Category: Blog

How to Account for Stranded Assets

How to Account for Stranded AssetsWith more than 14 million electric vehicle (EV) registrations in 2023 worldwide and 2023 seeing an increase in EV sales over 2022 by 35 percent, manufacturers are probably happy – but not those producing the traditional internal combustion engine (ICE) vehicles. This is according to the International Energy Agency’s Global EV Outlook 2024: Trends in Electric Cars.

This statistic is important because it illustrates how assets can be rendered less useful and potentially turn into stranded assets. A stranded asset, defined, is an asset that’s no longer able to provide its owner the profitable payback they originally expected. The difference is based on shifts, primarily negative, that impact the asset’s expected productive performance.

How & Why Assets Become Stranded

When an asset loses its earning power, normally due to extraneous circumstances, like the invention of a more efficient battery, it can become stranded. For example, a machine that’s exclusively capable of making an internal combustion engine (ICE) vehicle can be considered stranded as the transition to electric vehicles (EV) is made. Since the machine is less valuable because it makes fewer and fewer ICE vehicles, it could be impaired or stranded.

This example illustrates that new technology, especially one that moves forward, can render equipment less useful than previously expected. Other ways assets can be stranded include administrative modifications, evolving societal conventions, etc.

Considerations for Stranded Assets by Testing an Asset for Impairment

The primary way to establish if an asset is stranded is to run an impairment test on it. Stranded assets impact the income statement via a non-cash loss, along with impacting the balance sheet by reducing asset value. Therefore, companies must report a loss on the income statement as it’s completely written off the balance sheet.

Whether it’s through the lens of International Financial Reporting Standards (IFRS) or generally accepted accounting principles (GAAP), whether an asset is intangible or tangible, when its value issue is less than book value or impaired, it must be written down.

GAAP Standard

The first step is to determine the carrying value. This is calculated by subtracting the accumulated depreciation from the asset’s original cost. From there, the asset’s projected undiscounted future cash flows (UFCF) are analyzed against the asset’s carrying value. If the total UFCF is less than the carrying value, an asset is considered impaired.

IFRS Standard

The first step also looks at an asset’s carrying value. From there, if either of the following two values is lower than the carrying value, it’s considered impaired:

  • Present value of future cash flows generated by the asset (the so-called “fair value in use” consideration)
  • Fair value less costs to sell the asset

Financial Statement Considerations

If an asset is impaired or stranded, whatever amount the asset drops by, it lowers the business’ asset’s value on the balance sheet. Looking at the income statement, it’s considered a loss. Additionally, since a devaluation is not considered a cash event, it doesn’t trigger any cash outflows. A real-world example can better illustrate this.

The following assumes a business reports its accounting under GAAP. It could be a company that produces fracking equipment to recover natural gas and crude oil. With the uncertainty of domestic fossil fuel policy, specifically where land can be explored, the threat of OPEC and/or Iran being able to determine their production, and the threat of increased government spending on green energy, fracking equipment has a current carrying value of $10 million. However, with increased competition from the three different factors, the same assets can produce an aggregate of $7.5 million in undiscounted future cash flows.

Based on GAAP, since the carrying value is $2.5 million more than the total undiscounted future cash flows, the business would need to record the same amount for an impairment loss. The journal entries would be:

Loss from Impairment Debit:. $2.5 million

Provision for Impairment Losses Credit:  $2.5 million

Conclusion

When it comes to accounting for stranded assets, it’s important to ensure guidelines are followed based on the type of accounting standards businesses must follow.

Important Update on New Company Reporting Laws

On Jan. 1, 2024, the U.S. government debuted the Corporate Transparency Act (CTA). This legislation established the requirement for the majority of private companies, both big and small, to file information with the Financial Crimes Enforcement Network (FinCEN).

As with most new laws, the initial guidance and interpretations have been both challenged and questioned. In response, FinCEN recently turned out new FAQs, which we review below.

