Skip to content

Archives

What is the meaning of capital expenditure


what is the meaning of capital expenditure

tax act does not define the terms revenue expenditure and capital expenditure, so one has to depend on their natural meaning and as well. Government is spending far more than it collects in revenue. government makes in human capital, social and economic infrastructure. The purchase of non-current assets necessary for Commonwealth entities and Commonwealth companies to achieve their objectives. Did you find this.

: What is the meaning of capital expenditure

Activate first premier card
What is the meaning of capital expenditure
TARGET CREDIT CARD APPLICATION STATUS ONLINE

Meaning, Definition, and Importance of Capital Expenditure

What is Capital Expenditure? Capital expenditures (CAPEX) refer to funds that are used by a company for the purchase, improvement, or maintenance of long-term assets to improve the efficiency or capacity of the company. Capital expenditure can be tangible, such as a copy machine, or it can be intangible, such as a patent. In many tax codes, both tangible and intangible capital expenditures are counted as assets because they have the potential to be sold if necessary. So, what is the discussion? Meaning, Definition, and Importance of Capital Expenditure.

The Concept of Capital Expenditure explanation of Meaning, Definition, and Importance of Capital Expenditure.

Also known as CAPEX or capital expenses, capital expenditures include the purchase of items such as new equipment, machinery, land, plant, buildings or warehouses, furniture and fixtures, business vehicles, software and intangible assets such as a patent or license. Long-term assets are a company’s land, buildings, machinery, vehicles, furniture, computers, office equipment, software as well as patents, trademarks, and licenses. Companies report CAPEX on the cash flow statement and are amortized over the life of the related asset because, usually, the asset’s useful life is longer than the taxable year and, therefore, CAPEX cannot be reported as an expense.

Meaning and Definition of Capital Expenditure:

An expenditure which results in the acquisition of the permanent asset which is intended to be permanently used in the business for the purpose of earning revenue is known as capital expenditure. These expenditures are ‘non-recurring’ by nature. Assets acquired by incurring these expenditures are utilized by the business for a long time and thereby they earn revenue.

For example, money spent on the purchase of building, machinery, furniture etc. Take the case of machinery-machinery is permanently used for, producing goods and profit is earned by selling those goods. This is not an expenditure for one accounting period, machinery has a long life and its benefit will be enjoyed over a long period of time. By a long period of time, we mean a period exceeding one is there a pawn shop open today period. Moreover, any expenditure which is incurred for the purpose of increasing profit earning capacity or reducing the cost of production is a capital expenditure.

Sometimes the expenditure even not resulting in an increase of profit earning capacity but acquires an asset comparatively permanent in nature will also be a capital expenditure. It should be remembered that when an asset is purchased, all amounts spent up to the point until the asset is ready for use should be treated as capital expenditure.

Examples are, A) A machinery was purchased for $50,000 from Karachi. We paid carriage $1,000, octroi duty $500 to bring the machinery from Karachi to Lahore. Then we paid wages $1,000 for its installation in the factory. For all these expenditures, we should debit machinery account instead of debiting carriage A/c, octroi A/c and wages A/c. B) Fees paid to a lawyer for drawing up the purchase deed of land, C) Overhaul expenses of second-hand machinery etc. D) Interest paid on loans raised to acquire a fixed asset etc.

Rules and Items for Determining Capital Expenditure.

Capital Expenditure is that expenditure which results in the acquisition of the permanent asset or fixed asset which is used continuously in the business for the purpose of earning revenue any amount spent on the asset which will result in increasing the production or reducing the cost of production may also be treated as Capital Expenditure.

The following Rules for Determining Capital Expenditure are:
  • Expenditure incurred for acquiring Land, Building, Machinery, Investments, Patents or Furniture etc. are permanent or fixed assets. The fixed asset is used in the business for earning the profit and not for resale, is called a Capital Expenditure. For instance, when we purchase furniture it is a capital expenditure and at the same time to the Furniture Shop, who is engaged in buying and selling of furniture, it is not capital expenditure.
  • Expenditure incurred for putting an old asset in working condition or for putting a new asset to use is capital expenditure. For instance, an old machine is purchased for Rs. 10,000 and Rs 2,000 is spent for its repairs and installation and the total expenditures are capital expenditure.
  • Which increases the earning capacity in any way of a fixed asset can be called capital expenditure. For instance, the amount spent on cinema theatre for air conditioning.
  • Spent on raising the capital required for earning the profit is called capital expenditure. For instance, underwriting commission, brokerage etc.
  • On an existing asset which results in the improvement or extension of the business by increasing the earning capacity of the asset or by reducing the cost of production is also called capital expenditure. For instance, installations of machine or additions to buildings or plant etc. are chase bank debit card pin reset expenditure.
  • When the benefit of expenditure is not fully consumed in one period but spread over several periods, is called capita, expenditure. For instance, expenditure met for massive advertisements.
The following Items of Capital Expenditure are:
  • Land, Building, Plant, and Machinery.
  • Leasehold Land and Building.
  • Manufacture or purchase of furniture and fixtures.
  • Office Cars, Vans, Lorries or Vehicles.
  • Installation of lights, fans etc.
  • The erection of Plant and Machinery.
  • Trade Mark, Patents, Copyrights, Patterns, and Designs.
  • Preliminary Expenses.
  • Goodwill.
  • Addition to an extension of existing fixed assets.
  • Development what is the meaning of capital expenditure case of Mines and Plantations.
  • The invention.
  • Increasing capacity of the fixed asset, and.
  • Administration in industrial enterprises incurred during the period of construction.

Importance of Capital Expenditure:

Decisions how much to invest in capital expenditures can often be extremely vital decisions made by an organization.

They are important because of the following reasons:

Long-term Effects:

The effect of capital expenditure decisions usually extends into the future. The range of current production or manufacturing activities is mainly as a result of past capital expenditures. 

Similarly, the current decisions on capital expenditure will have a major influence on the future activities of the company. Capital investment decisions usually have a huge impact on the basic character of the organization. 

The long-term strategic goals, as well as the budgeting process of a company, need to be in place before authorization of capital expenditures.

Irreversibility: 

Capital expenditures can hardly be undone without the company incurring losses. Since most forms of capital equipment are customized to meet specific company requirements and needs, the market for capital equipment that has been used is generally very poor.

Once the capital equipment is purchased, there is little room to reverse the decision since the cost can often not be recouped. For this reason, wrong capital investment decisions are often irreversible, and poor ones lead to substantial losses being incurred. Once acquired, they need to be employed for use.

High Initial Costs: 

Capital expenditures are characteristically very expensive, especially for companies in industries such as production, manufacturing, telecom, utilities, and oil exploration.

The Capital investments in physical assets like buildings, equipment, or property offer the potential of providing benefits in the long run but will need a huge monetary outlay initially, much greater than even operating outlays. Capital costs often tend to rise with advanced technology.

Depreciation: 

Capital expenditures lead to an increase in the asset accounts of an organization. However, once capital assets start being put in service, their depreciation begins, and they continue to decrease in value throughout their useful lives.

“A capital expenditure (CAPEX) is an expense that a company makes towards. The purchase of new equipment or the improvement of its long-term assets, namely property, plant, and equipment”. Capital expenditures normally have a substantial effect on the short-term and long-term financial standing of an organization.

Therefore, making wise capital expenditure decisions is of critical importance to the financial health of a company. Many companies usually try to maintain the levels of their historical capital expenditure to show investors. That the managers of the company are investing effectively in the business. The expenditure amounts for an accounting period are usually stated in the cash flow statement.

Meaning Definition and Importance of Capital Expenditure
Nageshwar Das

Nageshwar Das, BBA graduation with Finance and Marketing specialization, and CEO, Web Developer, & Admin in www.ilearnlot.com.

Источник: https://www.ilearnlot.com/meaning-definition-and-importance-of-capital-expenditure/57635/

Mayor defends budget with larger tax increase, chamber of commerce CEO dumbfounded

Saskatoon property owners will be paying more in taxes next year than initially predicted.

Budget deliberations began on Monday and were completed late Wednesday night. After more than 21 hours, councillors voted 8-3 to pass the final operating and capital budgets. Mayor Charlie Clark stands behind council’s work, and says they all did their best.

“We got lots of feedback. We know there were some things in the budget that people wanted that weren’t there, and there are people who think that we could have cut services in other areas. In the end, we had to find the right balance between making sure we’re getting maximum value from our tax dollars and also making strategic investments and the things we need to do to ensure our city will succeed,” Clark explained.

Before the process began, administration set out its indicative rate — what it would cost the city to maintain services at their current levels for next year and in 2023.

The rates were pegged at 3.51 and 3.14 per cent, respectively. Numerous additions were approved in the operating budget, which has a direct impact on property taxes.

