22.08.2025

Principles for recognizing incurred expenditures as an increase in the value of fixed assets under Polish and International Accounting Standards

The construction of a fixed asset involves the need to account for the expenditures that contribute to its initial value. Some of these expenditures – such as the purchase of land or invoices documenting construction works performed by the general contractor – leave no doubt as to their recognition in the books.

At the same time, during the investment process, companies also incur other costs, the final classification of which may raise uncertainties. The Polish Accounting Act of 29 September 1994 (hereinafter: the “Accounting Act” or “UoR”) addresses this matter only in general terms, while allowing for the application of detailed guidance set out in National Accounting Standard 11 – Fixed Assets and NAS 8 – Development Activity. In the case of the International Accounting Standards (IAS), the relevant provisions are contained in IAS 16 – Property, Plant and Equipment.

According to Article 28(8) of the Accounting Act, the acquisition cost and the production cost of fixed assets under construction, fixed assets, as well as intangible assets, include all costs incurred by the entity during the period of construction, assembly, adaptation, and improvement, up to the balance sheet date or the date of being put into use, including:

non-deductible VAT and excise tax, and
the cost of servicing liabilities incurred for their financing and related exchange rate differences, less the income derived from this title.

This definition is rather general, directly indicating only two elements that may be recognized in the value of a fixed asset. For more detailed guidance, reference should be made to the National Accounting Standards (NAS/KSR).

Main principles for determining the value of a fixed asset produced in-house according to the Polish Accounting Standard (KSR)

The main guidelines regarding the capitalization of expenditures on fixed assets under construction are described in KSR 11. This standard, in point 6.36, states that only costs that have a direct cause-and-effect relationship with the production of the asset may be included in the production cost. Moreover, it indicates that only costs incurred between the documented start date of construction and the documented date of the asset’s acceptance for use may be capitalized.

According to point 6.38, the production cost of a fixed asset includes both direct and indirect costs. Direct costs cover all expenditures that can be directly attributed to a given asset (fixed asset) on the basis of source documents confirming the incurrence of the cost, or on the basis of measurement units (coefficients) that clearly determine the amount of costs incurred for the given asset. Indirect costs, on the other hand, are those that cannot be directly attributed to a specific asset, as they relate not only to the construction of that particular asset but also to the construction of other assets or to other activities (e.g. general operational activities). In such cases, in accordance with point 6.39 of the standard, the allocation of such costs requires the preparation of a reliable measurement, appropriate documentation, and cost records. However, the standard allows, where necessary, for such measurement to be replaced or supplemented by estimates or judgments of the entity’s personnel, in particular the unit responsible for the construction of the fixed asset.

Point 6.39 concerns not only the rules for allocating indirect costs, but also other key elements of determining the value of a fixed asset produced in-house, including the determination of:

the documented date of commencement of construction, which conditions the recognition – as production costs – of expenditures incurred in connection with the construction of a fixed asset contributing to its initial value,
the construction objects for which production costs are separated (in this respect, an analysis of the construction design and the support of its author are necessary),
the rules for recognizing and allocating to construction objects the costs of maintaining the entity’s resources used for construction purposes,
the rules for recognizing the costs of maintaining organizational units involved in the construction,
the rules for recognizing the costs of tests carried out before the construction object is put into use,
the rules for recognizing the costs of use and repair of a fixed asset incurred before the completion of construction,
the rules for recognizing costs or losses resulting from damages incurred during the construction of a fixed asset,
the rules for recognizing the costs and revenues from the disposal of fixed assets that condition the construction of a new object, and
the rules for allocating the production costs of a construction object if it consists of two or more inventory items.

Commencement date of construction

Determining the documented commencement date of construction may, in practice, be challenging. KSR 11 refers in this respect to KSR 8 Development Activity, according to point 4.3 of which it is the date on which the developer initiated active, documented actions aimed at carrying out the project.

KSR 8 indicates that this cannot be earlier than:

the date on which the developer, based on reasonable estimates, concluded that there is a probability of obtaining economic benefits from the planned development project, or
the date on which the developer made binding arrangements (internal or external decisions) to commence the development project.

At the same time, this date cannot be later than:

the date on which the developer undertook the first marketing or informational activities aimed at presenting the planned development project to potential clients,
the date on which the developer signed the first development (sales) agreement, or
the date on which the developer notified the building supervision authority of the commencement of construction works.