Big Question First: To Report or Not

Reporting is generally required by all private, for-profit entities. This includes corporations, LLCs, S-Corps, etc., whenever the company was created by filing a document with the office of the Secretary of State. Entities formed under the laws of jurisdictions outside the United States are also likely subject to reporting, if they are registered to do business in the United States.

To help visualize the above, you can take a look at this flowchart published on the FinCEN website.

Screenshot from FinCEN website

While the general rules seem (and are) broad in construction, there are 23 specific exemptions, including publicly traded companies, nonprofits and certain large operating companies. The FinCEN’s Small Entity Compliance Guide checklist can help in determining if you fall under an exemption.

Now, let’s move on to more specific questions.

Who is a beneficial owner?

An individual who either directly or indirectly exercises substantial controls or owns 25 percent or more of the reporting company.

What constitutes substantial control?

There are four (separate) ways to exercise substantial control:

  • The individual is a senior officer
  • Has the authority to appoint or remove officers or a majority of directors
  • An important decision-maker (regarding strategic, business or finance)
  • They have any other form of substantial control as per the FinCEN’s Small Entity Compliance Guide

Who is a company applicant for a reporting company?

Another of the more perplexing questions revolves around exactly who a company applicant of a reporting company is.

First, only reporting companies created or registered on or after Jan. 1, 2024, need to concern themselves with the company applicant rules; companies formed before are exempt.

There are two possible individuals who could be considered company applicants. One is the person who directly files the documents to create and register the company. This person will always exist and be an applicant of the reporting company. In the case where there were multiple people involved in the filing or registration, the individual who primarily controlled the filing is also considered an applicant.

Thankfully, FinCEN created another handy flowchart to help navigate through this rather confusing decision.

Screenshot from FinCEN website

What about sole proprietorships?

It depends. Sole proprietorships only have to report if the entity was created by filing a document with a secretary of state or similar office. In other words, if you just start freelancing and don’t file anything with a secretary of state office, you are not subject to the reporting requirements. Basically, if you didn’t form an LLC, you don’t need to report. For example, obtaining an employer identification number, a fictitious business name or a professional or occupational license does not subject you to the FinCEN reporting requirements.

What if my company ceased to exist before the CTA requirements went into effect?

If a company ceased to exist on or before Jan. 1, 2024, then they are NOT subject to the reporting requirements.

Do I have to report more than once?

No, you only have to file an initial report once. There is NOT an annual report. You do, however, need to amend your original filing to update pertinent changes or corrections within 30 days of their occurrence.

What happens if I don’t file a report?

Willful violation can subject one to a fine of up to $500 per day until the violation is resolved. Criminal penalties could also be imposed, resulting in up to two years imprisonment and a fine of up to $10,000.

Conclusion

The FinCEN released its guidance in the hopes of clarifying uncertainties around the new CTA created reporting requirements. The goal is to ensure full and accurate compliance without undue burden on companies and individuals.

Looking at the Expanded Accounting Equation

Whether it’s a private equity transaction or an institutional or retail investor, analyzing a company’s financial statements is an important part of fundamental analysis. One important but basic way to analyze whether a company is worth investing in is through the expanded accounting equation. The most straightforward equation to analyze a business’ balance sheet is:

Assets = Liabilities + Shareholder’s Equity

However, there are more detailed equations that analysts can employ to more closely examine a company’s financial situation. One way to look at it is by more comprehensive equations that break down net income and the transactions related to the equity owners (dividends, etc.).

This equation is a building block of accounting because it focuses on double-entry accounting – or that each occurrence impacts the bifurcated accounting equation – requiring the correct solution to always be in balance. This system is used for journal entries, regardless of the type of transaction. Looking at this equation in greater detail, here’s a more granular example:

Assets = Retained Earnings + Liabilities + Share Capital

Assets are the capital that give a business the ability to benefit from projected, increased productivity and hopefully increased gains. Whether it’s short-term (less than 12 months) or long-term (more than 12 months), it can take the form of real estate, cash, cash-equivalents, pre-paid expenses, accounts receivable, etc.