But after lengthy debate and several attempts to try and lower the property tax rate, councillors approved a 3.86 per cent rate increase for 2022 and a 3.53 per cent increase in 2023.

Once the operating budget was approved, Coun. Randy Donauer was the first to try and bring down the 2022 rate, with a $1.33 million dollar “global adjustment,” equivalent to half a percentage point in property taxes in the Corporate Governance and Finance Business line.

Chief financial officer Clae Hack and city manager Jeff Jorgensen told council that they already had to cut nearly $7 million from the 2022 budget, and more than $5.5 million from the 2023 budget. Adding on another $1.3 million would “build an even deeper hole” to get out of next year.

The motion ultimately was not supported. Coun. David Kirton said it would be inequitable, especially lower income residents who depend on city services.

According to administration, the impact bringing down the tax rate from 3.86 per cent to 3.36 per cent would mean a $10 dollar per year savings for the average household.

Subsequent motions by Coun. Bev Dubois to remove all Full Time Equivalent positions except for police and fire, was also defeated, as was a motion by Coun. Zach Jeffries to lower the contribution to the Reserve for Capital Expenditures by $500,000 was also voted down.

What does that mean?

The average homeowner with a house assessed at $344,000 will pay an extra $74.04 in 2022, or about $6.17 per month. The tax increase in 2023 will amount to an extra $70.43 for the year, or $5.87 per month.

Water and mortgage questions login page utilities are also set to increase about 2.5 per cent in 2022, and about 3.5 per cent in 2023, while Saskatoon Light and Power customers will see a 1.75 per cent increase on their bills in both of those years. Waste collection will become a utility in 2022, meaning people will get a separate bill for the service next year.

The $119-million Saskatoon Police budget was also approved. Eight new officers will be added in 2022, and another four in 2023. The $56 million Fire Department budget was given a thumb’s up, and will see another five positions in 2022 and the same number in 2023.

The $153 million Transit operating budget also got the green light by a 9-1 vote, with Coun. Darren Hill opposed.

Other approved expenses

Mayor Charlie Clark is also defending some of the optional expenses approved in both the capital and operating budgets.

“These are all good examples of the challenge of budgeting right now and being able to both — make sure we can bring in any expenditures and positions that are justifiable — but also meet the needs of our community as it changes and grows.”

One of those jobs, called “Assisted Collections,” was originally presented under “Operating Options,” but was moved to “Capital Expenditure Options.” Clark said the position had expired and needed to be renewed.

The position will see a city or contractor employee rolling waste collection bins from homes to the curb, and to “tip its contents” into the collection vehicle and return the cart. Council approved $50,000 for the position in 2022, and $70,000 in 2023.

Another position in the Capital Expenditures Options, would see a “mental wellness consultant” paid $109,500 in 2022 and again in 2023 to develop a holistic approach and to support city employees through “unprecedented change in the organization and society by working on a city-wide strategy to build change resilience.”

To date, the city says it has responded to mental health needs of employees though counselling services and other health benefits programs.

Two additional usaa san antonio human resources positions will go to a seasonal painter and part-time custodian to complement the existing seasonal graffiti crew at a cost of $60,000 in 2022 and again in 2023. Administration says “there is always more graffiti reported than the crew can clean in a timely manner.”

Chamber of Commerce gives budget a failing grade

Saskatoon Chamber of Commerce CEO Jason Aebig was dumbfounded by the outcome of budget deliberations on Wednesday night

“I guess the what is the meaning of capital expenditure from this budget is ‘all is well,'” Aebig told the Brent Loucks Show on 650 CKOM Thursday morning.

“We had every assumption that actually the proposed rate was not going to be the final rate. We assumed council was going to whittle it down.”

Aebig says it’s hard to accept that there were united first class lounge dulles additional savings in a $1.2 billion budget at a time when businesses are still reeling from the effects of the pandemic.

“The debt load being carried by small and medium-sized businesses is huge because subsidies play a role, but they didn’t fill the gap.”

“We’re dealing with labour shortages. We’ve got supply chain disruptions and of course the ongoing uncertainty of things like variants .”

Aebig believes this will stunt the city’s economic recovery, adding some businesses will have to rethink their hiring plans while others will close up shop.

Ironically, Aebig tweeted about the closure of a what is the meaning of capital expenditure retailer in downtown Saskatoon shortly after making those comments.

Sad news for our downtown. The closure of the store will mark the end of Birks in #yxe and #SK. Iconic Canadian company and fixture in our downtown. Points to the fragility of our economy and ongoing challenges retailers are facing. No business untouched, even longstanding ones. pic.twitter.com/X0VEWBOBP4

— Jason Aebig (@JasonAebig) December 2, 2021

Aebig said this budget shows a disconnect between elected officials and the residents they serve.

“Somebody is paying those bills. Unfortunately, we’re not at a state here where that understanding is clear. If it is clear, it’s certainly not acted on.”

Источник: https://www.ckom.com/2021/12/02/saskatoon-2/

World's largest offshore wind farm 'unprofitable' for Equinor, say government-funded researchers

Equinor's investment in Dogger Bank — the world's largest offshore wind project under construction — will be unprofitable, according to a Norwegian government-funded study.

The new research raises challenging questions about the Norwegian state-controlled oil and gas giant's energy transition strategy.

The study was submitted this month to Norway’s Petroleum & Energy Ministry, which financed it as part of wider research into potential energy transition opportunities for the country.

Equinor chief executive Anders Opedal set ambitious new goals in June for the company to step up its investments in "renewables and low carbon solutions" to more than 50% of its gross annual investments by 2030.

Equinor sees the What is the meaning of capital expenditure Bank project in the UK North Sea as a world-class asset that benefits from strong wind conditions, innovations and unprecedented scale: It will have 3.6 gigawatts of installed capacity when completed.

One of the study's authors told Upstream that the massive project's rate of return does not exceed Equinor's rate of return requirement, so the researchers deem the project to be unprofitable.

Article continues below the advert

“In our estimate, Dogger Bank is unprofitable,” said University of Stavanger professor Petter Osmundsen. "The project has to compete with alternative investment opportunities."

Equinor has not disputed the study's conclusions, but emphasised that it had benefited from selling stakes in the project.

Read more:Future bidding wars could threaten offshore wind margins

Osmunden expressed confidence in the study's conclusions, while acknowledging the researchers had relied on a number of assumptions, public information and industry norms in creating it.

Equinor would do better to focus on other types of clean energy projects with higher entry barriers more aligned with the company's competence, he said.

"Committing to a very large capacity in bottom-fixed offshore wind is putting too many eggs in one basket — possibly also not in the right basket," he said. "Low entry barriers and highly competitive bidding would make it hard to earn a resource rent."

Promising business segments

Equinor is entering new business segments that look more promising for the company than bottom-fixed offshore wind, Osmundsen said, such as seabed minerals, carbon capture and storage, clean hydrogen, and perhaps floating offshore wind.

Equinor emphasised to Upstream that it benefited from Italian energy company Eni buying into Dogger Bank as a partner.

“Equinor entered Dogger Bank early, and the farm downs to Eni demonstrate the value of accessing early and maturing assets before farm downs,” a company spokesperson wrote in an e-mail response to Upstream's questions.

Equinor is in charge of operations for the UK North Sea project, while Scotland-based partner SSE leads the project's construction and Eni is an industrial partner for all three phases of the wind what is the meaning of capital expenditure. Equinor and SSE each hold 40% stakes in the project, while Eni holds 20%.

Offshore wind challenges

The rapidly expanding offshore wind industry anticipates project construction costs will come down as scale increases, offering robust investment returns.

Costs have indeed come down for the bottom-fixed Dogger Bank and other offshore wind projects, but not at the same pace as strike prices have fallen in UK offshore wind auctions, according to the study.

Strike prices are a government-guaranteed price for electricity that will be generated from the project, which is awarded to the lowest bidder. Strike prices protect the developer from prices falling too much and protect consumers from prices rising too much.

Equinor's bigger wind turbines, low prices for raw materials and limited competition helped the company generate solid profit from its larger early offshore wind projects.

That climate has since changed, as the world's largest player in the segment, Orsted of Denmark, has warned about supply-chain blockages and higher raw material prices. Increased competition for new licences also has significantly reduced strike prices in auctions.

Negative net present value

The researchers calculated the Dogger Bank project's expected net present value (NPV) at minus £970 million (minus $1.3 birdee stephens. A negative NPV indicates that the value of the investment is below the rate of return which the company should require from its investments.

They calculated the expected internal rate of return (IRR) on total capital in the Dogger Bank project at 3.6%, in real terms, with a payback period of 17 years. IRR is a method used to compare relative profitability of projects.