KSR 8 also provides two specific examples of dates that may be recognized as the commencement date of a project, i.e., the date on which work on the construction design began, and the date on which an application was submitted for the reclassification of land designated for agricultural use, provided that the probability of a favorable decision on this application is high. In practice, the document confirming the commencement date of works may be the date on which the Management Board approved the investment budget.

Examples of costs that may be capitalized in the value of fixed assets under construction

According to KSR 11, costs that may increase the value of fixed assets under construction include, among others:

Point 6.41: expenditures on the preparation of analyses, opinions, technical studies, or assessments of construction alternatives, incurred after the documented commencement date of construction (e.g., an environmental impact report),
Point 6.46: a portion – separated in accordance with the rules of point 6.39 – of the maintenance costs of the entity’s tangible fixed assets engaged in the construction of a fixed asset (provided they can be reliably estimated). These costs include, among others, depreciation and staff remuneration,
Point 6.49: in specific cases, the maintenance costs of internal organizational units established to manage or support the construction process of fixed assets. As a rule, such costs should be recognized as period costs. However, if the entity ensures a reliable system for collecting, measuring, and recording the operating costs of such a unit, and justifies their cause-and-effect relationship with the construction of the assets, then an appropriate portion of these costs increases their initial value,
Point 6.50: warehouse handling costs related to the construction of fixed assets, provided that a direct relationship with the construction of the asset can be demonstrated.
Point 6.51: costs of trials and tests conducted to verify the functioning of a fixed asset and to confirm its readiness for use in accordance with the entity’s intentions or external requirements, incurred by the entity up to the documented date of its acceptance for use. At the same time, the initial value of the fixed asset under construction is reduced by the net selling price of semi-finished goods, finished goods, or services received into inventory or sold as a result of trials and tests, if their value is material,
Point 6.51: Costs of trials and tests carried out to verify the operation of a fixed asset and to confirm its suitability for use in accordance with the entity’s intentions or external requirements, incurred by the entity up to the date of its documented acceptance for use. At the same time, the initial value of a fixed asset under construction is reduced by the net selling price of semi-finished products, finished goods, or services accepted into inventory or sold as a result of the trials and tests, provided that their value is material.
Point 6.53: costs of dismantling (e.g., demolition) of another fixed asset, provided that its removal is necessary for carrying out the construction. At the same time, if the entity has previously recognized a provision for the future dismantling of the fixed asset, then the actual dismantling costs up to the amount of the provision represent its utilization. In such a case, they do not increase the initial value of the newly constructed fixed asset.

General principles of capitalizing investment financing costs for fixed assets

An important category of costs that may be capitalized in the value of fixed assets under construction are investment financing costs. These include the servicing of loans, borrowings, and other liabilities incurred to finance investments in fixed assets (KSR 8.6.58).

External financing costs primarily comprise interest, negative exchange differences, and commission fees or other charges incurred in connection with the financing obtained. According to the standard, as well as Article 28(8) of the Accounting Act, such costs should increase the value of the property. At the same time, the value of the property should be reduced by financing-related income, such as positive exchange differences.

At the same time, a prerequisite for including external financing costs in the initial value of a fixed asset is their reliable attribution to a single fixed asset, based on a cause-and-effect relationship. These are external financing costs that would not have been incurred had expenditures on acquiring the fixed asset not been made.

A significant element of financing income/costs may also consist of changes in the value of hedging instruments, such as a SWAP contract. KSR 8 sets out the rules for capitalizing these elements in points 6.66–6.68. At the same time, if the entity does not apply the provisions of the Regulation of the Minister of Finance on financial instruments, the effects of revaluing a hedging transaction are recognized directly in the current profit or loss.

Entities may take out financial liabilities that will serve only partially to finance an investment in a fixed asset, or that are intended to finance more than one investment. In such cases, the entity should appropriately allocate financing costs to the relevant purposes, based on available documentation and estimates made by the entity’s qualified personnel. To help determine what portion of a liability relates to a specific investment, one may ask: what amount of funds would the entity have had to borrow to finance the acquisition of the fixed asset if this source of financing were unavailable, and what financing costs would it have incurred as a result (KSR 8.6.72)?

