The sale of a fixed asset under construction (środek trwały w budowie) is an accounting transaction that requires particular care and knowledge of the relevant accounting rules in Poland. Businesses may find themselves in a situation where, for various reasons, they have to sell a facility that is still being built. Such a decision has specific accounting consequences and affects how financial results are presented in the financial statements.
Fixed assets under construction are a specific category of assets that have not yet been put into use, but on which the entity has already incurred certain outlays. Selling them differs significantly from selling completed fixed assets, which is reflected both in the accounting records and in the presentation in the profit and loss account (rachunek zysków i strat, RZiS). Until they are put into use, no depreciation is charged on them, so the differences between accounting and tax depreciation do not yet arise.
Characteristics of fixed assets under construction
Fixed assets under construction are assets on which the entity incurs outlays from the start of construction or production until they are put into use – the Accounting Act (ustawa o rachunkowości) defines them as fixed assets classified as non-current assets during their construction, assembly or improvement of an existing fixed asset (Article 3(1) point 16). All costs incurred are recorded in account 080 "Fixed assets under construction", and each project should have separate sub-ledger records. Detailed sub-ledgers, including for account 080, are part of the full accounting we keep for companies and other businesses.
The Accounting Act requires subsidiary ledger accounts to be kept for fixed assets, including fixed assets under construction (Article 17(1) point 1), and separate sub-ledger records for each facility are a practical way of meeting this obligation. This makes it possible to determine precisely the value of the outlays incurred on individual investments and makes later accounting settlements easier
The outlays recorded in the fixed assets under construction account cover a wide range of costs related to the investment project. These include, among others, the costs of building materials, the pay of employees directly involved in the construction, services of external firms, design costs and other expenses necessary to complete the investment.
The value of a fixed asset under construction grows systematically as work progresses and further outlays are incurred. Every invoice, every salary or service cost related to the construction increases the carrying amount of this asset. Such records make it possible to monitor investment costs on an ongoing basis and keep control over the project budget.
Fixed assets under construction are not depreciated, because the entity is not yet using them. Depreciation starts only after the asset is put into use and its value is transferred to the appropriate fixed asset account
Reasons for selling fixed assets under construction
The decision to sell a fixed asset under construction may result from various business and economic factors. The most common reason is a change in the company's investment strategy, which may be caused by changes in the market or a new approach to the company's development.
Financial difficulties are another important reason for selling projects that are still under way. A lack of funds to complete the construction may force the management board to decide to sell the unfinished investment in order to recover at least part of the outlays incurred and improve the entity's liquidity.
- A change in market conditions can make further investment in the project unprofitable
- Restructuring often requires selling some assets
- Improving liquidity by selling assets
- Concentrating resources on other, more promising projects
- Changes in the legal environment can make it impossible to continue the construction
An analysis of whether it is worth continuing the project may also lead to a decision to sell it. If forecasts point to low profitability of the investment or a long payback period, the business may decide to sell the project at the construction stage.
The decision to sell a fixed asset under construction should be preceded by a detailed financial analysis that takes into account the outlays incurred, the possible sales proceeds and alternative ways of using the funds
Sometimes the sale is also caused by external factors, such as changes in local zoning plans, new industry regulations or problems with obtaining the necessary administrative permits. In such situations, continuing the construction may become impossible or much more difficult.
Accounting records for the sale of a fixed asset under construction
Booking the sale of a fixed asset under construction requires using the appropriate accounts in line with the company's chart of accounts, which the entity sets out in its accounting policy (Article 10(1) point 3 letter a of the Accounting Act). The transaction is classified as an event indirectly related to the entity's operating activity, which determines the choice of the right accounts.
Under Article 3(1) point 32 letter b of the Accounting Act, other operating expenses and income include expenses and income indirectly related to the entity's operating activity, in particular those related to the disposal of fixed assets, fixed assets under construction, intangible assets and real estate classified as investments.