Oil and gas projects' internal rates of return often are much higher than for offshore wind, what is the meaning of capital expenditure is not exposed to the volatility of oil prices because of power price guarantees.

The researchers applied industry norms and based their estimates on assumptions about capacity factor, operating and decommissioning costs, and the electricity price for the last 10 years of production.

"Public information from the project gives detailed information about capital amazon cyber monday 2019 switch, production capacity and prices for the first 15 years of production," Osmundsen said.

In June, Equinor reduced its expected rate of return for offshore wind to between 4% and 8% (excluding farm downs), from 6% huntington online banking login huntington 10%, but the new study finds that Dogger Bank might end up below the revised range.

Upstream and sister publication Dagens Naeringsliv requested an interview about the study with Equinor’s head of renewables, Paal Eitrheim, but he was not available.

Equinor emailed written comments about the study to Upstream.

“We do not communicate net present value on project basis. However, at our capital markets day we gave an interval for expected returns," an Equinor spokesperson wrote.

"We expect project base-returns between 4% and 8% real with mature markets such as the UK at the lower end of the range and emerging markets at the higher end.”

Equinor has long stressed that offshore wind has a very different risk profile than oil and gas, with more stable revenues.

However, with a fixed price for the power produced, there is also little potential upside, and costs recently appeared to be rising for some other wind power first financial bank hopkinsville ky routing number — not falling.

For example, Danish wind installation giant Orsted warned in a third-quarter earnings statement about difficult conditions due not only to weaker-than-usual winds, but also supply-chain difficulties and delays in manufacturing.

Supply-chain instability and rising energy prices — as well as accelerated cost inflation for raw materials, transport and turbine components — also impacted the profitability of leading turbine manufacturer Vestas.

Equinor’s spokesperson acknowledged that the company's projects can be affected by global trends for the cost and availability of inputs, but added that there are contractual mechanisms in place to balance the risk between supplier and developer.

Farming down in offshore wind

Equinor has previously had success in farming down within offshore wind. The sale of a 50% share of Empire Wind in the US was seen as a particularly successful sale.

However, there is still little sign of Dogger Bank boosting profitability significantly for Equinor and SSE, which made two sales to Eni of different parts of the UK project.

After the first sale to Eni, Equinor and SSE increased their internal rate of return to 4.2%, according to the University of Stavanger research.

At Upstream's request, the researchers also calculated the effect of the recent sale.

“After the second sale, where the payment per megawatt is down some 30%, the rate of return increased to 4.4%,” Osmundsen said, adding that the researchers have assumed the three phases are equal.

Equinor's spokesperson acknowledged that the company received less for the third phase of the project, but said there are site-specific conditions for this phase, including a different layout leading to lower production factors than phases A and B, distance from shore and water depth meaning capex per kilowatt is higher.

"Increased corporation tax rate is another element," he said.

Norwegian researchers behind the study

Professor Petter Osmundsen and associate professor Sindre Lorentzen, both from University of Stavanger, and Magne Emhjellen-Stendal, senior advisor in Petoro with a research collaboration with University of Stavanger, have analysed profitability for developers of bottom-fixed offshore development projects, using Dogger Bank as a case study. The report is part of a research program funded by the Norwegian government to explore energy transition opportunities.

Why do the Norwegian researchers deem Equinor's Dogger Bank wind farm to be unprofitable?

Whether the project is profitable, depends on the rate of return requirement. Compared to an International Energy Agency rate of return requirement from 2018 of 6.55%, the Dogger Bank project is not profitable. The same applies with the suggested 6% requirement from 2020 by the UK Department for Business, Energy & Industrial Strategy (BEIS).

While it is normal to use one discount rate, the researchers argue for two rates for this kind of project. One rate for the first 15 years of fixed electricity prices given by the UK contracts for difference (CfD) calculated at 3.9%, and one rate for the period of market price (6.5%). The researchers conclude that with their assumptions, the project is unprofitable, with an expected net present value of minus £970 million.

The UK strike price has fallen drastically, from £114.39 per megawatt hour in the 2015 CfD auction to the 2019 Dogger Bank award of £39.650/MWh for phase A and £41.611/MWh for phases B and C (all in 2012 prices).

Other researchers, who have observed the dramatic reduction in the strike price awarded after aggressive bidding, conclude that very significant cost reductions are needed to safeguard project economics. One way of achieving this, these researchers argue, is for investors to reduce the rate of return requirement. The internal rate of return for offshore wind farm developers is now only half of what it was six years ago.

(Ole Ketil Helgesen is Upstream's Norway energy reporter. Morten Aanestad and Mikael Holter are reporters for Upstream's sister publication, Dagens Naeringsliv.)

Share: Email

Источник: https://www.upstreamonline.com/exclusive/worlds-largest-offshore-wind-farm-unprofitable-for-equinor-say-government-funded-researchers/2-1-1098012

Capital Expenditure

Definition: Capital Expenditure or CapEx refers to the financial outlay made by the firm for an asset which is expected to stay in the business for a long time, so as to use the same for more than one financial year, which not only generates enduring benefits for the company but ensures the generation of revenue over the years.

In finer terms, when the company uses its funds for acquiring, improving or upgrading its long term assets, so as to increase its productivity, capacity and efficiency, such an expense is called as capital expenditure.

These expenditures can also be made with the aim of increasing the scope of operations, improving the working condition of assets or extending the useful life of the assets. Such expenditures are primarily made by the company to start a new unit, project or venture, with an aim of earning revenue therefrom.

Examples

  • Overhauling expenses of second-hand machinery.
  • Expenses made by the promoters before the commencement of business, i.e. preliminary expenses are of capital nature.
  • Purchase of assets such as furniture, plant, building, computer, vehicles, etc. for the use in business and not for the purpose of trading and reselling.
  • Trial run expenses of newly installed machinery.
  • Advance paid in relation to a broadband connection, in the office.
  • Fee paid for acquiring a license, to run a specific business.

Capital expenditure incurred by the firm for buying or upgrading the asset accrues long-lasting benefit to the firm and so the total amount spent on it will also be spread over the useful life of the asset.

Furthermore, the asset purchased by making capital expenditure can be reconverted into cash, irrespective of the fact that the reconversion resulted in profit or loss.

Factors Determining Capital Expenditure

There are certain factors on the basis of which the expenses are considered as capital expenditure, they are:capital expenditure

  1. Nature: The nature of the business, in which the company trades or deals plays a crucial role here, because, for a company engaged in real estate business, purchase of land or buildings is revenue expenditure, as it is considered as company’s inventory. But for other companies, the purchase of land and building will be a capital expenditure.
  2. Frequency: Capital Expenditure involves a one-time outlay of cash, usually nonrecurring in nature, and so it is not directly taken to Profit and Loss account, in the year in which the outlay is done. So, if an expense occurs frequently, it will be considered as an item of revenue expenditure and not a capital one
  3. Purpose: Expenditure made by the firm so as to increase the productive capacity of an asset will be regarded as a major repair, and so it is of capital nature.
  4. Revenue earning capacity: Any expenditure will be called as capital expenditure if it is made with the purpose of increasing the company’s earning capacity, as well as the benefits of such expenditure extends to a number of years.

Capital Expenditure is shown in the asset walmart 800 customer service of the balance sheet, as they generate revenue to the company, for more than one accounting year.

Further, these expenses are transferred to the company’s profit and loss account (income statement) of the year, as per the utilization of that benefit, from the expenditure, in the concerned accounting year.

Источник: https://businessjargons.com/capital-expenditure.html

CapEx and OpEx

Lean-Agile Leaders need to understand an Enterprise’s current software development capitalization practice, as well as how to apply these principles in Agile development. Otherwise, the transformation to Agile may be blocked or, alternately, the company may not be able to correctly account for development expense.

—SAFe advice

Capital Expenses (CapEx) and Operating Expenses (OpEx) describe Lean-Agile financial accounting practices in a Value Stream budget. In some cases, CapEx may include capitalized labor associated with the development of intangible assets—such as software, intellectual property, and patents.

Enterprises fund a SAFe portfolio to support the development of the technical Solutions that allow the company to meet its business and financial objectives. These Lean Budgets may include both CapEx and OpEx elements. In accordance with accounting standards, some enterprises may capitalize some percentage of the labor involved in creating software for sale or internal use.

Although software capitalization practices are well established in many enterprises, they’re typically based on waterfall development, in which up-front requirements and design phase gates may represent the events that can trigger CapEx treatment. In Agile development, however, these are not relevant phase gates. This means the enterprise is faced with a new problem: how to treat these costs effectively in an Agile program. If finance is unable to reconcile the change in methodology, it may mandate that work continues under waterfall development. Or it may decide to expense all Agile development labor costs. Uia booking online approach is ideal.