Liabilities are the amounts owed to lenders due to past agreements. This is related to the sum of liabilities, which is the total of current (up to 12 months) liabilities, plus long-term (more than 12 months) debt and related obligations. This takes the form of loans, accounts payable, owed taxes, etc. Shareholder’s equity is how much the company owners may assert ownership on after accounting for all liabilities.

Another way this equation can be expressed is as follows:

Assets = Liabilities + Contributed Capital + Beginning Retained Earnings + Revenue + Expenses + Dividends

Depending on the financial outcome of the company, dividends and expenses may be negative numbers.

To further explain, these variations on the equation help analysts break down shareholder’s equity. Revenues and expenses illustrate the delta in net income over discrete accounting/earning periods from sales and costs, respectively. Stockholder transactions are able to be accounted for by looking at what capital the original stockholders provided to the business and dividends, or earnings distributed to the company’s stockholders. Retained earnings are carried over from a prior accounting period to the present accounting period. Despite being elementary, the information is helpful for business managers and investors to develop a higher level of analysis.

When it comes to evaluating bankruptcy, it can help investors determine the likelihood of receiving compensation. When it comes to liabilities, should debts be due sooner or over longer periods of time, these debts always have priority. When it comes to liquidated assets, these are then used to satisfy shareholders’ equity, until funds are exhausted.  

While this is not a comprehensive look at how to analyze a company, it provides internal and external stakeholders with a way to build a strong financial analytical foundation.

7 Reasons You Need a Will

Drafting a will is not something that people, for the most part, want to think about. But no one gets out of life alive. So if you want to have a say in what happens to your property and assets after you’re gone, a will is very smart idea. Here are a few specific reasons having a will makes good sense.

Facilitates Probate

First, a definition: Probate is the legal procedure your estate goes through after you pass. During this process, a court will start the process of distributing your estate to those you designate. When you have a will, the probate process has a legal document as a guide, one the court uses that clearly defines your wishes. This way, there are fewer roadblocks. Things go a lot more smoothly.

Protects Your Estate

Now, if you don’t have a will, there’s no binding, legal document that espouses what you want to do with your assets. Instead, the probate court will distribute your estate according to your state’s intestacy laws. There’s no guarantee that the state agrees with what you wanted.

Designates Who Gets What

This is one of the most important. If your family includes ex-spouses and/or estranged relatives, having a will helps prevent squabbles. An unhappy relative will think twice about protesting when you have a well-drafted will.

Disinherits People, Too

If you don’t have a will, again, probate courts will distribute your estate based on your state’s intestacy laws, which create a hierarchy of inheritance among your surviving family members. Because families – and life – can be messy, when you have a will, you can specify who doesn’t get parts of your estate. Better still, you can even specify certain people to receive your assets as beneficiaries, who aren’t necessarily relatives. When you’re this specific within a legal document, it can further safeguard your wishes.

Provides For Your Children and Pets

When you have a will, it gives you the power to decide who will care for your children if they’re minors when you pass. If you don’t decide, a court will appoint a guardian. It’s safe to say that most people don’t want this; you know your children best. Since pets are considered property and they can’t inherit, you can make sure your beloved furry family members are adopted by a person or organization that you know and trust.

Specifies the Executor and Administrator of Your Estate

You get to decide who these people are, though sometimes they can be the same person. Generally, their function is to make sure your beneficiaries receive the assets you’ve designated for them. Having these trusted people in place will give you peace of mind. When you don’t have these individuals in place, you give up the control you could have had.

Helps Minimize Estate Taxes

Yes, it’s true. Your family, should they inherit property from you after you’re gone, might have to pay taxes on it. That’s why it pays to look into estate planning tools. When you have a will, you can build these stipulations into it. Just ask your accountant and/or lawyer to help you navigate these waters. It’s well worth it.

These are a just a few of the reasons you need a will. Probably the main reason is that tomorrow isn’t guaranteed. When you’re gone, you’ve missed your opportunity to legally draft your final desires. That’s why, when you’ve set up provisions for all the things you’ve worked so hard for and all the people you leave behind, it’s truly an act of love.

