Amundsen Accounting
18111 Hillsborough Road
Lexington, KY 15330
(118) 177-1200
Mr. James Nesmith
3562 Windsor Way
Mendon, KY 16984
October 18, 2006
Dear Mr. Nesmith
In response to your request, I have researched the proper balance sheet reporting for Windsor
Grey Farm’s stallions under the accrual basis. Apollo and Zeus should be reported as noncurrent assets, at cost, net of accumulated depreciation. Windsor’s share in Atoka should be
reported at cost, adjusted for changes in its fair market value plus an appropriate amount for
Windsor’s share of future retirement/disposal costs. Connemara must be reported as “held for
sale” in the current asset section at its estimated market value of $100,000.
Apollo, Zeus, and Atoka—all proven winners--should be classified as non-current assets
because they will yield revenue gradually over a period of years; hence, they should be
periodically depreciated (CON 6, 1984, ¶¶25 & 26, 2005; ARB 43, 1953, Ch 3A, ¶6, 2005).
Connemara—not a winner--should be classified as held for sale under current assets because
he will be sold within the year, and he shall not be depreciated (FAS 144, 2001, ¶34, 2005). He
was purchased for $2 million and his estimated value is $100,000 (see attachment).
Apollo and Zeus are valued at historical cost net of accumulated depreciation because they are
non-current assets with expected future value (CON 5, 1984, ¶67, 2005). More specifically,
since Apollo is an internally produced asset, he must be reported at capitalized cost. Since
Connemara will be sold this year for less than his purchase price, he should be tested for an
asset impairment and reported “…at the lower of its carrying amount or fair value less cost to
sell . . . “ (FAS 144, 2001, ¶30, 2005). See the attached balance sheet for proper reporting.
Windsor’s two shares in the syndicated horse, Atoka, are a long-term investment reported at
cost and adjusted for changes in its fair market value (FAS 107, 1991, ¶ 22, 2005).
Furthermore, the contractual obligation in the Syndication agreement meets the definition of an
asset retirement obligation because Windsor is liable for a portion of future retirement/disposal
costs (FAS 143, 2002, ¶A2, 2005). And, the amount must be estimated and capitalized--added
to the carrying value of the asset and amortized over its life (FAS 143, 2002, ¶11, 2005). “The
future obligation is discounted at an appropriate discount rate and reported at its present value”
(CON 5, 1984, ¶67e, 2005).
Please call me if you have any further questions about classification and valuation of assets.
Sincerely
Karen Kong, Chief Accountant
Mr. James Nesmith
October 18, 2006
Page 2
ATTACHMENT
Windsor Grey Star Farm
Balance Sheet
As of 12/31/200x
Assets
Current Assets
Horse held for sale
$100,000
Non- current Assets
Racing Stallions (net of accumulated depreciation)
Long term investment
$XXX,xxx
$392,000 + PV of ARO
REFERENCES
Accounting Principles Board (APB). 1953. ARB 43—Restatement and revision of Accounting
Research Bulletins. Ch 3A—Working capital. Section A, ¶6—Current assets and current
liabilities. Accounting Research Bulletin. (2005). Financial Accounting Research
System (FARS). Published by the Financial Accounting Standards Board.
Financial Accounting Standards Board (FASB). 1984. CON 5—Recognition and measurement
in financial statements of business enterprises. ¶67—Measurability. Fundamental
Recognition Criteria. Statements of Financial Accounting Concepts. (2005). Financial
Accounting Research System (FARS). Published by the Financial Accounting
Standards Board.
Financial Accounting Standards Board (FASB). 1984. CON 6—Elements of financial
statements. ¶25—Assets. Statements of Financial Accounting Concepts. (2005).
Financial Accounting Research System (FARS). Published by the Financial Accounting
Standards Board.
Financial Accounting Standards Board (FASB). 1984. CON 6—Elements of financial
statements. ¶26—Characteristics of assets. Statements of Financial Accounting
Concepts. (2005). Financial Accounting Research System (FARS). Published by the
Financial Accounting Standards Board.
Financial Accounting Standards Board (FASB). 1991. FAS 107—Disclosures about fair value of
financial instruments. ¶22—Financial instruments with no quoted prices. Appendix A:
Examples of Procedures for Estimating Fair Value. Financial Accounting Standard.
(2005). Financial Accounting Research System (FARS). Published by the Financial
Accounting Standards Board.
Mr. James Nesmith
October 18, 2006
Page 3
Financial Accounting Standards Board. 2001. FAS 144—Accounting for the impairment or
disposal of long-lived assets. ¶30—Long-lived assets to be disposed of by sale.
Recognition. (2005). Financial Accounting Research System (FARS). Published by the
Financial Accounting Standards Board.
Financial Accounting Standards Board. 2001. FAS 144—Accounting for the impairment or
disposal of long-lived assets. ¶34—Long-lived assets to be disposed of by sale.
Measurement. (2005). Financial Accounting Research System (FARS). Published by the
Financial Accounting Standards Board.
Financial Accounting Standards Board. 2002. FAS 143—Accounting for asset retirement
obligations. ¶A2—Appendix A: Implementation guidance, scope, legal obligation.
FASB Statements. (2005). Financial Accounting Research System (FARS). Published
by the Financial Accounting Standards Board.
Financial Accounting Standards Board. 2002. FAS 143—Accounting for asset retirement
obligations. ¶11—Disclosures about fair value of financial instruments. Standards of
Financial Accounting and Reporting. (2005). Financial Accounting Research System
(FARS). Published by the Financial Accounting Standards Board.