If approached by the CEO, I would explain to him that what he is
asking is unethical and not in accordance with GAAP principles. I
would advise that I am unable to do what he is asking and I would
explain to him why it cannot be done. a I would explain that according
to GAAP, in order to capitalize interest a company must address three
issues:
• Does the asset qualify for interest capitalization? A company is
required to capitalize interest on assets that are either
constructed for its own use or constructed as discrete projects
for sale or lease to others. a In addition, if a company purchases
land and incurs expenditures to develop it for a particular use
(e.g., a building or plant site), any interest costs that are
associated with these expenditures qualify for interest
capitalization and are included as part of the cost of the
resulting asset, not the land (Wahlen, 2017).
• Over what period can interest be capitalized? The capitalization
period begins when (1) expenditures for the asset have begun,
(2) activities that are necessary to get the asset ready for its
intended use are in progress, and (3) interest cost is being
incurred. Interest capitalization continues as long as the three
conditions are present (Wahlen, 2017).
• Over what period can interest be capitalized? The amount of
interest capitalized for a qualifying asset is the portion of the
interest cost that could have been avoided if the construction
had not occurred (Wahlen, 2017).
Since construction did not begin until 2016, interest cannot be
capitalized for 2015. Planning completed in 2015 does not qualify for
capitalization because it does meet the conditions required. It is also
not possible to "double dose" on capitalization for 2016 as the
interest is capitalized by the actual interest on incremental funds
borrowed for the construction.
I would also advise there are two alternatives for a company to
include overhead costs in the cost of a self-constructed asset. I would
explain the company can allocate fixed and variable overhead to the
self-constructed asset in the same manner it allocates overhead to
units of inventory produced. I would explain the company can only
include the overhead that increases as a result of the construction. I
would explain that it would be unfaithful representation to include a
portion of my salary to the cost of the construction since no
additional cost is being incurred. a I advised that my salary would have
been incurred whether the construction took place or not, therefore,
it would not be ethical to report it again (Wahlen, 2017).
Reference:
Wahlen, James M., et al. Intermediate Accounting: Reporting and
Analysis. Cengage Learning, 2017.