 

Sources

Top 10 Reasons to Have a Will (findlaw.com)

Executor vs. Administrator: What’s the Difference? – Policygenius

Probate – What Is Probate & How To Avoid It | Trust & Will (trustandwill.com)

 

From Likes to Leads: Converting Social Media Analytics into Business Opportunities

Social media has become a powerful tool for helping businesses reach their prospects and customers. Using social media, a business can connect with its audience, build brand awareness and drive sales. However, many struggle to convert social media engagement – likes, shares, comments and followers – into tangible business opportunities. Transforming these engagements into actionable leads and sales is where the real power of social media lies. To successfully unlock this potential, businesses must effectively use social media analytics.

Understanding Social Media Analytics

Social media analytics involves gathering and analyzing data from social media platforms to help make informed business decisions. This data includes metrics such as engagement rates, reach, impressions, follower growth and sentiment analysis, among others. By understanding what this data signifies, businesses can gain valuable insights into the behavior, preferences and needs of their audience. These insights are then used to tailor marketing strategies, create more relevant content and improve customer interactions.

The Shift from Vanity Metrics to Meaningful Insights

Sometimes, it’s easy to get caught up in vanity metrics, such as the number of likes or followers. It is important to note that these metrics do not necessarily translate to sales. To convert social media engagement into leads, businesses need to focus on meaningful insights that reveal how engaged their audience is and how this engagement can be leveraged.

For instance, instead of focusing on the number of likes, businesses should analyze which types of posts are receiving the most engagement and why. This includes checking the topics, formats or times of day that generate more interest and engagement. By identifying patterns and trends, businesses can enhance their content strategy to focus on what resonates most with their audience.

Identifying and Nurturing Potential Leads

After having a better understanding of what drives engagement, businesses can begin to identify potential leads within their social media audience. This is where advanced analytics tools come into play. Tools that track and analyze individual user interactions will help identify users who consistently engage with posted content.

For example, a user who frequently comments on posts, shares content, or clicks on links may demonstrate a strong interest in the business’ products or services. Businesses can categorize such users as potential leads. More focus is placed on this category by nurturing them through personalized content, direct engagement, and targeted offers.

It is also good to note that social media analytics is a powerful tool for analyzing competitors’ strategies, too. By monitoring their comment sections, a business can identify gaps or unmet needs in their audience that present opportunities to capture market share.

Leveraging Social Media Ads for Lead Generation

Social media advertising is another effective way to convert social media engagement into leads. Platforms like Facebook, Instagram, LinkedIn and X (formerly Twitter) offer advanced targeting options that allow businesses to create highly personalized ad campaigns based on user data. Businesses can create ads specifically designed to appeal to their most engaged followers.

For instance, if analytics reveal that a particular segment of followers is highly interested in a specific product, businesses can create ads that feature this product and offer a special promotion or discount.

Turning Engagement into Sales Through Conversion Optimization

Once potential leads are identified and targeted through ads or personalized content, the next step is to optimize the conversion process. This involves ensuring a seamless journey from social media engagement to lead capture and eventual sale. A critical aspect of this process is the landing page – a dedicated page on the business’s website designed to capture leads.

The landing pages must be tailored to match the expectations set by the social media content or ads that drove the traffic. For example, if an ad on a social media platform promises a free or discounted offer, the landing page should prominently feature this offer. Additionally, it helps to A/B test different landing page designs, headlines, and calls to action to identify the most effective strategies.

Using Analytics to Measure and Improve ROI

Unlike traditional marketing channels, social media analytics can track and measure the effectiveness of marketing campaigns. By tracking key performance indicators (KPIs) such as reach, click-through rates, conversions and cost per lead, businesses can measure the effectiveness of their social media campaigns and make necessary adjustments.

Continuous monitoring and optimization ensure that social media efforts drive engagement and contribute to the business’s bottom line.

In conclusion, converting social media engagement into actionable leads and sales opportunities requires a strategic approach leveraging social media analytics’ power. Businesses can tailor their content, identify and nurture potential leads, and optimize their conversion strategies by moving beyond vanity metrics and focusing on meaningful insights. This will ultimately drive business growth and success in today’s competitive digital landscape.