This article provides the strategies that SAFe enterprises can use to categorize labor costs in Agile development, some of which may be subject to CapEx treatment. However, this is an emerging field of understanding, and there are many viewpoints. References [2] and [3] below provide additional perspectives. Lean-Agile change agents should engage early with business and financial stakeholders to establish an understanding of how the new way of working may affect accounting procedures.


Disclaimer: The authors have no formal training or accreditation in accounting. The treatment of software costs and potential for capitalization vary by country, industry, and individual company policy. (For example, suppliers to the US federal government have an entirely different set of rules.) Moreover, even when subject to the US Financial Accounting Standards Board (FASB) guidelines, under the Generally Accepted Accounting Principles (GAAP) principle of conservatism, some companies choose not to capitalize software development costs at all [4]). Each enterprise is responsible for the appropriate implementation of financial accounting for capitalization of development costs.


Enterprises provide funding to a SAFe portfolio to support the development and management of a set of solutions. Within the portfolio, allocating funds to individual value streams is the responsibility of Lean Portfolio Management (LPM), which allocates the necessary funding for each value stream in a portfolio. A budget for a SAFe portfolio may include both CapEx and OpEx elements. OpEx records the ongoing costs of running a product, business, or service. These include:

  • Salaries
  • The burden for operating personnel, sales, and marketing
  • General and administrative costs
  • Training
  • Supplies and maintenance
  • Rent
  • Other expenses related to operating a business or an asset of the business

Costs are recorded and expensed in the period in which they occur.

Most often CapEx reflects the monies required to purchase, upgrade, or fix tangible physical assets, such as computing equipment, machinery, or other property. In this case, the cost of purchase is put on the balance sheet as an asset and then expensed on the income statement what is the meaning of capital expenditure the useful life of that asset. In addition, in some cases, some of the labor costs associated with the development of intangible assets, such as patents and software, may also be subject to CapEx treatment. In this case, CapEx may include salaries and direct burden, contract labor, materials, supplies, and other items directly related to the solution development activities.

Portfolio stakeholders must understand both CapEx and OpEx so that they are included in the Economic Framework for each value stream. Otherwise, money may not be spent in the right category, and/or the financial results of the portfolio may not be accurate.

In particular, capitalizing some of the costs of software development can have a material effect on financial reporting. That is the topic of the remainder of this article.

Accounting for Software Development Costs

Rules for capitalization of software assets vary by country and industry. In the United States, the US Financial Accounting Standards Board provides guidance for Generally Accepted Accounting Principles for US companies that report financials in the public interest. This includes those that report publicly under US Securities and Exchange Commission regulations. Similar organizations exist in other countries. For example, UK Financial Reporting Council (FRC) provides policies that are largely similar to those of FASB. In addition, the US federal government has different standards under the Federal Accounting Standards Advisory Board.

For US companies operating in the private and public reporting sectors, US FASB 86 provides accounting guidelines for the costs of computer software to be sold, leased, or otherwise marketed [1]. FASB 86 states that costs incurred internally in creating a computer software product must be expensed when incurred as research and development until technological feasibility has been established. Thereafter, software production costs may be capitalized and subsequently reported at the lower of either the unamortized cost or the net realizable value. Capitalized costs are amortized based on current and future revenue for each product, with an annual minimum equal to the straight-line amortization over the remaining estimated economic life of the product. For these purposes, a software product is defined as what is the meaning of capital expenditure a new product or a new initiative that changes the functionality of an existing one.

Software Classifications under FASB 86

There are three primary classifications of software development under FASB 86:

  • Software for sale – Software developed for sale as a stand-alone or integrated product, typically by independent software vendors (ISVs)
  • Software for internal use – Software developed solely for internal purposes or in support of business processes within an enterprise, which is further described in Statement of Position (SOP) 98-1 (also FASB Accounting Standards Update 350-40  for fees paid in Cloud Computing)
  • Embedded software – Software as a component of a what is the meaning of capital expenditure product needed to enable that product’s essential functionality

Capitalization standards are treated differently within these categories, so the relevant guidelines must be taken into consideration.

Capitalization versus Expense Criteria

In general, FASB 86 requires that a product must meet the following criteria to capitalize ongoing development costs:

  • The product has achieved technical feasibility
  • Management has provided written approval to fund the development effort
  • Management has committed the people and resources to development
  • Management is confident that the product will be successfully developed and delivered

Before software can be capitalized, finance departments typically require documented evidence that these specific activities have been completed. Once these criteria are met, further development costs may be subject to capitalization, as described in Table 1.

Table 1. Categories of expensed and what is the meaning of capital expenditure capitalized costs

Capitalization Triggers in Waterfall Development

Historically, capitalization was applied in the context of waterfall/phase-gate development. Waterfall development had a well-defined up-front phase, during which requirements were developed, the design was produced, and feasibility was established. For those projects that received further approval, the requirements and design milestones often served as phase gates for starting capitalization, as shown in Figure 1.

Agile Development Capitalization Strategies in SAFe

In Agile, however, requirements and design emerge continuously, so there’s no formal phase gate to serve as an official starting point for capitalization. That does not mean, however, that projects fund themselves. Instead, the SAFe enterprise organizes around long-lived flows of value in value streams. The personnel and other resources of an Agile Release Train (ART), operating on a fixed Program Increment (PI) cadence, implement them.

The majority of the work of most ARTs is typically focused on building and extending software assets that are past the point of feasibility analysis. They generally do this by developing new features for the solution. Since Features increase the functionality of existing software, the User Stories associated with those features constitute much of the work of the ART personnel. Therefore, this labor may be subject to potential capitalization.

The ARTs also help establish the business and technical feasibility of the various portfolio initiatives (Epics) that work their way through the Portfolio Kanban. This feasibility work is somewhat analogous to the early stages of waterfall development and is typically expensed up until the ‘go’ recommendation when new feature development would begin.

This means that both types of work are typically present in any PI—and, by extension, any relevant accounting period. Much of this is new feature work that increases the functionality of the existing software. Other work includes innovation and exploration efforts. These may be initiated from the portfolio Kanban—as part of the research and feasibility for potential new portfolio level epics—or they may arise locally. In addition, maintenance and infrastructure work also occur myato the period. Figure 2 illustrates these concepts.

Figure 2. Anatomy of a PI with respect to potential CapEx treatment

Categorization of Features for OpEx and CapEx

Creating new features for the solution is part of implementing new projects and enhancing existing products. By their very definition, features provide enhanced functionality.

Features can be easily identified and tracked for potential CapEx treatment. To do so, accounting fiduciaries work with Product Management to identify them in the Program Backlog. The selected features are ‘typed’ (flagged) for potential CapEx treatment, which creates the basic tracking mechanism. Thereafter, teams associate new stories with those features and perform the essential work of realizing the behavior of the features by implementing stories in the new code base.

Applying Stories to CapEx and OpEx Treatment

Most stories contribute directly to new functionality of the feature; the effort for those stories may be subject to CapEx treatment. Others—such as Enabler stories for infrastructure, exploration, defects, refactoring, and any other work—may not be. Agile Lifecycle Management (ALM) tooling can support the definition, capture, and work associated with implementing stories.

By associating stories with features when applicable in the tooling (typically called ‘parenting’ or ‘linking’), the work related to feature development can be identified for potential CapEx treatment. Various query functions in the ALM tool can help automate the needed summary calculations.

Table 2 indicates three of the possible mechanisms for calculating the percentage of work that may be a candidate for CapEx treatment.

By Story Hours

The most granular means for capturing labor effort is to have team members record their hours against each story. Although there’s some overhead, many teams do this anyway because of traditional time-tracking requirements for job costing, billing, estimating, and other needs. However, this should not be the default mode for CapEx, as it incurs overhead and thus reduces value delivery velocity. The rest of the calculation is straightforward: the CapEx potential percentage is simply the percentage of hours recorded for CapEx features, divided by the total of all hours invested in any period. After converting hours worked to cost, the enterprise can assess the total cost that may be subject to CapEx treatment.

(Note: During planning, some Agile Teams break stories into tasks and estimate and update task hours accordingly. This first method only requires that actual total team hours are recorded for the story; tasking is not mandatory.)

By Story Points

Story points are the common currency of Scrum. Scrum teams estimate stories in points and update their estimates to actuals to improve future estimates. Although story points are relative, not absolute, units of measure, they’re all that’s necessary. The enterprise only needs to know the percentage of story points allocated to stories that have CapEx potential, over the total story points delivered in any accounting period. Conversion to actual costs is handled in the same way as for the preceding example. This is a low-friction, low-overhead method that generally does not create any additional burden on teams, other than the need to be sure to update estimates to actuals for each story completed. Again, ALM tooling typically supports the recording and automated calculation of such measures.

