USA Items to capitalize

[DPT]

1. When a new building is constructed, what items are capitalized vs. expensed? For example, the painting of the building?

ty

 

[Counterofbeans]

The general rule for fixed assets is as follows:

You should capitalize all costs necessary to deliver the asset to its intended locations and prepare it for its productive use. This would include the paint in my mind.

Since you are talking about building construction, consider the following:

When it comes to a building, capitalized costs include those like:

-Demolition of preexisting structures occupying the land, as well as costs related to excavate, grade, or fill the land to get it ready for the new stucture
-Contact price paid to general contractors and subcontrators
-Architectural and engineering costs
-Building permits
-Costs of renovating a preexisting purchased building to convert it for use by the buyer.

Ordinary repairs and maintenance are expensed as incurred.

Hope that helps

 

[DPT]

The general rule for fixed assets is as follows:

You should capitalize all costs necessary to deliver the asset to its intended locations and prepare it for its productive use. This would include the paint in my mind.

Since you are talking about building construction, consider the following:

When it comes to a building, capitalized costs include those like:

-Demolition of preexisting structures occupying the land, as well as costs related to excavate, grade, or fill the land to get it ready for the new stucture
-Contact price paid to general contractors and subcontrators
-Architectural and engineering costs
-Building permits
-Costs of renovating a preexisting purchased building to convert it for use by the buyer.

Ordinary repairs and maintenance are expensed as incurred.

Hope that helps

It does. Ty! I recenly had this on a test. I treated as part of the building and depreciated it vs expensing it. Left the test wondering if I made the right decision.

 

[The Finance Writer]

Some expenditures during construction are not capitalized and depreciated, but very few. As usual, Counterofbeans has given sound detail that illuminates this matter -- i.e., "repairs and maintenance are expensed." Therefore, a payment to clear brush around a construction site could be a maintenance expense. However, clearing brush to prep the construction area is part of the capital cost. Even removing brush as part of the landscaping step is capitalized because landscaping is a capital item. That brings to mind a related point. Not all of the costs are depreciated over the same period as the building. Certain items are segregated for separate calculations of depreciation.

Notably, real estate taxes paid during construction are expensed, unless an election is made to capitalize them.

 

[continuelearning]

Dear all,
My apology. To add on to this topic, if I have a project (to develop a software), and we are hiring new internal employee/contractor to develop the software, can we capitalize the manpower cost?

Cause I am thinking, the manpower cost will be charge accordingly to Salary account etc (which is under opex), and can we reclass it to capex and capitalize when it is put in use??

Can we also capitalize if we engage and pay a 3rd party via online to build the prototype?

Thanks again and best regards,
Beng Chin

 

[The Finance Writer]

Dear all,
My apology. To add on to this topic, if I have a project (to develop a software), and we are hiring new internal employee/contractor to develop the software, can we capitalize the manpower cost?

Cause I am thinking, the manpower cost will be charge accordingly to Salary account etc (which is under opex), and can we reclass it to capex and capitalize when it is put in use??

Can we also capitalize if we engage and pay a 3rd party via online to build the prototype?

Thanks again and best regards,
Beng Chin

You definitely need to discuss this matter with your accountant... preferable one with audit experience in the software industry. Normally, software development costs are deductible expenses -- especially if the software is for internal use. However, development costs for marketable software are capitalized in some instances, particularly for companies with average annual revenue greater than $10 million for 3 years. However, a great deal of flexibility exists for determining when capitalized costs are amortized.

 

[Counterofbeans]

Dear all,
My apology. To add on to this topic, if I have a project (to develop a software), and we are hiring new internal employee/contractor to develop the software, can we capitalize the manpower cost?

Cause I am thinking, the manpower cost will be charge accordingly to Salary account etc (which is under opex), and can we reclass it to capex and capitalize when it is put in use??

Can we also capitalize if we engage and pay a 3rd party via online to build the prototype?

Thanks again and best regards,
Beng Chin

The answer to your question(s) is probably/overwhelmingly yes. We've been doing this for years. ASC 350-40 provides the guidance you are looking for.

Software must meet two criteria to be accounting for as internal-use software:

1. The software specs must be designed (or modified) to meet the reporting entity's
internal needs, including costs to customize purchased software.
2. The software can't be marketed externally.

If management concludes it is probable that the software will be completed and used as intended, you can justify capitalizing those costs.

In terms of when to start capitalizing costs, there's a bunch of mumbo-jumbo in the rules, but it really boils down to being PAST the point of project ALTERNATIVES. If you are considering alternatives, these costs are expensed immediately as R&D. Once you have chosen the software, however, rock and roll.

One thing to keep in mind is that it isn't just the payroll costs you get to capitalize, don't forget payroll related costs (i.e. benfits, taxes, etc.), as those can get capitalized as well.

The only other thing I can think of that can trip you up is training costs. These costs are expensed as incurred, not capitalized. This issue gets particularly fun when training costs are part of the software purchased from 3rd parties.

Hope that helps