Some line managers might be allowed to spend on OpEx, but not on CapEx. Buying a perpeptual one time license smells like a CapEx expenditure; where the SaaS model is more clearly an operating expenditure with the gleam of being easy to cut.
Some line managers might be allowed to spend on OpEx, but not on CapEx. Buying a perpeptual one time license smells like a CapEx expenditure; where the SaaS model is more clearly an operating expenditure with the gleam of being easy to cut.
CapEx purchase are usually justified by meeting a certain financial threshold. From what I can tell, SaaS is more being pushed with software that costs hundreds of dollars, not thousands of dollars (as in the difference between OpEx and CapEx). Expensive software is justified by creating a CapEx for the initial purchase, and then annual support/maintenance contracts usually fall under an OpEx. And corporations have tax advantages with CapEx, so I'm not really sure why any company would not want to embrac
From what I can tell, SaaS is more being pushed with software that costs hundreds of dollars, not thousands of dollars (as in the difference between OpEx and CapEx).
Accountant here. Under IFRS all leases are capitalized including software leases [centralts.com]. The fact that an individual seat of the software has a modest cost is irrelevant when you are purchasing hundreds of seats. GAAP is requiring similar measures and the accounting rules makers are aware of the complications that software subscriptions create on the financial statements.
And corporations have tax advantages with CapEx, so I'm not really sure why any company would not want to embrace it when justified.
Usually companies would rather expense things rather than capitalize them whenever possible. If you capitalize a purchase (equipment or lease
My company just bought a $30K piece of equipment which we have to capitalize. So I have to pretend we didn't actually hand over a $30K check and depreciate it over the next several years until we pretend the asset has no residual value even though we'll be using it 10 years from now long after we aren't depreciating it any more. Would make more sense and be more advantageous to us to simply expense it and take the tax writeoff today.
First off, thank you for the clarity. Regarding this last comment, while it makes sense from an out-of-pocket cost to expense everything and take the immediate tax writeoff, it's a bit inaccurate to financially state that equipment you're going to run for a decade only holds value for one year. From what I understand, depreciation schedules are somewhat tied to the expected life of the asset. Sure, you could run that hardware for 10 years and you're only going to be able to depreciate those costs for a f
Regarding this last comment, while it makes sense from an out-of-pocket cost to expense everything and take the immediate tax writeoff, it's a bit inaccurate to financially state that equipment you're going to run for a decade only holds value for one year.
That's my point. Let's use a simple example. I buy a machine for my business for $10K and it depreciates straight line for 5 years ($2K/year). So I spend cash money in the amount of $10K right up front and then I have an asset that according to my books is fully used up and without value at year 5. My cash is gone immediately but I don't get to realize the full tax value of that for another 5 years whether or not it actually makes me money. Furthermore chances are that the machine is still going to be working and generating me revenue after year 5 even though according to my books it has zero residual value.
Accounting rules fairly often don't make real world sense, or at least aren't intuitive in their logic. Inventory is considered an asset (because in theory you can sell it) but in real world practical terms it's more like a liability because it turns a liquid asset (cash) into a not liquid one (inventory) and reduces opportunity costs. Capital equipment rules tend to have similar problems. They're trying to implement the matching principle [wikipedia.org] and that's a good idea but it's a clumsy implementation of a solution. Problem is that more accurate options tend to require a LOT more work or opportunities for clever people to mislead.
From what I understand, depreciation schedules are somewhat tied to the expected life of the asset.
That's correct. What they don't reflect is the actual business utility or the residual real world value. I have a press in my shop that cost us about $100K to buy 15 years ago. It's fully depreciated so on my books it has no value. But I could go on eBay and sell it for probably $30-50K right now. Plus it continues to make us money but our books don't show any asset value. That's why it can be kind of misleading. It's hard to value assets that you don't sell but depreciation and capital expense rules do a poor job of capturing the real world value of them.
One example of this sort of thing is McDonalds. McDonalds is basically a real estate company [wallstreetsurvivor.com] that happens to sell food. They own most of the real estate their restaurants are located on and most of the purchases of this were made many years ago. The books show the purchased value of the real estate but land purchased 30 years ago is likely to be significantly more valuable today. But until you sell it you have no way to know it's real value so there is no objective way to make the books reflect the value of that asset that does not invite opportunities for fraud. But what it means is that McDonalds has an asset (real estate) on their books that is worth WAY more than the book value.
I certainly don't pretend to understand why the rules are what they are today, but I would assume there's more than one reason for the limitations. Again, thanks for the feedback.
There are good reasons why the rules are what they are. I'll spare you the gory details but most of them revolve around the fact that you can't easily value assets that you aren't selling and that capitalizing purchases (sometimes) provides a more accurate picture of how assets are benefiting the business to users of the financial statements.
