Capital work in progress

A factory that is still being built is not yet earning anything. It does not belong with the machinery that is already running.

So the balance sheet keeps it in its own line, capital work in progress, until the day it is ready for operation. Only then does it move across to property, plant and equipment, and only then does depreciation begin on it.

Capital work in progress sits in non-current assets, alongside property, plant and equipment (PPE) — but it is not the same line. PPE is depreciated every year because it is in use. Capital work in progress is not depreciated at all, because it is not yet in use.

The workbook's own reference balance sheet, Bharti Airtel's FY2019 consolidated statement, shows PPE reported at Rs 815.2 billion. Whatever the company had under construction at that date — towers, network equipment not yet commissioned — would sit in capital work in progress instead, and only join that Rs 815.2 billion figure once completed and ready for operation.

A cement company is building a new grinding unit. At year end it has spent Rs 1,200 crore on the unit — foundations, machinery ordered and partly installed, civil work — none of it yet running. That Rs 1,200 crore sits in capital work in progress, separate from the company's existing, running plant of Rs 4,500 crore, which sits in PPE and is being depreciated as usual.

Next year, the company spends a further Rs 300 crore to finish the unit, and it is commissioned in October. The full Rs 1,500 crore now moves out of capital work in progress and into PPE. Depreciation on that Rs 1,500 crore starts only from October — not from when construction began.

Chapter 8.3.1, in the non-current assets breakdown, defines capital work in progress right after PPE. Expect a question that hands you a balance sheet extract and asks you to classify a line item correctly, or one that tests whether an asset under construction is being depreciated (it should not be).

• No depreciation is charged on capital work in progress. Depreciation only starts once the asset is transferred to PPE and put into use — a common trap is assuming an asset depreciates from the day money is spent on it.
• Do not confuse capital work in progress with intangible assets under development, the equivalent holding line for an intangible asset (say, software) that is not yet ready — same idea, different asset class.