(Note: In order to compensate for the relative nature of story points, which can vary from team to team, SAFe suggests a means for normalizing story point estimating across teams as part of the common economic underpinning for an ART.)

By Story Count

The methods above provide a fairly granular means of categorizing work to be capitalized. But then there’s the labor of entering and capturing the data, and that extra work does not, by itself, deliver end-user value. Given the scope of the typical ART in the enterprise, there may be an easier way.

In a single PI, it’s not unusual for an ART to implement many hundreds of stories, in various types and sizes (for example, 10 teams, 10 stories per Iteration, over 4 iterations, yield 400 stories per PI). Sizing hdfc saving account interest rate story is not biased by an understanding of the potential for CapEx treatment of a story, and therefore story sizes will average out over time. In addition, over time the CapEx and associated depreciation schedules resolve to expense all development anyway.

Thus, near-term perfection is not necessarily the goal, as it’s probably false precision anyway that may come at too high a cost. This suggests that simply counting stories by type is a fair proxy for the amount of effort devoted to potential CapEx stories. In a manner similar to the first two methods above, this percentage can then be used to determine the CapEx potential in a given accounting period. Some Agilists have reported that this percentage approach is being applied to new Lean-Agile development initiatives (sometimes based simply on initial capacity allocation (see Program Backlog). While subject, appropriately, to occasional audits, this method provides a fairly friction-free approach that allows teams to focus exclusively what is the meaning of capital expenditure value delivery.

What Labor is Subject to CapEx Treatment?

There is one final aspect left to discuss: What labor elements may be applied to CapEx treatment? Again, the answer is highly specific to the actual enterprise. However, within the Agile development world, the following guidelines are often applied:

  • The salaries of Agile team members who are directly involved in refining, implementing, and testing stories may be subject to CapEx, as is largely consistent with existing waterfall practices. This may midas car care credit card login software developers and testers and User Experience (UX) and other subject matter experts.
  • In addition, Product Sovereign online personal banking login (POs) and Scrum Masters are part of the Agile team and directly contribute to story definition and implementation. This indirect labor is directly associated with new value delivery and, thus, may be appropriate for CapEx treatment. This can be accomplished by adding an additional average cost burden on a CapEx story.
  • Further, not all work for a feature is performed solely by Agile team members. System Architects, System Teams, and IT Operations also contribute to the features under development. Some portion of their cost may be subject to CapEx as well.
  • Finally, additional roles in the Solution Train may contribute to value creation via Pre- and Post-PI Planning, creation and maintenance of Solution Intent, and the Solution Demo. While further removed from the specific implementation tasks, all of these activities and roles provide value. So their potential for CapEx treatment may be appropriate, at the discretion of the enterprise.

Learn More

[1] FASB 86 summary at fasb.org/summary/stsum86.shtml[2] Reed, Pat, and Walt Wyckoff. Accounting for Capitalization of Agile Labor Costs.Agile Alliance, February 2016.[3] Greening, Dan. Why Should Agilists Care about Capitalization? InfoQ, January 29, 2013.[4] Footnote from a US public reporting software company’s Form 10-K filing, highlighting a policy of not capitalizing software development expense: “Research and development expenses primarily consist of personnel and related costs of our research and development staff, including salaries, benefits, bonuses, payroll taxes, stock-based compensation, and costs of certain what is the meaning of capital expenditure contractors, as well as allocated overhead. Research and development costs related to the development of our software products are generally expensed as incurred. Development costs that have qualified for capitalization are not significant.”

 

Last update: 10 February 2021

 

The information on this page is © 2010-2021 Scaled Agile, Inc. and is protected by US and International copyright laws. Neither images nor text can be copied from this site without the express written permission of the copyright holder. Scaled Agile Framework and SAFe are registered trademarks of Scaled Agile, Inc. Please visit Permissions FAQs and contact us for permissions.

Источник: https://www.scaledagileframework.com/capex-and-opex/

What is the meaning of capital expenditure -

Characteristics of Capital Expenditure

By Andrew Latham

Capital expenditures can be used to offset the basis for capital gains.

Capital expenditure is an accounting term used to describe money spent to improve or upgrade physical assets. For instance, capital expenditure on a property includes everything from adding a bathroom to the main bedroom to installing a satellite dish. The difference between capital expenditure and deductible expenses is that the IRS does not allow you to deduct capital expenditure until the asset upgraded on is sold. A way around this is to capitalize the expenditure, or in other words, spread the cost of the expenditure over the asset's useful life and deduct the expense over several years as a depreciation. You can use Form 4562, Depreciation and Amortization, to declare a depreciation of a capital expenditure (see Resources).

Useful Life

According to the IRS, capital expenditure on a property must have a useful life of more than one year. Investments that only have a temporary effect on a property, such as mowing the grass or cleaning the gutters, are considered maintenance not a capital expenditure.

Special Assessments For Improvements

Fees paid to a professional consultant to assess the aptness or feasibility of a capital expenditure are also considered a capital expenditure. For instance, any consulting fees you pay to plan, locate and build a well or a septic tank can be declared as a capital expenditure.

Adds Value

Capital expenditure must add value to the asset. For instance, installing central air-conditioning, a new driveway or a soft water filtration system all add to the value of a property. Small repairs like painting a room or fixing a leaking faucet do not qualify as a capital expenditure because they do not add any value to the property. According to Bank Rate, a good way to decide if an improvement on a property is a capital expenditure is whether you need a local government permit to do the work.

Exceptions

The IRS does not consider as a capital expenditure any improvement that is no longer part of the home. For example, you cannot declare as a capital expenditure built-in appliances--which are a capital expenditure--if they are no longer part of the property. You can consider repairs as a capital expenditure if they are part of an extensive remodeling or restoration of an asset. Any improvements you make on a property after an accident or casualty loss is also a capital expenditure.

References

Resources

Writer Bio

Andrew Latham is a seasoned copywriter for both print and online publishers. He has a Bachelor of Science, majoring in English, a diploma in linguistics and a special interest in finance, science, languages and travel. He is the owner of LanguageVox.com, a company based in Charlottesville, Virginia, which provides writing, interpreting and translating services for English and Spanish audiences.

Источник: https://homeguides.sfgate.com/characteristics-capital-expenditure-7335.html

Operational Excellence Goals That the Organization Can Get Behind

Operational Excellence Goals-406418-edited

 

Operational excellence (OpEx) isn’t just a “nice to have,” it’s a core part of how modern organizations remain competitive and cost-effective. At its core, OpEx is the execution of your business strategy with greater consistency and efficiency than the competition. The role of the OpEx team is to facilitate the implementation of the behaviors and work process required to achieve what the business requires to be successful.

That being said, it’s important to establish clear goals for the implementation of OpEx so that the organization can fairly judge whether its investment in OpEx is generating the desired return. Generally speaking, OpEx goals can be divided into three broad categories:

 

  • Financial. These goals are focused on the monetary aspects of the business—such as reducing costs or improving revenues.
  • Operational. These goals tend to focus on improving productivity or quality so as to differentiate the company from its competitors.
  • Cultural/Workforce. These goals are designed to improve the workforce’s capabilities, commitment, and discretionary effort.

Among each of these categories, it is vital for the business to ensure that individual goals and associated metrics align with the business’ needs and overall strategy—not to mention the OpEx vision, strategy, and resource model.

Here are a few examples of operational excellence goals that your organization can get behind to improve the execution of its overall business strategy:

 

Financial Goals

Some key examples of financial OpEx goals include:

 

  • Greater Sales. Most businesses desire to increase their sales volume in some way. However, the organization can only increase sales volume if it can reliably meet the demand. From an OpEx perspective, this means finding an opportunity to release resident capacity in the business that isn’t being utilized because of waste, inefficiency, or lack of capability. In manufacturing, this phenomenon is sometimes referred to as the “hidden factory” but it plays out in service-based organizations as well. Unleashing resident capacity is often the key to sustainable sales growth.
  • Improved Cost Competitiveness. The ability to differentiate based on cost is critical to the success of most organizations, but particularly those that operate in mature markets where the customer has many viable alternatives. OpEx can play a huge role in driving cost out of the business.
  • Improved Cash Position. A sometimes overlooked financial benefit from OpEx lies in the amount of capital that can be made available to drive business growth. For example, if the organization is able to avoid or delay a major capital expenditure (e.g., new manufacturing process, patient care facility, service center, etc.) because of improved productivity within its existing assets, that capital is now available to be used in other ways that could be more beneficial to the business. The same is true if the organization is able to increase inventory turns or shorten the cash-to-cash cycle time.