Expenses and income related to the sale of a fixed asset under construction are recorded in a typical chart of accounts in accounts 761 "Other operating expenses" and 760 "Other operating income" – the account numbers come from the company's chart of accounts, and the Accounting Act only determines that these transactions belong to other operating activity
The first stage of booking involves derecognising the value of the outlays incurred on the construction of the fixed asset being sold. This means transferring the value from account 080 "Fixed assets under construction" to an operating expense account. The accounting entries are as follows:
- Derecognising the value of the fixed asset under construction
- Recording the sales invoice with the appropriate VAT
- Settling the receivable from the buyer
- Calculating the result on the sale for reporting purposes
The second stage is recording the sales invoice documenting the sale of the fixed asset under construction. The invoice should contain all the required elements, including correctly calculated VAT if the transaction is subject to VAT.
| Booking stage | Debit account | Credit account | Description |
|---|---|---|---|
| Derecognising outlays | 761 | 080 | Transfer of value to expenses |
| Sales invoice | 240 | 760, 221 | Income and output VAT |
| Receipt of payment | 130 | 240 | Settlement with the buyer |
The accounting documentation related to the sale of a fixed asset under construction must be complete and include all documents confirming the outlays incurred and the sale transaction. Pay particular attention to calculating VAT correctly
A practical example of booking the sale
A practical example best illustrates how to book the sale of a fixed asset under construction. Consider a sp. z o.o. (limited liability company) that decided to sell an unfinished service and retail building because of a change in business strategy and financial difficulties.
Before deciding to sell, the company had incurred outlays of PLN 470,000 on the project. These outlays covered the load-bearing structure of the building, the electrical and plumbing installations and partial finishing of the building. All costs were recorded systematically in account 080 "Fixed assets under construction" with the appropriate sub-ledger records.
A construction company started building an office complex with a planned value of PLN 2 million. After incurring outlays of PLN 800,000, market conditions changed – demand for office space in that location fell. The management board decided to sell the project at the shell stage for PLN 950,000 net, making a profit of PLN 150,000 on the sale.
The sale was completed by issuing a VAT invoice for PLN 762,600, including VAT at 23% of PLN 142,600. The net value of the transaction was therefore PLN 620,000. The difference between the net revenue and the outlays incurred was PLN 150,000, which is the profit on the sale of the fixed asset under construction.
The booking of this transaction included the following entries:
- Recording the sales invoice for the fixed asset under construction
- Derecognising the outlays incurred from the fixed assets under construction account
- Settling the receivable from the buyer after the payment was received
- Calculating the financial result for reporting purposes
The profit on the sale of the fixed asset under construction of PLN 150,000 will be shown in the profit and loss account as a gain on the disposal of non-financial non-current assets within other operating income
Presentation in the profit and loss account
How the sale of a fixed asset under construction is presented in the profit and loss account is strictly defined by the Accounting Act. The key rule is that the result on the sale is shown, rather than the income and expenses related to the transaction separately.
In the profit and loss account prepared in line with Annex No. 1 to the Accounting Act, in both the function-of-expense (kalkulacyjny) and the nature-of-expense (porównawczy) format, the sale of a fixed asset under construction is treated as a disposal of non-financial non-current assets. This means that only the final result of the transaction – the profit or loss – is presented. The same approach applies to the gain or loss on the sale of a fixed asset that was already in use.
The profit and loss account does not show the income and expenses related to the sale of a fixed asset under construction separately, but only the net result of the transaction, in line with the presentation rules for the disposal of non-financial non-current assets
If the sale of a fixed asset under construction results in a profit, the amount must be shown in the group "Other operating income" under the item "Gain on disposal of non-financial non-current assets". The exact location depends on the profit and loss account format chosen. The amount increases the net result, and the next step after the year-end close is settling the financial result.
In the function-of-expense format, this item is in group G. Other operating income I. Gain on disposal of non-financial non-current assets. In the nature-of-expense format, the corresponding item is D. Other operating income I. Gain on disposal of non-financial non-current assets.
If the sale of a fixed asset under construction results in a loss, it must be shown in the group "Other operating expenses" under the item "Loss on disposal of non-financial non-current assets". In the function-of-expense format, this is item H. Other operating expenses I. Loss on disposal of non-financial non-current assets, and in the nature-of-expense format E. Other operating expenses I. Loss on disposal of non-financial non-current assets.
