Long-Term Assets

Learning objectives

By the end of the week you can:

1. Decide whether any given expenditure should be capitalized or expensed, and quantify, year by year, what each choice does to EBIT, EBITDA, net income, CFO, and total assets.
2. Build the capitalized cost of a PP&E item from an invoice and a fact pattern (duties, freight, installation, trial runs, dismantling provisions), and state which costs must stay out.
3. Componentize an asset per IAS 16 / Ind AS 16 / Schedule II, and compute capitalized borrowing costs with both specific and general borrowings, including the IFRS-vs-US-GAAP netting difference.
4. Depreciate one asset under straight-line, written-down-value/declining-balance, and units-of-production, reconcile the three totals, and apply a change in useful life or salvage value prospectively.
5. Run the analyst's useful-life and salvage screens: depreciation rate, capex/depreciation, and average-age arithmetic, and estimate how much a life extension inflated EBIT.
6. Apply the R&D rules under US GAAP (ASC 730, with the ASC 985-20 / 350-40 software nuances) and IFRS/Ind AS (IAS 38 / Ind AS 38 development criteria), and execute the Damodaran R&D capitalization adjustment to restore comparability.
7. Execute both impairment models: the US two-step (undiscounted recoverability screen, then fair value, no reversal) and the IFRS/Ind AS recoverable-amount model (higher of value-in-use and fair value less costs of disposal, reversals allowed except goodwill), applied to the same fact pattern to explain why the answers differ.
8. Explain where goodwill comes from, how the impairment-only regime works in each framework, and read a goodwill write-off as a verdict on capital allocation.

Prerequisites & connections

Builds on. M1.01 (journal entries for purchases, depreciation, disposals, impairments); M1.02 (where D&A and impairment sit in the P&L layers); M1.03 (PP&E, accumulated depreciation as a contra asset, intangibles, goodwill); M1.04–M1.05 (capex in CFI, D&A and impairment as non-cash add-backs in CFO); M1.06 (you have seen cost capitalization once already: inventory absorbs cost until sale releases it to COGS; PP&E is the same idea stretched over years).

Feeds into. M1.08 (leased assets; book-vs-tax depreciation creating deferred taxes). M1.09 (consolidation and purchase price allocation: where goodwill is born; previewed here). M1.10 (reading these notes in a real filing). M2.03 (ROIC: invested capital is mostly what this week measures). M2.06 (improper capitalization, previewed via WorldCom). M3.04 (forecasting capex). Phase 5 (asset-heavy sector playbooks).

Spine connection. Question 2 of the five (is ROIC durably above the cost of capital?) has invested capital in the denominator and depreciation inside NOPAT. If management games asset lives or capitalization, both halves of the master ratio are wrong. This week is where you learn to check.

1. Capitalize or expense: the one decision that moves profit between years

First principles. A company spends ₹90 crore. Accounting must answer one question: did that spending buy this period's revenue, or future periods' revenue?

• Benefit consumed now → expense: the full ₹90 crore hits this year's P&L.
• Benefit stretches over future years → capitalize: park it on the balance sheet as an asset, then release it to the P&L gradually (depreciation/amortization) over the years it serves.

Everything else (standards, thresholds, footnotes, frauds) is machinery for answering "which periods benefit?" honestly.

The formal test (IAS 16 / Ind AS 16; US GAAP equivalent in substance): recognize an asset when (a) it is probable that future economic benefits will flow to the entity, and (b) cost can be measured reliably. Routine repairs, advertising, training, most R&D (under US GAAP), and general overheads fail, benefits are immediate or too uncertain, so they are expensed as incurred.

What each choice does. Same cash, very different optics:

Two rows are lifelong traps:

• EBITDA is not neutral. Capitalizing removes the cost from opex and re-labels its P&L echo as depreciation, which EBITDA excludes by construction. Aggressive capitalizers get a permanently fatter EBITDA, not a timing shift.
• CFO is not neutral. The cash still leaves, but through the investing section. "Strong operating cash flow" can be manufactured by reclassification alone.