In our last post, we started a discussion about capitalization. Today we’ll continue by addressing a few more questions and digging a little deeper.
How should a project be accounted for before it is capitalized?
Capitalized costs incurred during construction or acquisition should be accounted for as “Work in Progress” (WIP) or “Construction in Progress” (CIP). Once these costs are capitalized, they are recorded as a lump sum asset and begin to be expensed out in the form of depreciation.
One ingredient that is vital to the capitalization process is team work — especially between facilities and accounting. A good example comes from Jeanette Brooks, the facilities budget manager at Santa Ana Unified. She explains that WIP equals construction costs for all projects for one year, plus all costs that have been reported in WIP in the previous years, minus the total costs of completed sites. Jeanette has had to adjust her reporting to accommodate for the way the Accounting Department books WIP. Once a project is closed, she informs Accounting, and the project becomes a capital asset that can be depreciated.
What should be included in capitalized costs?
Capitalized costs are all direct costs. They may be hard costs, like bricks and mortar, or they might be soft costs, like design or inspection fees. San Diego Unified defines Cost of Construction as all costs attributed to the construction of the project, including the cost of contracts, construction support items, general condition items, and all purchased labor, material, and fixed equipment.
Sometimes a fine line divides direct and indirect costs. Best practice is to distinguish capital costs from indirect costs as delineated in the CA School Accounting Manual by using Object Codes in the 6000s. (Any exceptions to this rule should be carefully considered.) For more information on this topic, please reference Colbi Technology’s Best Practice Advisory on the subject.
Other Important Information:
Glossary of Terms for Capital Bond Fund Programs: (Borrowed from the California School Accounting Manual)
That sums up our Capitalization series. We hope these posts have been helpful. As always, if you have any questions or would like to talk to someone about your district’s capital building program, feel free to call us. Don’t forget to check back here in December for our next Internal Control Processes topic!