Construction in Progress (CIP)

Code: 1216
👁 Views: 13

Account Information

Financial Statement Statement of Financial Position
Normal Balance Debit

Definition

An account that accumulates capitalized costs for fixed assets still under construction and not yet operational. This includes material costs, labor, contractors, engineering fees, and interest during construction. Upon project completion, the balance is transferred to the appropriate fixed asset account (Buildings, Machinery, etc.).

Common Journal Entries

Capitalizing costs for a construction in progress project (materials, labor, subcontractors, etc.)

Dr. Construction in Progress
Cr. Bank / Suppliers / Subcontractors

Transferring completed construction in progress to the appropriate fixed asset account after commissioning

Dr. Buildings (or Machinery)
Cr. Construction in Progress

📐 IFRS vs US GAAP Accounting Treatment

IFRS IAS 16 Construction in Progress - Fixed Asset Under Construction
✅ Recognition Criteria

IFRS: CIP is recognized as a fixed asset under construction when construction begins. Depreciation begins only when the asset is complete and ready for use.

📏 Measurement Basis

IFRS: Cost includes materials, labor, direct costs, and capitalized borrowing costs. GAAP: Same elements with interest capitalization rules per ASC 835.

📝 Disclosure Requirements

IFRS: Disclose CIP movement during the period, capitalized borrowing costs, and any impairment losses. GAAP: Additional disclosures on impairment testing method.

📌 Example:
Example: A company builds a factory costing SAR 20M, with loan interest of SAR 2M during construction. IFRS and GAAP: Total asset cost = SAR 22M upon completion.
US GAAP ASC 360 CIP - Fixed Asset Under Construction (ASC 360)
✅ Recognition Criteria

GAAP: CIP recognized as fixed asset under construction when construction begins.

📏 Measurement Basis

GAAP: Cost includes materials, labor, direct costs, and capitalized interest.

📝 Disclosure Requirements

GAAP: Additional disclosures on impairment testing method.

📌 Example:
Example: Company building factory costing SAR 20M + interest SAR 2M. Total cost = SAR 22M.
⚠️ Key Difference Between IFRS and US GAAP

IFRS (IAS 16): Borrowing costs are capitalized during the construction period, and impairment testing is performed where indicators are present. GAAP (ASC 360): Impairment testing is performed using a two-step test, and interest is capitalized according to ASC 835.

❓ Frequently Asked Questions

Q: What is construction in progress (CIP)?

A: An account that accumulates capitalized costs for fixed assets still under construction and not yet operational, such as a factory being built.

Q: When is CIP transferred to the final fixed asset?

A: Upon project completion and readiness for use, the balance is transferred to the appropriate fixed asset account (buildings, machinery, etc.).