Operational Goals

Some operational goals that can be tied to your OpEx efforts include:

  • Improved Safety Performance. While many organizations manage the implementation of their workplace safety program separate from OpEx, the reality is that no organization can be truly operationally excellent if it isn’t operating safely. Therefore, any structured effort to improve operations should at a minimum not interject risk into the organization’s efforts to facilitate proper workplace safety. Ideally though, OpEx will reinforce the importance of proper safety practices and contribute to a safer work environment through hazard identification & risk reduction and employee competency development.
  • Increased Value Stream Productivity. A common OpEx goal is to increase the productivity of a given value stream within the organization. The benefits of increased productivity can manifest as increased throughput, improved labor efficiency, or enhanced product/service flexibility (i.e., the ability to produce a wider array of products or provide a more diverse set of services).
  • Improved Product/Service Quality. Improving the quality of your organization’s products and services can improve customer retention and brand loyalty metrics. And for certain industries, such as food & beverage or patient care, there are either significant regulatory or customer/patient consequences associated with sub-par product or service quality that require a persistent focus on continuous improvement.

Cultural and Workforce OpEx Goals

Some core cultural and workforce-oriented goals associated with OpEx may include:

  • Increased Skills Attainment. Knowledgeable employees are more valuable and productive employees. Embedding new skills, such as structured problem solving, leader standard work, and performance coaching is a common goal for many companies striving to achieve operational excellence.
  • Increased Employee Involvement in Continuous Improvement Activities. Ultimately, the long-term success of any structured OpEx effort is tied to the organization’s ability to driveline ownership and accountability for continuous improvement. For this reason, setting goals for employee involvement in continuous improvement activities might make sense to ensure that the organization is being intentional about driving line that much needed line ownership.
  • Improved Employee Satisfaction with Their Job and the Organization. Job satisfaction can have a significant effect on the productivity of employees in any organization. Employees with high job satisfaction are also more likely to remain with the organization rather than seek new employment opportunities elsewhere. OpEx can facilitate increased employee satisfaction by partnering with them to address the sources of waste and inefficiency that negatively affect their work environment or change the behaviors that create friction within and across work teams.

Aligning OpEx Goals to the Organization’s Strategy

The sample goals listed above are by definition generic in nature, but in order for OpEx to make the most positive impact on your organization, its goals and objectives need to be aligned to the organization’s overall business strategy.

Why?

One reason is that any time an organization seeks to change behaviors, work practices, or mindsets there will always be some resistance to that change. A thoughtful, deliberate, and aligned business approach to introducing the changes needed to meet OpEx goals is needed to minimize change resistance within the organization.

A key way to make sure that OpEx implementation strategies are aligned with your organization’s business strategy is to ask a few basic questions, including:

 

  • What is the long-term vision for OpEx within the organization?
  • How can this vision dovetail with the organization’s business vision/strategy?
  • What metrics should be used to measure the impact of OpEx goals on the organization?
  • Do the resource model and budget for OpEx align with the business’ vision?
  • How will we deploy OpEx into the organization?
  • What are the key behaviors and mindsets that need to change in the leadership team to sustain the work moving forward?

By answering these key questions, you can start adjusting your operational excellence implementation strategy to align it with your business’ current situation and future goals—helping you know “where you are” and get to where you need to be.

 

Implementing OpEx to Drive Goal Achievement

Once you align your organization’s OpEx goals and objectives to the business strategy, it’s time to start the implementation process. However, there are some “evergreen” barriers to implementation that need to be overcome. The most important barrier to OpEx implementation is making sure that everyone can understand and follow the steps necessary to achieve OpEx implementation.

To overcome this barrier, you need to translate the critical concepts and tools of OpEx into a practical and logical sequence of activities that can be understood and implemented by others in the organization. In other words, you need to provide a set of easy-to-understand instructions and tools that others can use to manage their work and meet expectations—this is something that EON refers to as a playbook.

Playbooks are fully-developed models—consisting of a series of implementation toolkits that fully address a specific OpEx-related topic—that OpEx teams and leaders in an organization can use to better manage their work.

 

Some key aspects of EON’s ready-made playbooks include:

  1. Simple self-assessment questions;
  2. Easy-to-read practical descriptions of roles and goals; and
  3. Tools, templates, training modules, and other resources related to the OpEx topic.

These playbooks provide practical guidance that helps teams implement important concepts, methods, and tools of OpEx so they can work side by side with your operational excellence team.

If you need help implementing or managing your organization’s OpEx goals, contact EON today! Our OpEx platform is designed from the ground up to help you manage all aspects of your operational excellence implementation so you can:

 

  • Deploy strategic objectives;
  • Conduct project portfolio and lifecycle management;
  • Implement standard business processes;
  • Measure performance; and
  • Track improvement.

This is all accomplished on a platform that is vastly simpler and more efficient than attempting to manage OpEx through Excel or PowerPoint. With hundreds of assessment criteria on a platform that creates visibility and drives accountability, EON is the perfect solution to your OpEx management needsTalk with an operational excellence expert from EON

Источник: https://www.eonsolutions.io/blog/operational-excellence-goals-that-the-organization-can-get-behind

Capital Expenditure

Definition: Capital Expenditure or CapEx refers to the financial outlay made by the firm for an asset which is expected to stay in the business for a long time, so as to use the same for more than one financial year, which not only generates enduring benefits for the company but ensures the generation of revenue over the years.

In finer terms, when the company uses its funds for acquiring, improving or upgrading its long term assets, so as to increase its productivity, capacity and efficiency, such an expense is called as capital expenditure.

These expenditures can also be made with the aim of increasing the scope of operations, improving the working condition of assets or extending the useful life of the assets. Such expenditures are primarily made by the company to start a new unit, project or venture, with an aim of earning revenue therefrom.

Examples

  • Overhauling expenses of second-hand machinery.
  • Expenses made by the promoters before the commencement of business, i.e. preliminary expenses are of capital nature.
  • Purchase of assets such as furniture, plant, building, computer, vehicles, etc. for the use in business and not for the purpose of trading and reselling.
  • Trial run expenses of newly installed machinery.
  • Advance paid in relation to a broadband connection, in the office.
  • Fee paid for acquiring a license, to run a specific business.

Capital expenditure incurred by the firm for buying or upgrading the asset accrues long-lasting benefit to the firm and so the total amount spent on it will also be spread over the useful life of the asset.

Furthermore, the asset purchased by making capital expenditure can be reconverted into cash, irrespective of the fact that the reconversion resulted in profit or loss.

Factors Determining Capital Expenditure

There are certain factors on the basis of which the expenses are considered as capital expenditure, they are:capital expenditure

  1. Nature: The nature of the business, in which the company trades or deals plays a crucial role here, because, for a company engaged in real estate business, purchase of land or buildings is revenue expenditure, as it is considered as company’s inventory. But for other companies, the purchase of land and building will be a capital expenditure.
  2. Frequency: Capital Expenditure involves a one-time outlay of cash, usually nonrecurring in nature, and so it is not directly taken to Profit and Loss account, in the year in which the outlay is done. So, if an expense occurs frequently, it will be considered as an item of revenue expenditure and not a capital one
  3. Purpose: Expenditure made by the firm so as to increase the productive capacity of an asset will be regarded as a major repair, and so it is of capital nature.
  4. Revenue earning capacity: Any expenditure will be called as capital expenditure if it is made with the purpose of increasing the company’s earning capacity, as well as the benefits of such expenditure extends to a number of years.

Capital Expenditure is shown in the asset section of the balance sheet, as they generate revenue to the company, for more than one accounting year.

Further, these expenses are transferred to the company’s profit and loss account (income statement) of the year, as per the utilization of that benefit, from the expenditure, in the concerned accounting year.

Источник: https://businessjargons.com/capital-expenditure.html

The term has two distinct meanings.

1.  New Valuation Definition

An expenditure used to create new assets or to increase the capacity of existing assets beyond their  original design capacity or service potential. CAPEX therefore increases the value of an asset and may be considered equivalent to incremental cost. The total investment needed to complete aproject and bring it to operational status, after which there will be recurring operational or running costs. See also: upgrade.

2. Cost Threshold Definition

An expenditure from the reserve account to pay for the renewal or major maintenance of an asset.

The cost of maintenance, repair, or replacement that has the following attributes:
  • It is infrequent (ie., not routine)
  • It is significant in costs
  • It is impractical to include in an annual budget.

Examples of Capital Expenditures:
Listed below are some examples of typical capital expenditures:
  • The replacement of a roof is a capital cost and the ongoing maintenance and periodic components repairs are the operating costs. 
  • The redecorating of the lobby of the building at a cost of $150,000.

Attributes of Capital Expenses:
Capital costs generally have the following attributes:
  • They are infrequent and occur less often than once a year.
  • They are generally of significant value.
  • They are funded from sources other than the operating budget.
  • They require special approval, typically at a special general meeting.
  • They have long lead times in preparation.
  • They are the outflows on a cash flow table. 

