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. a 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. a 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.
