Opinion ID: 783758
Heading Depth: 2
Heading Rank: 2

Heading: Tooling and prototype costs

Text: 10 (1) Tooling 11 Moody executed and sent letters to Ponce for AAC's 1989, 1990, and 1991 financial statements, representing that AAC had progressed beyond the research and development stage in developing certain aircraft and that, as a result, their tooling was properly capitalized. Specifically, the letters stated that in 1989 this was true for the Dragon, Falcon, Hind, Patriot, and Cobra projects; in 1990 for the Dragon, Falcon, Hind, and Penetrator projects; and in 1991 for the Falcon, Hind, Patriot, and Penetrator projects. However, in the Form 10-K annual reports for 1990 and 1991, AAC disclosed that it had not completed development on its Penetrator helicopter project. Also, at the hearing before the ALJ, Moody testified that the Falcon and Hind were never flight tested. 12 Additionally, in April 1989, AAC's Board of Directors passed a resolution that the tools for the Hind, Falcon and Dragon aircraft be capitalized in the amount of $862,649. However, AAC's 1989 Form 10-K annual report stated that the company had recently acquired designs for the Hind, Falcon, Dragon, and Patriot and had to expend a significant amount of its capital in [their] research, development and tooling. 13 At the hearing before the ALJ, Ponce testified that he discussed the treatment of tooling costs with AAC's management. Initially it was Ponce's belief that they be treated as research and development; however, Moody insisted that since it was not new technology, it should be capitalized. Ponce had previously told Moody on other occasions that tooling costs were research and development and thus should be expensed. As such, the tooling costs were initially recorded as expenses when incurred. 14 In the end, Ponce treated AAC's tools as assets worth $1,435,575 in the Form 10-K annual report for 1989. Similarly, in its 1990 Form 10-K annual report, tools and molds were treated as assets worth $1,222,896. This was true even though the Penetrator was the only project in active development and AAC had written off tools for projects that were deferred in the amount of $508,889. 15 (2) Prototypes 16 During fiscal year 1991, AAC capitalized certain costs related to the manufacture of its aircraft prototypes. In its 1991 Form 10-K, AAC disclosed that since January 1990, [it] had been developing the Penetrator, a remanufactured version of the UH1 Huey helicopter[,] that was now obsolete. They also disclosed that after flight testing, which began in December 1991, the single Penetrator proof of concept would be disassembled and analyzed. Ponce initially recorded the prototype costs for the Penetrator as expenses when incurred. Once again, Moody disagreed with Ponce's characterization of the prototype costs because he believed them to be assets. Ponce then directed AAC's bookkeeper, Adolfo Batista, to adjust the accounting records and financial statements for 1991 to reflect Moody's position that the prototype costs were assets. In the end, AAC reported the Penetrator prototype as assets valued at $562,847 and $1,973,193 in 1990 and 1991, respectively.