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Accounting Releases
Capitalization of Allowance for Funds Used During Construction
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Question: What is the proper period for capitalization of Allowance for Funds Used During
Construction (AFUDC)?
Answer: The capitalization period for AFUDC shall begin when two conditions are present: (1) capital expenditures for the project have been incurred; and (2) activities that are necessary to get the construction project ready for its intended use are in progress. AFUDC capitalization shall continue as long as these two conditions are present.
The term “activities” is to be construed broadly and includes all the actions required to prepare the construction project for its intended use, including activities prior to physical construction, such as the development of plans or the process of obtaining permits from governmental authorities. However, the term “activities” does not include preliminary survey and investigation activities. Activities occurring prior to the above two conditions being met would be considered preliminary in nature for the purpose of determining feasibility of projects under contemplation and would be included in Accounts 183, Preliminary Survey and Investigation Charges, or 183.2, Other Preliminary Survey and Investigation Charges, as appropriate. These preliminary activities would not be subject to AFUDC accruals until such a time as the two conditions are met and the amounts included in Account 183 or Account 183.2 are transferred to Account 107, Construction Work in Progress.
No AFUDC should be accrued during periods of interrupted construction unless the company can justify the interruption as being reasonable under the circumstances.
Capitalization of AFUDC stops when the facilities have been tested and are placed in, or ready for, service. This would include those portions of construction projects completed and put into service although the project is not fully completed. Should the test period exceed the allowable 30, 90, or 120 days, the company must submit full particulars and justification for an extension of such period to the Commission in accordance with Electric and Gas Plant Instruction 9(D) in the Uniform System of Accounts.
AI11-1-000
Bryan K. Craig
Director and Chief Accountant
Division of Audits
Office of Enforcement
