Reference no: EM131986975

Case - Cost Capitalization at Crispy Crust

Crispy Crust Pizzeria is a privately owned restaurant chain with over 750 locations nationwide. The company has received numerous awards from the National Pizza Federation for its tireless efforts in creating pizza pies that are truly delizioso! Each Crispy Crust pizza is brushed with sauce made from plump, juicy tomatoes smothered with 100% real mozzarella cheese and topped with only the freshest meats and vegetables. Crispy Crust offers its patrons the choice of a casual dining environment or convenient home delivery service.

Crispy Crust currently leases each of its restaurant sites and opens approximately 25 new locations each year. The company incurs significant costs related to the identification and development of these restaurants. Multiple consulting firms are engaged by Crispy Crust to prepare demographic studies, assist with site selection, and create the interior and exterior design plans for selected locations. In addition, Crispy Crust hires third party construction companies to build out its facilities and prepare them for operation.

Crispy Crust has historically capitalized all acquisition costs and construction costs (including all carrying costs during the construction period, such as rent, insurance, taxes, and security, and interest expense) associated with its restaurants for U.S. GAAP reporting purposes. However, the company has adopted the provisions of Statement of Position No. 98-5, Reporting on the Costs of Start-up Activities (SOP 98-5), as of the beginning of its current fiscal year. Crispy Crust's management team does not believe the provisions of SOP 98-5 will affect their cost capitalization policy because they are not a start-up company. In addition, they believe that costs incurred to identify and develop new restaurant sites are being properly capitalized as costs incurred to prepare the assets (the restaurants) for their intended use.

Required: Is it appropriate for Crispy Crust to capitalize the acquisition, construction, and carrying costs as part of the cost of preparing its new restaurants for their intended use?