Cost of Buildings

When a company incurs expenses for acquiring or constructing buildings, these costs form an integral part of its assets and reflect in the financial records. Proper categorization and recording of these costs ensure an accurate representation of the asset’s value and compliance with accounting standards. Here’s a structured overview of the elements that comprise the cost of buildings.

Key Components of Building Costs

Direct Costs of Acquisition or Construction
- Materials, Labor, and Overhead Costs: Expenses directly associated with construction, such as materials, wages for labor, and general overhead costs during the building process, are included as part of the building’s total cost.
- Professional Fees and Building Permits: This encompasses fees paid to architects, engineers, and legal advisors, as well as expenses incurred for acquiring necessary permits and regulatory approvals.
Contractual Construction Costs
- Often, companies opt to contract out the building’s construction to specialized contractors. In such cases, every expense, from excavation to the final completion, is included in the total building cost.

Special Cases and Additional Considerations

Old Building Demolition Costs
- If the acquired land has an existing structure that must be demolished, the cost of removing this old building, minus any salvage value, should be categorized as a land expense, as it is essential to prepare the land for its intended new use.
Remodeling and Reconditioning
- The expenses associated with altering or improving an existing building to make it fit for the company’s use are added to the building cost. This may involve extensive modifications or minor reconditioning based on the requirements of the business.
Excavation and Ground Preparation
- Expenses incurred in the groundwork for the specific building, including excavation and soil preparation, are integral to the cost structure. These are necessary steps to make the site construction-ready.
Architectural Design and Compliance
- Costs for architectural plans and designs and compliance with building codes are included, reflecting all fees for designs that ensure structural safety and aesthetic suitability. The permits that authorize construction work also fall into this category.
Capitalized Interest Costs
- During the construction phase, companies may choose to capitalize a portion of the interest expenses incurred on financing. This is specific to cases where the project spans over an extended period and meets the criteria for capitalization under accounting standards.

Unanticipated and Incidental Costs

Unexpected Site Conditions
- Situations like encountering unexpected rock formations or underground streams might require additional work, such as blasting or rerouting water. These specific costs, directly related to preparing the site, can be added to the building’s acquisition cost.
Unavoidable Costs vs. Avoidable Costs
- While necessary expenses directly linked to the acquisition of economic benefits are included, certain costs from unforeseen events, like labor strikes or fire incidents, are expensed rather than capitalized. This distinction ensures only essential costs contribute to the asset’s capital value.

Example of Accounting for Building Costs

Imagine a company, XYZ Corp., acquiring a building contract for $200,000. They incur the following additional expenses:

Professional fees of $10,000 for design and permits.
Excavation costs amounting to $15,000.
Interest capitalized during construction, valued at $5,000.

In this scenario, XYZ Corp. would record the total cost of the building as:

Building Cost = $200,000 (Contract Price) + $10,000 (Professional Fees) + $15,000 (Excavation) + $5,000 (Interest)
Total Building Cost = $230,000

This aggregate figure reflects the asset’s initial valuation on the balance sheet, ensuring all directly attributable costs are accounted for accurately.

Conclusion

The cost of buildings encompasses a broad range of expenditures, from basic construction to incidental costs tied to site preparation. Proper accounting treatment of these expenses is crucial for accurate financial reporting and compliance. By carefully categorizing each element of building costs, companies can ensure they reflect the asset’s true value and contribute to informed financial decisions.