Capitalizing over 12 months *VS* expensing

"Numbers Afficionado" wrote

I'm not sure what depreciating over 12 months has to offer, except to smooth out the monthly financials and create "make work" for the accounting staff.

As far as capitalizing expenses, they probably took something that ordinary people would consider an expense and treat it as having a long-term benefit (their justification for capitalizing it).

Take an advertisement campaign, where they spend hundreds of thousands of dollars just to create the ad spot, and more to air it to the public. They may have deduced that the ad carries a long-term benefit for sales, so capitalize it and amortize it over time.

You don't show any expense (or very little), and show an asset. The books look good in both directions. The shareholders are happy. Management gets their billion dollar bonuses. They retire to a private island with an excess benefit plan. The new guy says "What's this crap?" And the stock hits the bottom of the toilet.

Paul,

When something is capitalized, does this mean that the cost is not deduced from revenues, and instead, it gets subtracted from the equity portion of the balance statement? This would have the impact of increasing earnings, but decrease equity of the company.

"Numbers Afficionado" wrote

No. When you buy an asset or pay for something that's a capital item, only balance sheet items are affected. Cash goes down and the asset goes up is the basic example. If you bought on credit, you increase the asset and increase the liability. There's no impact on the income statement. So the more things you can treat as a capital expenditure, the less go down as an expense on the income statement.

Equity only is impacted if there is a distribution of profits or another transaction onvolving stocks or shareholders.

But amortization/depreciation over 12 months causes the item to be expensed within a year and expenses, as an income statement item, eventually hits equity.

The only purposes I can see of doing it this way is a) to show a better net income figure to users of interim financials or b) to split the expense between two fiscal years (i.e. if the company's fiscal year is the same as the calendar year and the item in bought in June, then half of it will be expensed this fiscal year and the other half next year). Beverly

"Beverly" wrote

But for all but the expenses made in the first month will bleed over to the next fiscal year.

If the expense is something that carries a 12 month life, then it's done that way for GAAP. Like making the annual premium payment for insurance, you capitalize it and amortize it for the term of the policy. That's SOP as far as I'm concerned.