My response to the CEO would be something like this: The
approach required by GAAP for interest to be capitalized
must address these 3 issues. 1) Does the asset qualify for
interest capitalization? A company can capitalize interest
on an asset being constructed for its own use however it
cannot be capitalized for assets that are idle and not
undergoing the activities necessary to get them ready for
use. In this case, the request to capitalize the interest from
2015 would not be permissible as construction did not start
until June 2016. 2) Over what period can interest be
capitalized? Capitalization begins when expenditures for
the asset have begun, activities necessary to get the asset
ready for use are in progress, and interest cost is being
incurred. Again, in this situation we would not be able to
capitalize on any interest in 2015 as it doesn’t fit any of the
criteria above. 3) What amount of interest can be
capitalize? The portion of interest cost that could have
been avoided if construction had not occurred. Because
construction didn’t begin until 2016 there was no interest
cost in 2015 to capitalize (Wahlen et al., 2017). For these
reasons laid out above, I would not be able to “take it out of
this year's expense”, so you can get a “double dose”.
Regarding adding “lots of overhead to the cost of the
building to increase profits for this year” that is also
something I would not be able to do. It is unethical and
very misleading from a financial reporting standpoint.
Asking me to add 1/12 of my salary as cost of the building
goes against certain core principles of GAAP such as the
principle of sincerity, the principle of regularity, the
principle of good faith, and the principle of materiality
(GAAP, 2022). For you to ask this reflects poorly on you as
a leader and will reflect poorly on the company, and for this
reason I cannot do as you have asked.
Reference:
Wahlen, James M., et al. Intermediate Accounting:
Reporting and Analysis. Cengage Learning, 2017.
GAAP. Corporate Finance Institute. (2022, February 27).
Retrieved from
https://corporatefinanceinstitute.com/resources/knowledge/
accounting/gaap/
