Just a quick Q, Expensing A Cost is in the IS as non-operating cost right? Therefore expensing a cost will not have a direct effect on EBIT right? However if you are comparing it to capitalising then by expensing a cost EBIT will be higher as dep will be less than it would have been if capitalised. All this correct?
not sure it is a non-operating cost.’ think about an operating lease. lease rental expense - is not non-operating. Usually part of COGS, or SG&A. Now when you capitalize the lease EBIT New = EBIT Old + Rental Expense - Depreciation (Due to the Capitalization of Rental Expense). Usually Rental Expense > Depreciation due to capitalization. (in the initial periods immediately after the capitalization). So EBIT New > EBIT Old
I can’t seem to find any reference to any of this in the index for CFAI. The thing about an operating lease is you have both an asset and liability created. Asset reduced by dep and liab by lease payments. However by capitalising a cost you just add to the assets and dep/ammort it right?
Yep. Capitalizing means it goes to the balance sheet. Expensing is immediately recognized on the IS.
Jmac - when you expense it does it hit operating profit or non-operating profit??
If it is something where you have to consider capitalization, it likely has to do with items like maintenance. Since this is an operating cost it would hit operating income. So, it depends on the item. It is possible that you capitalize some financing costs, and these might be below EBIT. Just focus on the item at hand - and whether it is operating or non-operating.
okay thanks