Analysis of Capital Expenses:
The following asset management concepts provide further insight into capital expenses:
Capital costs typically represent about 50% of the total cost of ownership (TCO) of a building.


Identification of Capital Expenses and Needs:
Identification means
:

Classification of Capital Expenditures:

There are a variety of different ways that Capex is determined by different organization or in different jurisdictions. Listed below are the two primary methods.


Financing of Capital Expenses:
There are three primary sources of funds for capital expenses:


Management of Capital Expenses:
Some of the complexities associated with classification, management and financing of capital expenses are address through the following principles:
The relationship and interdependencies between CapEx, OpEx and TotEx
Fig. The relationship and interdependencies between CapEx, OpEx and TotEx.


TCO distributed across the different systems of a facilty or across the asset portfolio
Fig.  CapEx distributed across the different systems of a facilty or across the asset portfolio.



1
Fig.  Exterior painting and sealant renewal is an example of a capital expense.


1
Fig. Roof renewal is typically a large capital expense
carried out every 15-25 years.


1
Fig. Capital costs shown on a 30-year strategic plan as purple bars. That is, the distribution of capital costs over time.


I. Care is trying to ensure that inflows match outflows, but this requires cooperation and teamwork
Fig. I. Care is trying to ensure that inflows match outflows, but this requires agreement on long-range stewardship, cooperation and teamwork.


1
Fig. Pie chart to illustrate the distribution of capital costs across the different systems of a building.


1
Fig. Capital expenses shown on a cash flow table to illustrate the inflows and outflows of money over time.


1  Roof renewal project
Fig. Exterior painting project    Fig. Roof renewal project.

1  1
Fig.  Repiping project.               Fig. Pool resurfacing project.

Источник: https://assetinsights.net/Glossary/G_Capital_Expenditure_CAPEX.html

World's largest offshore wind farm 'unprofitable' for Equinor, say government-funded researchers

Equinor's investment in Dogger Bank — the world's largest offshore wind project under construction — will be unprofitable, according to a Norwegian government-funded study.

The new research raises challenging questions about the Norwegian state-controlled oil and gas giant's energy transition strategy.

The study was submitted this month to Norway’s Petroleum & Energy Ministry, which financed it as part of wider research into potential energy transition opportunities for the country.

Equinor chief executive Anders Opedal set ambitious new goals in June for the company to step up its investments in "renewables and low carbon solutions" to more than 50% of its gross annual investments by 2030.

Equinor sees the Dogger Bank project in the UK North Sea as a world-class asset that benefits from strong wind conditions, innovations and unprecedented scale: It will have 3.6 gigawatts of installed capacity when completed.

One of the study's authors told Upstream that the massive project's rate of return does not exceed Equinor's rate of return requirement, so the researchers deem the project to be unprofitable.

Article continues below the advert

“In our estimate, Dogger Bank is unprofitable,” said University of Stavanger professor Petter Osmundsen. "The project has to compete with alternative investment opportunities."

Equinor has not disputed the study's conclusions, but emphasised that it had benefited from selling stakes in the project.

Read more:Future bidding wars could threaten offshore wind margins

Osmunden expressed confidence in the study's conclusions, while acknowledging the researchers had relied on a number of assumptions, public information and industry norms in creating it.

Equinor would do better to focus on other types of clean energy projects with higher entry barriers more aligned with the company's competence, he said.

"Committing to a very large capacity in bottom-fixed offshore wind is putting too many eggs in one basket — possibly also not in the right basket," he said. "Low entry barriers and highly competitive bidding would make it hard to earn a resource rent."

Promising business segments

Equinor is entering new business segments that look more promising for the company than bottom-fixed offshore wind, Osmundsen said, such as seabed minerals, carbon capture and storage, clean hydrogen, and perhaps floating offshore wind.

Equinor emphasised to Upstream that it benefited from Italian energy company Eni buying into Dogger Bank as a partner.

“Equinor entered Dogger Bank early, and the farm downs to Eni demonstrate the value of accessing early and maturing assets before farm downs,” a company spokesperson wrote in an e-mail response to Upstream's questions.

Equinor is in charge of operations for the UK North Sea project, while Scotland-based partner SSE leads the project's construction and Eni is an industrial partner for all three phases of the wind farm. Equinor and SSE each hold 40% stakes in the project, while Eni holds 20%.

Offshore wind challenges

The rapidly expanding offshore wind industry anticipates project construction costs will come down as scale increases, offering robust investment returns.

Costs have indeed come down for the bottom-fixed Dogger Bank and other offshore wind projects, but not at the same pace as strike prices have fallen in UK offshore wind auctions, according to the study.

Strike prices are a government-guaranteed price for electricity that will be generated from the project, which is awarded to the lowest bidder. Strike prices protect the developer from prices falling too much and protect consumers from prices rising too much.

Equinor's bigger wind turbines, low prices for raw materials and limited competition helped the company generate solid profit from its larger early offshore wind projects.

That climate has since changed, as the world's largest player in the segment, Orsted of Denmark, has warned about supply-chain blockages and higher raw material prices. Increased competition for new licences also has significantly reduced strike prices in auctions.

Negative net present value

The researchers calculated the Dogger Bank project's expected net present value (NPV) at minus £970 million (minus $1.3 billion). A negative NPV indicates that the value of the investment is below the rate of return which the company should require from its investments.

They calculated the expected internal rate of return (IRR) on total capital in the Dogger Bank project at 3.6%, in real terms, with a payback period of 17 years. IRR is a method used to compare relative profitability of projects.

Oil and gas projects' internal rates of return often are much higher than for offshore wind, which is not exposed to the volatility of oil prices because of power price guarantees.

The researchers applied industry norms and based their estimates on assumptions about capacity factor, operating and decommissioning costs, and the electricity price for the last 10 years of production.

"Public information from the project gives detailed information about capital expenditure, production capacity and prices for the first 15 years of production," Osmundsen said.

In June, Equinor reduced its expected rate of return for offshore wind to between 4% and 8% (excluding farm downs), from 6% to 10%, but the new study finds that Dogger Bank might end up below the revised range.

Upstream and sister publication Dagens Naeringsliv requested an interview about the study with Equinor’s head of renewables, Paal Eitrheim, but he was not available.

Equinor emailed written comments about the study to Upstream.

“We do not communicate net present value on project basis. However, at our capital markets day we gave an interval for expected returns," an Equinor spokesperson wrote.

"We expect project base-returns between 4% and 8% real with mature markets such as the UK at the lower end of the range and emerging markets at the higher end.”

Equinor has long stressed that offshore wind has a very different risk profile than oil and gas, with more stable revenues.

However, with a fixed price for the power produced, there is also little potential upside, and costs recently appeared to be rising for some other wind power businesses — not falling.

For example, Danish wind installation giant Orsted warned in a third-quarter earnings statement about difficult conditions due not only to weaker-than-usual winds, but also supply-chain difficulties and delays in manufacturing.

Supply-chain instability and rising energy prices — as well as accelerated cost inflation for raw materials, transport and turbine components — also impacted the profitability of leading turbine manufacturer Vestas.

Equinor’s spokesperson acknowledged that the company's projects can be affected by global trends for the cost and availability of inputs, but added that there are contractual mechanisms in place to balance the risk between supplier and developer.

Farming down in offshore wind

Equinor has previously had success in farming down within offshore wind. The sale of a 50% share of Empire Wind in the US was seen as a particularly successful sale.

However, there is still little sign of Dogger Bank boosting profitability significantly for Equinor and SSE, which made two sales to Eni of different parts of the UK project.

After the first sale to Eni, Equinor and SSE increased their internal rate of return to 4.2%, according to the University of Stavanger research.

At Upstream's request, the researchers also calculated the effect of the recent sale.

“After the second sale, where the payment per megawatt is down some 30%, the rate of return increased to 4.4%,” Osmundsen said, adding that the researchers have assumed the three phases are equal.

Equinor's spokesperson acknowledged that the company received less for the third phase of the project, but said there are site-specific conditions for this phase, including a different layout leading to lower production factors than phases A and B, distance from shore and water depth meaning capex per kilowatt is higher.

"Increased corporation tax rate is another element," he said.

Norwegian researchers behind the study

Professor Petter Osmundsen and associate professor Sindre Lorentzen, both from University of Stavanger, and Magne Emhjellen-Stendal, senior advisor in Petoro with a research collaboration with University of Stavanger, have analysed profitability for developers of bottom-fixed offshore development projects, using Dogger Bank as a case study. The report is part of a research program funded by the Norwegian government to explore energy transition opportunities.

Why do the Norwegian researchers deem Equinor's Dogger Bank wind farm to be unprofitable?

