actually put to use. We therefore document the date with a handover record.

The opposite mistake is putting an unfinished asset into use just to start depreciating it sooner. If a building has no occupancy permit or a machine has not passed its tests, depreciation is not tax-deductible, and on a project with a grant a premature start date may also breach the grant conditions.