U.S. Flag Mandate, Combatting Deepfake Pornography and Legislative Priorities of the Vice President Nominees in 2024 Election

All American Flag Act (S 1973) – Introduced by Sen. Sherrod Brown (D-OH) on June 14, 2023, this bill requires that all U.S. flags used by the Federal government be manufactured domestically. This includes all raw materials. One exception to this mandate is if flags cannot be produced of acceptable quality and quantity as needed at competitive market prices. The bill passed in the Senate on Nov. 2, 2023, in the House on July 22 and was signed into law by the president on July 30.

Disrupt Explicit Forged Images and Non-Consensual Edits Act of 2024 (S 3696) – This bipartisan bill, also known as the DEFIANCE Act, is designed to protect victims of deepfake pornography. It defines civil action as a federal remedy for non-consensual parties who are identifiable in digital forgeries and depicted as nude or engaging in sexually explicit conduct. The bill, which was introduced on Jan. 30 by Sen. Richard Durbin (D-IL), passed unanimously in the Senate on July 23. It goes to the House next, where a similar bill has been introduced.

 

Congress is not in session Aug. 5-30, as members return to their districts. 

Accounting for Convertible Debt Instruments

According to EY, the convertible debt market saw whipsaw action in issuances. Between 2015 and 2019, average issuance varied between $40 billion and $45 billion. However, it dropped to $22 billion in 2022, but re-accelerated to $52 billion in 2023. While the levels of issuance varied, the way this type of debt is accounted for has remained much calmer.

Defining a Convertible Bond

A convertible bond is a type of debt security that gives the investor the right to exchange the bond, at certain milestones, for a pre-determined percentage of equity in the issuing company. This investment vehicle has both equity and debt features.

Since this type of investment gives investors the potential for equity conversion into a company, the debt/bond side of it may present investors with a nominal coupon remittance or a potentially zero-coupon payment. However, there are important accounting considerations for this type of investment vehicle via generally accepted accounting principles (GAAP) and International Financial Reporting Standards (IFRS).

IFRS

When it comes to IFRS, convertible bonds are considered blended securities because they are partially debt and partially equity. The debt piece is accounted for by discounting the principal and interest paid out to the bondholder at the company’s cost of straight debt. The following example illustrates how it’s calculated:

The business presents a 10-year, $250 million convertible bond, providing investors with a 2.5 percent coupon rate and a 9.5 percent straight cost of debt. Based on discounting these variables, the present value of the principal and coupon payments is: $182,805,096 (assuming end-of-year, annual coupons). To determine the equity proportion, we must take $250 million and subtract $182,805,096, which equals $67,194,904.

Looking at the journal entry, we have following breakdown:

Cash: Debit $250,000,000

Convertible Debt Component – Liability = $182,805,096

Equity Component – Shareholder’s Equity = $67,194,904

Looking at the interest expense, this is calculated as follows:

The 9.5 percent (straight debt cost) is multiplied by the net present value of the beginning debt liability balance of the first year ($182,805,096) is $17,366,484.12. Since there’s a coupon payment of (2.5 percent X $250,000,000 = $6,250,000), the difference between $17,366,484.12 and $6,250,000 = $11,116,484.12 should be “accreted” to the debt liability or the debt balance.

The journal entry would be as follows:

Debit: Interest Expense $17,366,484.12

Credit: Cash $6,250,000

Credit: Accretion of Debt Discount – Liability = $11,116,484.12

Now, if at the bond’s maturity the investor is unable to convert the bond to equity according to the terms of the convertible note, the entire $250 million bond will be paid back to the investor. The journal entry will be as follows:

Debit: Convertible Debt $250,000,000

Credit: Cash $250,000,000

If, however, the investor of the convertible bond is favorable to it being exchanged, the journal entry will be as follows:

Debit: Convertible Debt $250,000,000

Credit: Share Capital – Shareholder’s Equity = $250,000,000

This explanation assumes that convertible bonds are only able to be converted into company equity. However, if the bond is cash settled, there are alternate considerations. It’s also assumed that the bond is issued at year’s end and makes its coupon payments once a year.

