Definition:
Capital expenditures are the type of expenses that the entity spends on acquiring or upgrading long-term assets. Capital expenditures are normally called CAPEX.
The expenses could be recognized as or classed as capital expenditure only if those expenses are allowed to be capitalized as long-term assets according to accounting standards and the company’s accounting policies.
In general, the expenses treated as capital expenditure are for upgrading the existing fixed assets to get better performance, acquiring part of fixed assets, and purchasing new fixed assets.
Other expenses that are not allowed to classify as capital expenditure are classified as operational expenditure (OPEX). These kinds of expenses are sometimes called period costs or administrative costs.
Example and List:
Here are examples of Capital Expenditures:
- The building belongs to the entity. As you know, the building is the kind of fixed assets or long term assets in the Financial Statements. The build is depreciated annually based on the economic value that those buildings expected to be used for. The cost of acquiring a new building is a great example of Capital Expenditures.
- Computer Equipment: Cost purchasing the new computer equipment is allowed to be capitalized as non-long term assets. However, if the entity rends those assets for the short term, then the expenses should class as operating expenses. Finance Lease might need to be checked against.
- Office Equipment is sometimes treated as fixed assets and they are recording under the Capital Expenditure. but sometimes, the company treats it as operating expenses records in the income statements. However, Office Equipment is sometimes recorded as operating expenditure based on entity accounting policy.
- Furniture and Fixture are the types of capital expenditures.
- The land is the non-depreciable fixed assets. its lift is indefinite unless the company bought and own the land only for the period of time. No matter the useful life of the land is, the land is the Capital Expenditure.
- Some of the companies might own machinery like manufacturing companies and machinery is one of the big capital expenditures.
- Currently, technology is very important for the success of the business and also the big proportion of expenses that inured in the company. Software is one of the most expenditure that happens in the company. Software is also Capital Expenditures.
- Vehicles are also Capital Expenditures.
How to Calculate Capital Expenditure?
The calculation of capital expenditures might look simple if you understand the two important points above.
One is the definition of it, and another is familiarity with financial statements. You can calculate the capital expenditure by starting from the Statement of Financial Position and noting it.
If you ever touch the Statement of Financial Position, you can see the noted to PPE which is detail the amount of fixed asset brought forward, fixed assets purchased during the years, and fixed assets that had been disposing or written off.
The Capital Expenditures during the period are those expenses for purchasing new fixed assets and upgrading the existing ones.
Capital Expenditure Analysis:
The better place to start your analysis of the Capital Expenditure in your company is from its mission statement and its object and link them to the Critical Success Factor and KPI.
Once you identify these things, let’s think about your company’s rewarding system to your company’s top management.
Why it matters?
Top management is the one who initiated the company’s strategy, CSF, and KPI of the company while BOD does the final approval.
Yet, how the capital expenditure links to KPI and rewards might be the most important thing to note.
Top management trick on using Capital Expenditures to meet their KIP and get reward to their pocket.
Let say BOD set the KIP of the company by using Return on Investment or Return on Capital Employed, and BOD and top management could get the bonus when they hit this target.
In this case, management will be reluctant to investing new Capital Expenditure by purchasing new assets and upgrading the old ones.
The reason is when they invest in new assets or upgrading. It is hard for them to hit the target. As a result, they enjoyed using the one old, and the subsequent result is affecting the productiveness and performance of the company.
Conclusion:
Capital Expenditures is the term used to refer to expenses of or found to purchase fixed assets. The better way to analyze capital expenditure is always starting with the company mission statement, CSF, and KPI.
Written by Sinra
