Capitalising expenses

Recording a cost as an asset instead of an expense, so it hits profit slowly over years rather than all at once this year.

A company that capitalises ₹200 crore of costs and amortises them over ten years reports ₹180 crore more profit in year one than a company that expensed the same spending. Neither has more cash. The cash left when the money was spent, and the cash flow statement shows it in investing rather than operating, which also flatters operating cash flow.

Some capitalisation is correct and required. Interest during construction, development costs past technical feasibility, and directly attributable costs of bringing an asset into use all belong on the balance sheet.

The signals of the aggressive version are consistent. Capitalised costs growing faster than revenue, an amortisation period longer than the peer group uses, and a policy that changed in a year when profit would otherwise have fallen.

Compare the policy against two competitors before judging it.