GAAP

Under generally accepted accounting principles (GAAP), present standards treat it as straight debt. This accounting practice changed from GAAP’s previous treatment of bifurcating it, similar to IFRS’ current treatment.

At issuance, the journal entries are as follows:

Debit: Cash $250,000,000

Credit: Convertible Debt $250,000,000

With this accounting treatment, it’s recognized as interest expense. Since this contrasts with IFRS, no accretion is required under GAAP. This assumes there’s no additional debt issuance costs when calculating interest expenses. Therefore, assuming the same initial debt amount at par, and the coupon rate, for year one, it’s the rate for the debt issuance multiplied by the full debt amount ($250,000,000).

The journal entry is as follows:

Debit: Interest Expense $6,250,000

Credit: Cash $6,250,000

If the convertible debt doesn’t present a good opportunity for the investor, they’ll receive the principal back. The journal entry is as follows:

Debit: Convertible Debt $250,000,000

Credit: Cash $250,000,000

If, however, the convertible debt presents the investor with an opportunity to convert to equity, and it’s exercised, the journal entry is presented as follows:

 Debit: Convertible Debt $250,000,000

 Credit: Share Capital – Shareholder’s Equity $250,000,000

Conclusion

While these examples do not explore all the potential scenarios when accounting for convertible debt, they show what considerations accountants must keep in mind when analyzing a transaction.

Are You Ready for Major Tax Changes in 2026?

The enactment of the Tax Cuts and Jobs Act (TCJA) in 2017 brought with it major changes to the tax code on both personal and business levels. While many taxpayers have not only enjoyed but come to see these tax provisions as normal over the past seven years, many provisions of the TCJA are set to expire at the end of 2025. This makes 2026 and beyond potentially a very different tax landscape than the one we operate in today. This article reviews main provisions of the TCJA that could be affected and what it could mean for taxpayers.

Return of Higher Tax Rates

Lower tax rates were a hallmark of the TCJA. Rates on all income brackets were lowered (except the lowest 10 percent bracket). Without an extension of this act, tax rates will automatically return to their former levels, with the highest at 39.6 percent for federal income taxes.

Look for Return of Lower Standard Deductions; Higher Personal Exemptions; Unlimited SALT Deductions

The TCJA created a sort of trade-off by raising the standard deduction but lowering personal exemptions and limiting the state and local tax deductions (SALT) for itemizers. The reversal of these provisions can be either a net positive or negative, depending on each taxpayer’s situation. Generally, for those who reside in high tax brackets (income tax and/or property tax) or with a lot of dependents, the reversion will be favorable.

Currently, the standard deduction is $29,200 (married filing jointly) or $14,600 (single). These amounts will be almost cut in half to $16,600 and $8,300, respectively.

Offsetting these deduction losses, personal exemptions return. Currently, there are no personal exemptions, but this will go back to pre-TCJA levels adjusted for inflation, approximately $5,300 for each taxpayer, spouse and dependent.

The SALT deduction is capped at $10,000 under the TCJA. This limit will be eliminated; potentially giving dramatic benefit to taxpayers in high-income tax and property tax states.

Finally, it should be noted that materially lower standard deductions may create a lot more taxpayers who would benefit from itemizing deductions versus taking the standard deduction. In addition, the SALT cap, currently at $10,000 per tax return (not per person), will be eliminated.

Tax-Deductible Mortgage Interest on Large Loans

The TCJA limited tax-deductible interest on mortgages taken out in 2018 and after to interest on $750,000 of mortgage debt, versus the previous $1 million cap. This will revert back to the higher $1 million limit.

Lower Alternative Minimum Tax (AMT) Exemptions and Phase-Outs

Significant increases in AMT exemptions and phase-out limits were part of the TCJA and, as a result, millions of taxpayers were no longer subject to the AMT. This provision will revert as well, subjecting millions of taxpayers to the AMT. In particular, taxpayers who take large, itemized deductions and benefits from incentive stock compensation schemes will be the most negatively impacted.

