This is an interesting discussion prompt. It has taken some
consideration and these are my initial thoughts. While the CEO is
correct and the planning did indeed start the year before, there are
problems with this request. In this week’s reading it states: “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 (Whalen et al., 2017).” According to this statement, there can
be no interest capitalization for 2015, because while the second
factor applies (planning is necessary for building), the other two
factors are not present, therefore there is no interest to capitalize.
The textbook is giving us what is acceptable from the GAAP; this is
not accurate and it should not be done and is violative of those
principles. Secondly, adding to the overhead gives an unbalanced
view of the profits, therefore it is not an accurate representation of
the profitability and should be avoided.
Because of these factors, I would have to say no, from an accounting
standpoint and an ethical standpoint. To my understanding, GAAP
allows for certain interest capitalization, but not to this extent
(Whalen et al., 2017), it should not be done and is a violation of
those principles. It is inaccurate reporting of data from the financial
standpoint. And from an ethical standpoint, while I understand that a
business wants to be seen as profitable and in a good financial
position, it feels rather wrong, like it is a misrepresentation. The
whole point of accounting is to give an accurate report, and this feels
like number fudging, therefore I would not be comfortable with it.
Whalen, J. M., Jones, J. P., & Pagach, D. P. (2017). Intermediate
accounting: Reporting and analysis. Boston, MA: Cengage Learning.
