This type of dilemma gives me a headache every time, and also
hammers home, to me, why I plan on going into business for myself
and helping small business owners get off on the right foot. It did
make me start wondering about somethings, so I went down the
rabbit hole of IRS publications and was reminded why I do not want
to go into a business primarily doing taxes.
Why would he even think that anything was capitalized in 2015
when there were zero expenditures until June 2016? I have to
believe that there is no way that anyone makes it to CEO level
without knowing the basic concepts of accounting. It made me
wonder if he started paying the architect when he sent off the first
letter. Maybe he thought that he could capitalize that? Even then,
Wahlen is very clear about when the capitalization period begins:
"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." It would seem that an initial consultation
with an architect would not be the beginning of the expenditures. As
strange as his requests seems, I would like to get more information
before I assume that the CEO of a company that I work for is that
clueless.
With all of that being said, and assuming that the CEO is completely
clueless, I would inform him that he can not capitalize anything until
the actual process begins. Not only would it not be legal, it would
skew the financial statement numbers in a way that is unethical. As
would adding "lots of overhead" to the expenses of the project. All of
these figures should have been stated before the project was started,
so that the finance portion of the construction could be figured
accordingly. Coming in six or seven months after the project has
started, and throwing numbers around is completely unethical, and
could also be illegal. Specifically speaking to 1/12 of my salary being
capitalized for the construction, Wahlen states "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." My salary would have been the same with or without the
construction. Maybe next year, the CEO can pay me extra for the
time spent on the project and that can be capitalized?
Wahlen, James M., et al. Intermediate Accounting: Reporting and
Analysis. Cengage Learning, 2017.
