Should fixed assets in pre-operating periods be depreciated?

Fixed assets aren’t always ready for intended use as soon as they are purchased. There may be some activities which need to be completed before assets become ready for use. Can fixed assets be depreciated before they are ready for use? Can fixed assets go without being depreciation while they are not in use after pre-operating periods have ended? These questions will be answered in this article.

1. Can fixed assets in pre-operating periods be depreciated?

Depreciation of fixed assets is a process of allocating their costs over their useful lives.  An extract from a FASB ASC in relation to depreciation is presented below (text bolded by us).

“The cost of a productive facility is one of the costs of the services it renders during its useful economic life. Generally accepted accounting principles (GAAP) require that this cost be spread over the expected useful life of the facility in such a way as to allocate it as equitably as possible to the periods during which services are obtained from the use of the facility. This procedure is known as depreciation accounting, a system of accounting which aims to distribute the cost or other basic value of tangible capital assets, less salvage (if any), over the estimated useful life of the unit (which may be a group of assets) in a systematic and rational manner. It is a process of allocation, not of valuation.”

Based on the bolded text it is clear that the cost of a fixed asset (“facility”) should be depreciated over periods during which services are obtained from the asset.  Fixed assets in pre-operating periods don’t provide services, so they should not be depreciated.  Depreciation should start when assets are put in service.

2. What about idle fixed assets?

Having been in service for a period of time, fixed assets may become (temporarily) idle.  Some accountants may conclude that no service is being received from the assets so no depreciation should be recognized.  However, that is not the case.  Fixed assets which are temporarily not used should still be depreciated.

Note that we said “temporarily idle” fixed assets in the paragraph above.  If certain fixed assets are no longer planned to be used then they should be evaluated separately.

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