Whether the project is profitable, depends on the rate of return requirement. Compared to an International Energy Agency rate of return requirement from 2018 of 6.55%, the Dogger Bank project is not profitable. The same applies with the suggested 6% requirement from 2020 by the UK Department for Business, Energy & Industrial Strategy (BEIS).

While it is normal to use one discount rate, the researchers argue for two rates for this kind of project. One rate for the first 15 years of fixed electricity prices given by the UK contracts for difference (CfD) calculated at 3.9%, and one rate for the period of market price (6.5%). The researchers conclude that with their assumptions, the project is unprofitable, with an expected net present value of minus £970 million.

The UK strike price has fallen drastically, from £114.39 per megawatt hour in the 2015 CfD auction to the 2019 Dogger Bank award of £39.650/MWh for phase A and £41.611/MWh for phases B and C (all in 2012 prices).

Other researchers, who have observed the dramatic reduction in the strike price awarded after aggressive bidding, conclude that very significant cost reductions are needed to safeguard project economics. One way of achieving this, these researchers argue, is for investors to reduce the rate of return requirement. The internal rate of return for offshore wind farm developers is now only half of what it was six years ago.

(Ole Ketil Helgesen is Upstream's Norway energy reporter. Morten Aanestad and Mikael Holter are reporters for Upstream's sister publication, Dagens Naeringsliv.)

Share: Email

Источник: https://www.upstreamonline.com/exclusive/worlds-largest-offshore-wind-farm-unprofitable-for-equinor-say-government-funded-researchers/2-1-1098012

Meaning, Definition, and Importance of Capital Expenditure

What is Capital Expenditure? Capital expenditures (CAPEX) refer to funds that are used by a company for the purchase, improvement, or maintenance of long-term assets to improve the efficiency or capacity of the company. Capital expenditure can be tangible, such as a copy machine, or it can be intangible, such as a patent. In many tax codes, both tangible and intangible capital expenditures are counted as assets because they have the potential to be sold if necessary. So, what is the discussion? Meaning, Definition, and Importance of Capital Expenditure.

The Concept of Capital Expenditure explanation of Meaning, Definition, and Importance of Capital Expenditure.

Also known as CAPEX or capital expenses, capital expenditures include the purchase of items such as new equipment, machinery, land, plant, buildings or warehouses, furniture and fixtures, business vehicles, software and intangible assets such as a patent or license. Long-term assets are a company’s land, buildings, machinery, vehicles, furniture, computers, office equipment, software as well as patents, trademarks, and licenses. Companies report CAPEX on the cash flow statement and are amortized over the life of the related asset because, usually, the asset’s useful life is longer than the taxable year and, therefore, CAPEX cannot be reported as an expense.

Meaning and Definition of Capital Expenditure:

An expenditure which results in the acquisition of the permanent asset which is intended to be permanently used in the business for the purpose of earning revenue is known as capital expenditure. These expenditures are ‘non-recurring’ by nature. Assets acquired by incurring these expenditures are utilized by the business for a long time and thereby they earn revenue.

For example, money spent on the purchase of building, machinery, furniture etc. Take the case of machinery-machinery is permanently used for, producing goods and profit is earned by selling those goods. This is not an expenditure for one accounting period, machinery has a long life and its benefit will be enjoyed over a long period of time. By a long period of time, we mean a period exceeding one accounting period. Moreover, any expenditure which is incurred for the purpose of increasing profit earning capacity or reducing the cost of production is a capital expenditure.

Sometimes the expenditure even not resulting in an increase of profit earning capacity but acquires an asset comparatively permanent in nature will also be a capital expenditure. It should be remembered that when an asset is purchased, all amounts spent up to the point until the asset is ready for use should be treated as capital expenditure.

Examples are, A) A machinery was purchased for $50,000 from Karachi. We paid carriage $1,000, octroi duty $500 to bring the machinery from Karachi to Lahore. Then we paid wages $1,000 for its installation in the factory. For all these expenditures, we should debit machinery account instead of debiting carriage A/c, octroi A/c and wages A/c. B) Fees paid to a lawyer for drawing up the purchase deed of land, C) Overhaul expenses of second-hand machinery etc. D) Interest paid on loans raised to acquire a fixed asset etc.

Rules and Items for Determining Capital Expenditure.

Capital Expenditure is that expenditure which results in the acquisition of the permanent asset or fixed asset which is used continuously in the business for the purpose of earning revenue any amount spent on the asset which will result in increasing the production or reducing the cost of production may also be treated as Capital Expenditure.

The following Rules for Determining Capital Expenditure are:
  • Expenditure incurred for acquiring Land, Building, Machinery, Investments, Patents or Furniture etc. are permanent or fixed assets. The fixed asset is used in the business for earning the profit and not for resale, is called a Capital Expenditure. For instance, when we purchase furniture it is a capital expenditure and at the same time to the Furniture Shop, who is engaged in buying and selling of furniture, it is not capital expenditure.
  • Expenditure incurred for putting an old asset in working condition or for putting a new asset to use is capital expenditure. For instance, an old machine is purchased for Rs. 10,000 and Rs 2,000 is spent for its repairs and installation and the total expenditures are capital expenditure.
  • Which increases the earning capacity in any way of a fixed asset can be called capital expenditure. For instance, the amount spent on cinema theatre for air conditioning.
  • Spent on raising the capital required for earning the profit is called capital expenditure. For instance, underwriting commission, brokerage etc.
  • On an existing asset which results in the improvement or extension of the business by increasing the earning capacity of the asset or by reducing the cost of production is also called capital expenditure. For instance, installations of machine or additions to buildings or plant etc. are capital expenditure.
  • When the benefit of expenditure is not fully consumed in one period but spread over several periods, is called capita, expenditure. For instance, expenditure met for massive advertisements.
The following Items of Capital Expenditure are:
  • Land, Building, Plant, and Machinery.
  • Leasehold Land and Building.
  • Manufacture or purchase of furniture and fixtures.
  • Office Cars, Vans, Lorries or Vehicles.
  • Installation of lights, fans etc.
  • The erection of Plant and Machinery.
  • Trade Mark, Patents, Copyrights, Patterns, and Designs.
  • Preliminary Expenses.
  • Goodwill.
  • Addition to an extension of existing fixed assets.
  • Development in case of Mines and Plantations.
  • The invention.
  • Increasing capacity of the fixed asset, and.
  • Administration in industrial enterprises incurred during the period of construction.

Importance of Capital Expenditure:

Decisions how much to invest in capital expenditures can often be extremely vital decisions made by an organization.

They are important because of the following reasons:

Long-term Effects:

The effect of capital expenditure decisions usually extends into the future. The range of current production or manufacturing activities is mainly as a result of past capital expenditures. 

Similarly, the current decisions on capital expenditure will have a major influence on the future activities of the company. Capital investment decisions usually have a huge impact on the basic character of the organization. 

The long-term strategic goals, as well as the budgeting process of a company, need to be in place before authorization of capital expenditures.

Irreversibility: 

Capital expenditures can hardly be undone without the company incurring losses. Since most forms of capital equipment are customized to meet specific company requirements and needs, the market for capital equipment that has been used is generally very poor.

Once the capital equipment is purchased, there is little room to reverse the decision since the cost can often not be recouped. For this reason, wrong capital investment decisions are often irreversible, and poor ones lead to substantial losses being incurred. Once acquired, they need to be employed for use.

High Initial Costs: 

Capital expenditures are characteristically very expensive, especially for companies in industries such as production, manufacturing, telecom, utilities, and oil exploration.

The Capital investments in physical assets like buildings, equipment, or property offer the potential of providing benefits in the long run but will need a huge monetary outlay initially, much greater than even operating outlays. Capital costs often tend to rise with advanced technology.

Depreciation: 

Capital expenditures lead to an increase in the asset accounts of an organization. However, once capital assets start being put in service, their depreciation begins, and they continue to decrease in value throughout their useful lives.

“A capital expenditure (CAPEX) is an expense that a company makes towards. The purchase of new equipment or the improvement of its long-term assets, namely property, plant, and equipment”. Capital expenditures normally have a substantial effect on the short-term and long-term financial standing of an organization.

Therefore, making wise capital expenditure decisions is of critical importance to the financial health of a company. Many companies usually try to maintain the levels of their historical capital expenditure to show investors. That the managers of the company are investing effectively in the business. The expenditure amounts for an accounting period are usually stated in the cash flow statement.

Meaning Definition and Importance of Capital Expenditure
Nageshwar Das

Nageshwar Das, BBA graduation with Finance and Marketing specialization, and CEO, Web Developer, & Admin in www.ilearnlot.com.

Источник: https://www.ilearnlot.com/meaning-definition-and-importance-of-capital-expenditure/57635/

Comments

Leave a Reply

Your email address will not be published. Required fields are marked *