12.6 Summary of accounting for development and construction costs

Figure UP 12-3 summarizes general accounting guidance for costs that are typical in utility and power construction. This summary is provided for informational purposes only and should be considered in the context of the applicable guidance and specific facts and circumstances. It should also be read in conjunction with the guidance provided in UP 12.2.

Figure UP 12-3
Accounting for development and construction costs Type of cost Preliminary Pre-acquisition Construction Considerations Construction labor and other direct costs of construction Capitalize Capitalize

Labor and related direct costs should be expensed until the project is probable. Costs that are direct and clearly incremental should be capitalized once the project is probable and during the construction phase.

Consulting fees (e.g., engineering, architectural studies) It depends It depends

Fees should be expensed until the project is probable. Once the project is probable, directly identifiable costs may be capitalized. The amount capitalized should be limited to those amounts directly related to the site and project selected (e.g., costs related to evaluation of potential projects or locations should be expensed).

Contribution to local community organization or other similar gift made as a precondition to obtaining necessary permits or licenses

It depends It depends

Contributions should be expensed in the period made unless they are exchange transactions for the purchase of a good or service. Contributions made in exchange for a required license or permit may qualify for capitalization. See UP 12.2.1.3 and PPE 1.2.1.3

Demolition costs It depends It depends It depends

Demolition costs should be expensed as incurred, except in certain situations when incurred in conjunction with an acquisition or lease of real estate. See PPE 1.2.1.3.

Due diligence fees It depends It depends See discussion under “Consulting fees” above. Engineering, procurement, and construction contract costs Capitalize Capitalize

Direct costs of construction should be capitalized. Indirect costs and overhead of the EPC contractor may also be capitalized as part of the direct costs of construction because such amounts are considered an incremental direct cost.

Feasibility studies It depends It depends See discussion under “Consulting fees” above. Ground lease expense Generally expense

Capitalization of ground lease expense by a lessee for property constructed for its own use is prohibited. However, ground lease expense should be capitalized during the construction of property for sale or rental. See UP 12.2.2 and PPE 1.7.5.

Interest costs Capitalize Capitalize

Interest costs should be capitalized in accordance with the criteria in ASC 835-20. See UP 12.2.1.3 and PPE 1.3.

Land option Capitalize Capitalize Capitalize

The proposed PP&E SOP and ASC 970-340-25-3 specifically permit capitalization of land options, even during the preliminary stage when the project is not yet probable. Amounts paid should subsequently be accounted for at the lower of cost or fair value, less cost to sell. See UP 12.2.1.2 and PPE 1.2.1.2.

Legal fees It depends It depends See discussion under “Consulting fees” above. Materials and supplies Capitalize Capitalize Capitalize

Materials and supplies should generally be expensed during the preliminary stage unless they have an alternative use (e.g., inventory). The accounting for materials and supplies should be accounted for in accordance with the reporting entity’s policy for similar items. Such amounts for power and utility companies are usually capitalized and should be carried at the lower of cost and net realizable value. See UP 12.2.4 and UP 11.2.

Operating contract negotiation (e.g., fuel supply agreements, power sales agreements, operating and maintenance agreements)

Contract negotiation costs should be expensed. Although the project may not be viable without operating contracts (because, for example, a signed power sales agreement is a prerequisite for financing), these contracts are not directly related to or theoretically necessary for construction of the asset itself.

Organizational costs (e.g., corporate bylaws, other agreements) Organizational costs should be expensed in accordance with ASC 720-15.

Overhead, including rent, depreciation, and support functions (executive management, accounting, purchasing, corporate legal, human resources, and information systems)

Generally expense

General and administrative and overhead costs should be charged to expense as incurred, with a limited exception for property constructed for sale or rental. See UP 12.2.2 and PPE 1.7.3.

Outsourced administrative functions (e.g., accounting, purchases, and payables) Generally expense

General and administrative and overhead costs should be charged to expense as incurred, even if the costs are incurred by a third party on behalf of the reporting entity. These costs may be eligible for capitalization if the property is constructed for sale or rental. See UP 12.2.2 and PPE 1.7.3.

Project financing—external fees Capitalize Capitalize Capitalize

Specific incremental costs directly attributable to a project financing should be capitalized (e.g., debt issuance costs). Any amortization recorded during construction would be included in capitalized interest calculations.

Project financing—internal costs and salaries General and administrative costs and overhead costs should be charged to expense as incurred. Property taxes Generally expense

Property taxes are a cost of owning the property and are not a direct incremental cost of construction; thus, such amounts should be expensed as incurred. However, similar to ground lease expense, such amounts may be capitalized if the property is being constructed for sale or rental. See UP 12.2.2 and PPE 1.7.2.

Recruiting (costs to identify and hire operating and administrative personnel on site) Recruiting costs should be expensed in accordance with ASC 720-15. Salaries—developers, legal counsel, and other personnel working directly on the project It depends It depends

All payroll and payroll-related costs should be expensed until the project is probable. Once the project is probable, directly identifiable payroll and payroll expense should be capitalized. The amount capitalized should be limited to those amounts directly related to the site and project selected (e.g., costs related to evaluation of potential projects or locations should be expensed). In addition, occupancy and similar costs associated with personnel working on the project should be expensed.