Costs excluded from capitalization in the value of fixed assets under construction

KSR 8 also specifies a list of costs that do not form part of the production cost of fixed assets under construction and should always be recognized as period costs. These include:

Point 6.9.a – general administrative costs, except for the costs of maintaining internal organizational units established to manage or support the construction process of fixed assets, insofar as they can be directly linked to the construction of the asset,

Point 6.9.b – costs of training employees in the use of a newly acquired fixed asset, except where such costs were included in the purchase price of the asset and cannot be separately determined or reliably estimated,

Point 6.9.c – costs incurred in connection with relocating a fixed asset within the entity or reorganizing part or all of the entity’s operations (costs of moving fixed assets to new places of use),

Point 6.9.d – costs incurred prior to the documented commencement date of construction, such as analyses, feasibility studies, market studies, or technological studies,

Point 6.9.e – marketing costs intended to generate economic benefits from the fixed asset after its construction, regardless of when they are incurred,

Point 6.10 – property tax, even if incurred during the construction period,

Point 6.11 – costs of provisions for dismantling and land reclamation after the end of the fixed asset’s use,

Point 6.12 – costs of losses and damages incurred during the construction of a fixed asset, e.g., due to fire, flood, or contractor bankruptcy,

Point 6.40 – expenditures related to the analysis, assessment, and selection of a construction variant, even if the chosen option was ultimately implemented,

Point 6.50 – warehouse handling costs related to the construction of fixed assets that cannot be directly linked to a specific investment,

Point 6.52 – costs of using a fixed asset during its construction, e.g., repair costs resulting from its operation,

Point 6.54 – net value of a dismantled fixed asset, if it was physically removed in order to carry out a new investment. An exception is where the dismantled fixed asset is not physically removed but becomes part of the new fixed asset – in such a case, its value may be included in the cost of the new fixed asset. However, if the nature of the new asset differs substantially from the previous one, the construction cannot be treated as an improvement, but as the creation of a new asset,

Point 6.64 – costs of obtaining external financing sources (e.g., legal analyses of loan agreements), unless they are directly related to servicing a liability financing the acquisition of the fixed asset.

Differences between KSR and IAS

The rules on capitalization of costs into the value of fixed assets under construction are set out in paragraphs 16–28 of International Accounting Standard 16 – Property, Plant and Equipment. Compared with the provisions contained in KSR 11 and KSR 8, several significant differences can be identified:

Dismantling/land restoration costs → According to IAS 16.16(c), the cost of an item of property, plant and equipment includes the estimated costs of dismantling and removing the asset and restoring the site on which it is located, for which the entity has an obligation either when the asset is acquired or as a consequence of having used the asset during a particular period for purposes other than to produce inventories.

This differs from paragraph 6.11 of KSR 11, under which such costs should be recognized in profit or loss (on the date the asset is put into use).

Income and expenses from production before a fixed asset is put into use → According to the revised IAS 16.21 (effective 1 January 2022), an entity may undertake certain activities related to constructing or improving an item of property, plant and equipment, but which are not necessary to bring the asset to the location and condition necessary for it to operate as intended by management. Since such activities are not necessary to bring the asset to the condition required for intended use, the related income and expenses must be recognized in profit or loss. Under IAS, income from production before an asset is available for use therefore cannot reduce the carrying amount of the asset, and capitalization of such production costs is limited solely to determining whether the asset is functioning properly (IAS 16.17(e)).

This differs from paragraph 6.51 of KSR 11, under which the costs of trials and tests performed to verify the functioning of a fixed asset and confirm its readiness for use in accordance with the entity’s intentions or external requirements, incurred up to the documented date of acceptance for use, increase the initial value of the asset.

Scope of capitalization of financing costs → In this respect, IAS 16.22 refers to IAS 23 Borrowing Costs. Under this standard, borrowing costs include exchange differences arising from foreign currency borrowings only to the extent that they are regarded as an adjustment to interest costs.

This differs from paragraph 6.59 of KSR 11, under which financing costs include all negative exchange differences related to financing, not only those that can be considered an adjustment to interest costs.

Practical example – comparison of investment cost capitalization under Polish Accounting Standards (PSR) and IFRS

The entity KDT Sp. z o.o. (the “Company”) is undertaking an investment project involving the construction of a rental property. In November 202X-1, the Management Board engaged an external consultancy firm to conduct a feasibility analysis of the project. On 20 December 202X-1, the consulting company delivered a report confirming that the project would be profitable. The cost of this service amounted to PLN 130,000. On 12 January 202X, the Management Board approved the investment budget. On 12 February 202X, the Company signed a loan agreement with Bank A for EUR 20 million, bearing variable interest of EURIBOR 3M + 1.5%, to finance the entire investment. The remaining part of the investment is financed with equity. On 20 February 202X, the Company purchased the land for the investment (notarial deed signed). The transaction cost amounted to PLN 33 million. On 25 March 202X, the Company signed a contract with the general contractor. In the following months, up to the date of obtaining the occupancy permit on 14 January 202X+1, the Company incurred the following costs:

– Invoices from the general contractor – PLN 70 million

– Costs of preparing the construction design – PLN 2.9 million

– Property tax – PLN 150,000

– Invoices for project monitoring – PLN 1.2 million

– Total interest costs – EUR 800,000 (PLN 3.5 million)

– Unrealized foreign exchange differences on the loan revaluation – PLN 2.4 million (expense)

During the investment period, WIBOR fluctuated between 4.5% and 5.5% (average 5%).

