SAP Financial Accounting (SAP FI) Practice Exam

What defines assets under construction (AUC)?

1. They are depreciated immediately

2. They only accumulate costs for future depreciation

3. They are high value assets from the beginning

4. They require a lower depreciation rate

The correct answer is: They only accumulate costs for future depreciation

Assets under construction (AUC) refer to investments made in fixed assets that are still in the process of being completed. These assets do not begin to formally depreciate until they are ready for use, at which point they transition from AUC to a fully operational asset. Therefore, during their construction phase, they only accumulate costs that will eventually contribute to their future depreciation. This accumulation of costs includes various expenditures such as materials, labor, and overhead, which will be capitalized once the asset is placed in service. The distinction is critical because it underscores the nature of AUC being a financial position that is invested in but not yet actively contributing to depreciation expense. Once construction is complete, the asset will be subject to regular depreciation practices, based on its usable life and other relevant factors. In contrast, the other options present ideas that don’t align with the concept of AUC. Immediate depreciation does not apply since AUC is not depreciated until the assets are complete. The idea that AUC are inherently high-value assets is misleading, as the value of an asset under construction can vary widely. Likewise, the notion of requiring a lower depreciation rate is not accurate, as depreciation rates are generally determined upon the asset's completion and not its construction phase.