The result on the sale of a fixed asset under construction affects the entity's financial result in the financial year in which the sale took place, regardless of when the outlays on the construction of the asset were incurred
Tax aspects of selling a fixed asset under construction
Selling a fixed asset under construction has certain tax consequences that the entity must take into account in its settlements with the tax authorities. The most important aspect is calculating and settling VAT correctly if the transaction is subject to VAT.
If a fixed asset under construction that is real estate is sold, the transaction may be subject to VAT at the standard rate of 23%. However, in certain situations a VAT exemption may apply: for undeveloped land other than building land (Article 43(1) point 9 of the VAT Act) or for buildings and structures under the conditions of Article 43(1) points 10 and 10a (among others, a supply after first occupation or no right to deduct VAT on the outlays). For an unfinished facility, these conditions must be checked individually, and the value of the land under the building is not separated from the taxable amount (Article 29a(8)).
For corporate income tax (CIT) purposes, it is important to determine correctly the income and the tax-deductible cost related to the sale of the fixed asset under construction. The income is the amount received or receivable for the sale, while the tax-deductible cost is the outlays incurred on the construction – expenses on producing a fixed asset are not a cost on an ongoing basis, but become one when it is sold for consideration (Article 16(1) point 1 of the CIT Act; for businesses taxed under PIT – Article 23(1) point 1 of the PIT Act).
- Income from the sale of the fixed asset under construction
- Tax-deductible cost equal to the outlays incurred
- The difference is the taxable income or tax loss
- Income arises, as a rule, on the date of delivery, no later than the date the invoice is issued or payment is made – also when the price is paid in instalments (Article 12(3a) of the CIT Act)
- Obligation to document all outlays and income
CIT taxpayers must include in their fixed asset register the information needed to calculate charges under the tax rules (Article 9(1) of the CIT Act), and the tax register may differ from the accounting register, especially in terms of the initial value and depreciation methods for tax purposes
Pay particular attention to the tax documentation related to the outlays incurred. All invoices, contracts and other documents confirming construction costs must meet the formal requirements set out in tax law to qualify as tax-deductible costs.
Internal control and documentation
Selling a fixed asset under construction correctly requires an effective internal control system and complete accounting documentation. The entity should have procedures in place to ensure that all outlays on the construction are recorded correctly and that the sale is settled properly.
The internal control system should include regular checks of the value of fixed assets under construction, comparison of the actual progress of the project with the accounting records and checks of the correctness of source documents. It is particularly important to keep detailed sub-ledger records for each construction project.
Accounting documents relating to fixed assets under construction must be kept for at least 5 years from the beginning of the year following the financial year in which the transactions were finally completed and settled (Article 74(2) point 4 of the Accounting Act). For tax purposes, documents must be kept until the tax liability expires – as a rule 5 years from the end of the year in which the tax payment deadline passed (Article 86 § 1 and Article 70 § 1 of the Tax Ordinance Act (Ordynacja podatkowa))
Complete documentation should include all invoices and documents confirming the outlays incurred, contracts with contractors, design documentation, building permits, acceptance reports for the work performed and other documents related to the investment.
When a fixed asset under construction is sold, it is also necessary to prepare sales documentation, including the sale agreement, the VAT invoice, the handover report and other documents required by law. All documents must be prepared correctly in formal and accounting terms.
A property developer was building a housing estate consisting of three buildings. After the first building was completed and work on the second had started, the project's financing conditions changed. The developer decided to sell the second building at the closed shell stage together with the building permit and design documentation. The transaction required a detailed settlement of the outlays incurred on each building and a correct allocation of shared costs.
Effect on financial ratios
Selling a fixed asset under construction can significantly affect the entity's financial ratios, especially those related to profitability and asset structure. A profit on the sale improves the financial result for the period, while a loss reduces it, which is directly reflected in the profitability ratios.
A decrease in the value of fixed assets under construction affects the entity's asset structure, which may matter for debt and liquidity ratios. The cash received from the sale improves liquidity ratios, but at the same time the value of non-current assets decreases.
For entities in the construction or property development business, frequent sales of fixed assets under construction may indicate problems with completing projects or changes in business strategy. Financial analysts and investors pay attention to such transactions when assessing the financial condition of a business.
The result on the sale of a fixed asset under construction is classified as other operating income or expense, which means that it does not directly affect the result on core activities, but it does affect the total operating result