How should the value of the investment be determined under Polish and International Accounting Standards?

The first step, under both PSR and IAS, is to determine the commencement and completion dates of the investment. In both cases, the commencement date can be considered as 12 January 202X, the date on which the investment budget was approved. The relevant KSR provisions in this regard have been described above. According to IAS 7.7, capitalization may take place only if it is probable that the entity will obtain future economic benefits associated with the asset and the purchase price or production cost of the asset can be measured reliably.

Similarly, in both cases, the completion date can be considered as 14 January 202X+1, when the Company obtained the occupancy permit. This event meets both the IAS 16 criterion (the moment the asset is brought to the location and condition necessary for it to operate as intended by management) and the KSR 11 criterion (the documented acceptance of the fixed asset for use).

After establishing this, the next step is to assess whether individual costs should be capitalized as part of the investment and, if so, in what amount. The details are presented in the table below.

Type of Expenditure	Increase in Property Value under PSR	Increase in Property Value under IFRS	Justification
Feasibility analysis of the investment	0	0	PSR: Cost incurred before the documented commencement of the investment. IFRS: At the time the costs were incurred, the conditions of IAS 7.7 were not met.
Land purchase cost	PLN 33m	PLN 33m	PSR: Cost directly attributable to the project. IFRS: Expenditure necessary to bring the asset to the location and condition required for it to operate as intended by management.
Construction design preparation costs	PLN 2.9m	PLN 2.9m	PSR: Cost directly attributable to the project. IFRS: Expenditure necessary to bring the asset to the location and condition required for it to operate as intended by management.
Invoices issued by the general contractor	PLN 70m	PLN 70m	PSR: Cost directly attributable to the project. IFRS: Expenditure necessary to bring the asset to the location and condition required for it to operate as intended by management.
Property tax	0	0	PSR: According to NAS 11.6.10, property tax does not increase the value of a fixed asset, regardless of the period to which it relates. IFRS: IFRS does not explicitly address property tax; however, in practice, this cost is not recognized as part of the cost of bringing an asset to the location and condition necessary for it to operate as intended by management. This approach can be justified by the fact that land tax would be payable in the same amount regardless of whether the investment was carried out or not.
Invoices for project monitoring	PLN 1.2m	PLN 1.2m	PSR: Cost directly attributable to the project. IFRS: Expenditure necessary to bring the asset to the location and condition required for it to operate as intended by management.
Loan interest	PLN 3.5m	PLN 3.5 mln	PSR: External financing costs (including interest), incurred by the entity from the date of the documented decision to acquire a fixed asset, including from the documented commencement of its construction until the documented acceptance for use, increase the purchase price or production cost of the asset, forming part of its initial value. IFRS: Borrowing costs (including interest) that can be directly attributed to the acquisition, construction, or production of a qualifying asset are part of the purchase price or production cost of that asset.
Unrealized exchange differences	PLN 2.4m	PLN 2.1m*	PSR: External financing costs (including interest), incurred by the entity from the date of the documented decision to acquire a fixed asset, including from the documented commencement of its construction until the documented acceptance for use, increase the purchase price or production cost of the asset, forming part of its initial value. IFRS: Borrowing costs that can be directly attributed to the acquisition, construction, or production of a qualifying asset are part of the purchase price or production cost of that asset. At the same time, borrowing costs may include exchange differences arising from foreign currency loans and borrowings only to the extent that they are regarded as an adjustment to interest costs.
Total	PLN 113.0m	PLN 112.7m

* Below is the calculation of the value of unrealized foreign exchange differences that may be recognized as an increase in the value of the property:

Interest costs on the EUR loan (determined based on EURIBOR): PLN 3.5m

Interest costs on an equivalent loan in PLN: EUR 20m × 6.5% = EUR 1.3m = PLN 5.6m

Difference = PLN 2.1m (the maximum amount of foreign exchange differences that may be capitalized as part of the investment value)

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Bartosz Zioło
Senior Manager

bartosz.ziolo@bakertilly-tpa.pl