Windsor Grey Farms
TO:
Mr. James Nesmith
FROM:
Karen Kong, Chief Accountant
DATE:
October 18, 2006
SUBJECT:
CLASSIFICATION AND VALUATION OF WINDSOR’S STALLIONS
Converting from a cash basis to the accrual basis will affect the balance sheet reporting of
Windsor Grey Farm’s (Windsor) stallions.
ISSUE: How to properly classify and valuate Appollo, Zeus, Connemara, and Atoka.
CONCLUSIONS: Apollo and Zeus should be reported as non-current 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.
FACTS: Windsor owns two horses that are proven winners: Apollo and Zeus. A third stallion,
Connemara, was purchased for $2 million and has not been successful; he will be sold this year
at an estimated $100,000. Last, Windsor has purchased two shares in the syndicated horse
Atoka and is liable for a share of future retirement/disposal costs.
ANALYSIS: Apollo, Zeus, and Atoka 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
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).
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 shares in 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 (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 this issue.
Karen.kong@windsor.com
Ext. 302
Office: 104
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.
Karen.kong@windsor.com
Ext. 302
Office: 104
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.
Karen.kong@windsor.com
Ext. 302
Office: 104