Do You Depreciate Construction in Progress?

Construction in Progress (CIP) represents a balance sheet asset that captures the costs accumulated for a long-term asset currently under construction or development. It includes all expenditures directly related to building or acquiring an asset, such as a new facility or significant machinery, before it is ready for its intended use. This classification accurately reflects a company’s investment in ongoing projects.

Understanding Construction in Progress

Construction in Progress encompasses all direct and indirect costs incurred during the creation of a long-term asset. This includes the cost of materials, direct labor, and certain overhead expenses. Interest costs on borrowed funds can also be capitalized as part of CIP. During this phase, the asset is not yet operational, nor is it generating revenue or contributing to production capacity. Assets designated as CIP are not subject to depreciation.

Criteria for Depreciation

For an asset to be depreciated, it must meet specific accounting and tax requirements. These include a determinable useful life, use in a business or for income production, and being subject to wear, tear, obsolescence, or depletion. Construction in Progress does not meet these criteria because it is not yet complete or available for its intended use. Until the asset is ready for its function, its useful life for generating income has not begun, so its cost cannot be systematically allocated through depreciation.

Placing Assets in Service

Construction in Progress transitions into a depreciable asset when it is “placed in service.” An asset is placed in service when it is ready and available for its specific use, even if not actively used. At this point, accumulated CIP costs are reclassified to the appropriate fixed asset account, such as “Buildings” or “Machinery.” Depreciation begins only after this reclassification occurs. To initiate depreciation, the total capitalized cost, estimated useful life, and any estimated salvage value are necessary.

Accounting for Construction in Progress Costs

Construction in Progress is recorded as a non-current asset on the balance sheet within the Property, Plant, and Equipment section. All project costs are accumulated in this CIP account throughout the construction period. Upon completion and when the asset is placed in service, these accumulated costs are transferred from the CIP account to a permanent fixed asset account, forming the basis for future depreciation.