In the case of this CEO asking to capitalize on the planning that occurred in 2015, from a
financial reporting perspective it would not be possible. I would respond by informing the
CEO that planning alone is not anything that can be capitalized on. I would present them with
the following reasons: Expenditures for the asset have not yet begun, activities that are
necessary to get the asset ready for its intended use are not in progress, and interest cost is not
being incurred. Interest capitalization continues as long as the three conditions are present.
(Wahlen et al., 2017 p.10-4b) For the same reasons, as well, it would not be possible to gain a
" double dose " as the construction did not start until June 2016. Next, as far as adding extra
overhead it would also not be possible as all overhead has already been accounted for. If there
is any existing unaccounted overhead then it can be added.
From an ethical perspective, I would explain to the CEO that it is imperative to maintain the
integrity and accuracy of the company's financial records. Our stakeholders and future
investors rely on this information for their business decisions. The capitalization of something
that does not exist and the addition of overhead that does not exist would be discovered in an
audit. Unfortunately, your requests carry legal implications including fraud and puts the
reputation of the company at risk. For these reasons, I cannot participate in such actions. d
In case study C10-7 an accountant is asked by the CEO to capitalize 2015 costs for an
architect, accounting costs and any other costs they can find to increase the amount of interest
that they can capitalize in the 2016 year that has just closed. The accountant is also asked to
add lots of overhead to the project costs. After the CEO leaves the accountant finds
correspondence between the company and the architect starting January 2, 2015. If I was the
accountant in this situation, I would really have to take my time to figure out what (if
anything) I can do to benefit the company and fulfil the CEO’s request while also being
honest and upholding the GAAP principle of utmost good faith (Fernando, 2022).
It is less than ideal to report the 2015 capitalized interest in 2016 but from an internet search I
could not find anything that said it was forbidden. I am not sure if it would require a prior
period adjustment to make the interest journal entry. I also understand that the CEO is asking
for this to be done to decrease expenses in 2016; however, if there are legitimate interest costs
that were missed and can be depreciated, I believe there is a way to enter and notate that they
were from a prior year. The first step would be to look in the file and see if there are any paid
invoices from the architect for this specific project. According to Whalen, Jones, and Pagach
(2017), “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.” I do believe the architect costs would be eligible for interest
capitalization if the land has been purchased since the work performed by an architect is an
activity necessary to get the asset ready for its intended use. Without an architect, plans
cannot be made, permits cannot be pulled, and many other preconstruction activities cannot
occur. What I do not know is if there is avoidable interest on this project. Once all of that
information is gathered, I would go back to the CEO and give a full update on what can or
cannot be done.
The other item that the CEO asked for makes for more of an ethical concern as they asked the
accountant to arbitrarily attribute a percentage of their salary to overhead and they point blank
asked to add lots of overhead to increase profit. I would hope that it was determined prior to
construction whether the overhead would be applied using the full costing approach or
incremental overhead (Whalen, Jones & Pagach, 2017) and so there should be no room to add
excessive salary and dig up other costs. I would assume that this accountant has been doing
their job properly this whole time and has been accounting for the appropriate amount of
overhead to the construction project. I would also hope that the accountant caught the
construction costs from 2015 and properly capitalized the interest in that period. If I was the
accountant I would like to go back to the CEO with facts and reports that detail what has and
hasn’t been done and explain to them the constraints of GAAP. The CEO knew that they were
asking the accountant to make things look good, we do not know for sure if the CEO would
want the accountant to do anything illegal or immoral. In my own professional experience, I
have found that most of the time people want to follow the rules, they just don’t always
understand them and need an explanation. If the CEO pushed and made it clear that they were
asking for something inappropriate to be done I would refuse to do it, it would not be worth
risking my career and reputation.
After reviewing the case I have determined we cannot capitalize interest since 2015 because
the capitalization period begins when expenditures for the asset have begun, which was in
2016 (Whalen, 2017). We also cannot take it out of this year's expense because the
capitalization period ends when the asset is substantially complete and ready for its intended
use (Whalen, 2017). In addition, we cannot increase profits by adding lots of overhead to the
cost of the building this year, to allocate any amount other than the incremental overhead
would result in less overhead being allocated to inventory, resulting in lower expenses and
higher income; income should reflect the success of selling goods and services and not
depend on the amount of construction undertaken (Whalen, 2017). To falsify information on
financial statements or inflate numbers to increase profits would be unethical, illegal, and
immoral. I am sorry but I am unable to implicate any suggestions you have made currently.
Please let me know if you have any questions, thank you."
As an accountant I have ethical obligations to the company and to external users such as
investors to do my job honestly. In this case, if I do what the CEO is telling me to do, I am
being unethical and breaking the law. I am also jeopardizing my integrity as an accountant
and my whole career. I would politely explain to him why I will not be following his requests
because they are illegal and unethical. First, you cannot capitalize until after expenditures for
assets has begun. Him saying to capitalize a year prior to beginning work on the building does
not make sense from a rudimentary accounting standpoint. Secondly, telling me to add in
overhead costs to manipulate profits and 1/12th of my salary to entice me to break the law is
extremely illegal and misleading to shareholders and potential shareholders. My moral
compass would not allow me to do anything he asked me and I would probably quit the job
and report him with any evidence I had to the proper authorities.
As an accountant, there are issues and concerns with the CEO's requests. Providing false
information on the financial statements is illegal and as an accountant I would be responsible
for the incorrect information. I would respond to the CEO that I will not report incorrect
financial information, but that I would add notes on the financial statement that would explain
the business has started planning for construction in 2015. I would also note and explain the
reasons for the loss and not a profit for 2016. Also, as an accountant my salary would not be
part of the cost of the building. There are some concerns from an ethical perspective
regarding the CEO's request. Reporting inaccurate information on the financial statements is
not ethical. If I went along with the CEO's requests, I would report false information to
creditors, investors, and to the public, which I believe is unethical and not in accordance with
GAAP.
Whalen, J. M., Jones, J. P., & Pagach, D. P. (2017). Intermediate accounting: Reporting and
analysis. Boston, MA: Cengage Learning.
Wahlen, Jones & Pagach. (2017). Intermediate Accounting: Reporting and analysis (2nd ed.).
Boston, MA: Cengage Learning.
Whalen, J. M., Jones, J. P., & Pagach, D. P. (2017). Intermediate Accounting: Reporting and
Analysis. Boston, MA: Cengage Learning.
Fernando, J. (2022, February 8). Generally accepted accounting principles (GAAP).
Investopedia. Retrieved March 10, 2022, from
https://www.investopedia.com/terms/g/gaap.asp
Whalen, J. M., Jones, J. P., & Pagach, D. P. (2017). Intermediate accounting: Reporting and
analysis. Boston, MA: Cengage Learning.
Wahlen, James M., et al. Intermediate Accounting: Reporting and Analysis. Cengage
Learning, 2017.