Might be a CapEx vs OpEx question (Score:0)
Some line managers might be allowed to spend on OpEx, but not on CapEx. Buying a perpeptual one time license smells like a CapEx expenditure; where the SaaS model is more clearly an operating expenditure with the gleam of being easy to cut.
Re: (Score:2)
Some line managers might be allowed to spend on OpEx, but not on CapEx. Buying a perpeptual one time license smells like a CapEx expenditure; where the SaaS model is more clearly an operating expenditure with the gleam of being easy to cut.
CapEx purchase are usually justified by meeting a certain financial threshold. From what I can tell, SaaS is more being pushed with software that costs hundreds of dollars, not thousands of dollars (as in the difference between OpEx and CapEx). Expensive software is justified by creating a CapEx for the initial purchase, and then annual support/maintenance contracts usually fall under an OpEx. And corporations have tax advantages with CapEx, so I'm not really sure why any company would not want to embrac
Capitalizing assets (Score:3)
From what I can tell, SaaS is more being pushed with software that costs hundreds of dollars, not thousands of dollars (as in the difference between OpEx and CapEx).
Accountant here. Under IFRS all leases are capitalized including software leases [centralts.com]. The fact that an individual seat of the software has a modest cost is irrelevant when you are purchasing hundreds of seats. GAAP is requiring similar measures and the accounting rules makers are aware of the complications that software subscriptions create on the financial statements.
And corporations have tax advantages with CapEx, so I'm not really sure why any company would not want to embrace it when justified.
Usually companies would rather expense things rather than capitalize them whenever possible. If you capitalize a purchase (equipment or lease
Re: (Score:2)
My company just bought a $30K piece of equipment which we have to capitalize. So I have to pretend we didn't actually hand over a $30K check and depreciate it over the next several years until we pretend the asset has no residual value even though we'll be using it 10 years from now long after we aren't depreciating it any more. Would make more sense and be more advantageous to us to simply expense it and take the tax writeoff today.
First off, thank you for the clarity. Regarding this last comment, while it makes sense from an out-of-pocket cost to expense everything and take the immediate tax writeoff, it's a bit inaccurate to financially state that equipment you're going to run for a decade only holds value for one year. From what I understand, depreciation schedules are somewhat tied to the expected life of the asset. Sure, you could run that hardware for 10 years and you're only going to be able to depreciate those costs for a f
Depreciation (Score:3)
Regarding this last comment, while it makes sense from an out-of-pocket cost to expense everything and take the immediate tax writeoff, it's a bit inaccurate to financially state that equipment you're going to run for a decade only holds value for one year.
That's my point. Let's use a simple example. I buy a machine for my business for $10K and it depreciates straight line for 5 years ($2K/year). So I spend cash money in the amount of $10K right up front and then I have an asset that according to my books is fully used up and without value at year 5. My cash is gone immediately but I don't get to realize the full tax value of that for another 5 years whether or not it actually makes me money. Furthermore chances are that the machine is still going to be working and generating me revenue after year 5 even though according to my books it has zero residual value.
Accounting rules fairly often don't make real world sense, or at least aren't intuitive in their logic. Inventory is considered an asset (because in theory you can sell it) but in real world practical terms it's more like a liability because it turns a liquid asset (cash) into a not liquid one (inventory) and reduces opportunity costs. Capital equipment rules tend to have similar problems. They're trying to implement the matching principle [wikipedia.org] and that's a good idea but it's a clumsy implementation of a solution. Problem is that more accurate options tend to require a LOT more work or opportunities for clever people to mislead.
From what I understand, depreciation schedules are somewhat tied to the expected life of the asset.
That's correct. What they don't reflect is the actual business utility or the residual real world value. I have a press in my shop that cost us about $100K to buy 15 years ago. It's fully depreciated so on my books it has no value. But I could go on eBay and sell it for probably $30-50K right now. Plus it continues to make us money but our books don't show any asset value. That's why it can be kind of misleading. It's hard to value assets that you don't sell but depreciation and capital expense rules do a poor job of capturing the real world value of them.
One example of this sort of thing is McDonalds. McDonalds is basically a real estate company [wallstreetsurvivor.com] that happens to sell food. They own most of the real estate their restaurants are located on and most of the purchases of this were made many years ago. The books show the purchased value of the real estate but land purchased 30 years ago is likely to be significantly more valuable today. But until you sell it you have no way to know it's real value so there is no objective way to make the books reflect the value of that asset that does not invite opportunities for fraud. But what it means is that McDonalds has an asset (real estate) on their books that is worth WAY more than the book value.
I certainly don't pretend to understand why the rules are what they are today, but I would assume there's more than one reason for the limitations. Again, thanks for the feedback.
There are good reasons why the rules are what they are. I'll spare you the gory details but most of them revolve around the fact that you can't easily value assets that you aren't selling and that capitalizing purchases (sometimes) provides a more accurate picture of how assets are benefiting the business to users of the financial statements.