Expert: Consuelo Herrera, International Accountant and Fraud Examiner - 10/17/2006

Question
1. If an item (asset) was self-constructed (in my case, racing horses), then transferred to my business, how can I evaluate the racing horses in my balance sheet?

2. I also purchased two shares of sydication (cost $392,000). How should I report them?

Regarding question 1, I was suggested to list them as long-lived assets with $0 costs. However,I do not think it's a proper way.  

Please advise


Answer
Dear Ariane,

First of all, I apologize for the delay getting back with you. I was swamp with a deadline and somehow I lost track of time.

Concerning your questions this is my insight:

(Donald E. Kieso , Jerry J. Weygandt, and Terry D. Warfield have an excellent approach that you might find useful)
1) Determining the cost of self constructed assets can be a problem. Without a purchase price or contract price, the company must allocate costs and expenses in order to arrive at the cost of the self-constructed asset.  Materials and direct labor pose no problem; these costs can be traced directly. However, the assignment of indirect costs creates special problems. Indirect costs, called overhead or burden include power, heat, light, insurance, property taxes on factory and buildings and equipment, supervisory labor, etc.  These costs might be handled in one of two ways:
a) Assign No fixed overhead to the cost of the constructed asset. The argument is that indirect cost is generally fixed in nature and does not increase as a result of constructing one's own asset.
b) Assign a portion of all overhead to the construction process. This approach, a full costing concept is appropriate if one believes that costs attach to all assets constructed.  Advocates say that failure to allacate overhead costs understates de initial cost of the asset and result in inaccurate future allocation.  A pro rata portion of the fixed overhead should be assigned to the asset to obtain the cost. This treatement is used extensively because many believe a better matching of costs with revenue is obtained.  

Concerning the interest incurred, it has been a long-standing controversy. Three approaches have been suggested to account for interest incurred in financing the construction of assets:
1)Capitalize no interest during construction
2)Charge construction with all costs and funds employeed   whether identifiable or not.
3) Capitalize only the actual interest costs incurredx during construction. This approach relies on the historical cost concept that only actual transactions are recorded. A company that uses debt financing will have an asset of higher cost than an enterprise that uses stock financing.  

The site below seems to have resources that could help you to make an informed decision concerning your business:

http://equinecpa.net

Question 2)

I am assuming that you purchased these shares as a long-term investments, that will be held for many years and that were not acquired with the intention of disposing of them in the near future. They are ussually presented in the balance sheet just below "Current Assets" in a separate section called Investments.

I hope it helps and I wish you the best in your professional affairs.

Your feedback is very important to me!

Kind regards,


Consuelo Herrera
International Accountant and Fraud Examiner