Lower Estate and Gift Tax Limits

The TCJA nearly doubled the federal lifetime estate and lifetime gift tax exemption from $7 million to $13.61 million for a single taxpayer. These amounts double for couples making joint gifts. The limits would revert back to the $7 million level. Note that the annual gift tax exclusion of $18,000 per person is not expected to change.

Elimination of 20% Qualified Business Income Deduction and Bonus Depreciation

Pass-through business owners (e.g., S-corps, LLCs) benefitted from up to a 20 percent deduction on qualified business income under the TJCA (subject phase-outs). Business owners also benefitted from bonus depreciation as part of the TCJA – as high as 100 percent at one point. Both of these business-friendly provisions are set to expire completely unless Congress takes action.

Plan For Change

Whatever may be in the near-term, the only constant when it comes to taxes is that they will certainly be here. History teaches us to never get comfortable with the current tax code. The exact iteration of an extension of the TCJA or lack thereof is uncertain at this point, but the provisions at risk are known. For some taxpayers, this article is more of an FYI; while for those with multi-year planning strategies, the time to consider various outcomes and work with your tax advisor is now.

Accounting Considerations for Capital Expenditures and Operating Expenses

When it comes to running a business, there are a lot of expenses incurred during operations. As of January 2024, New York University’s Stern School of Business had recorded nearly $1.2 trillion in capital expenditures by U.S. sectors. Considering this, there are two important concepts that are imperative to study for effective accounting treatment: capital expenditures (CapEx) and operating expenses (OpEx).

Defining CapEx and OpEx

Operating expenses (OpEx) are required outlays a company incurs on a more frequent basis to take care of day-to-day expenditures. Capital expenditures (CapEx), conversely, are larger purchases that businesses intend to use over the long term (at least 12 months). 

Different Considerations

OpEx

This type of asset is more of a short-term consideration. Expenses that fall under this category include utilities, wages, rent, taxes, selling, general and administrative expenses (SG&A). Unlike CapEx, businesses may benefit from tax deductions for these types of expenditures, as long as the business incurs the expense during the same tax year. These expenses reduce a company’s net income. However, they are not eligible for depreciation, which is how CapEx reduces a business’ net income. Since the entire expense is recognized right away, they’re reported on the income statement.

CapEx

This type of asset is intended to have a useful life of more than one year. Examples of these types of assets include warehouses, data centers, work trucks, etc. Many of these items fall under PPE or property, plant and equipment (PP&E) on the balance sheet. On the cash flow statement, it can be reported under the investing activities section.

Since these items are intended to last for a considerable time frame, such investments are planned to improve the profitability/capabilities of the business. Unlike OpEx, these expenditures are not tax deductible. It’s also important to understand this applies to intangible assets, such as patents, goodwill, etc.  

These types of assets are financed by either collateral or debt. Businesses also can issue bonds or get creative with their financing partners. Listed as a capitalized asset on the balance sheet, it’s depreciated over the asset’s useful life. However, it’s important to note that land is not depreciated.

Considerations between CapEx and OpEx

When it comes to CapEx, it’s important to know that some transactions can be paid for during the acquisition period; but acquisition costs also can occur over multiple accounting periods if it’s a long-term project, such as building a manufacturing plant or warehouse.

CapEx can determine the financial health of a company. If a company can reinvest in itself through patents, machinery, equipment, etc., along with maintaining or increasing its dividend payments to shareholders, then the company is on solid financial footing.

Depreciation for CapEx items is advantageous for companies because it provides a balance to the investment by lowering the company’s net income.   

There is another reason why both types of expenses exist. OpEx is a better choice if a business wants to be more agile and protect capital. CapEx would be used if a business is aiming to invest for long-term profitability and competitiveness.

Understanding how these two expenses are classified and accounted for are essential for businesses to navigate the accounting requirements and tax code effectively.

Sources

https://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/capex.html

Pre-Retirement Planning Guide

Step 3: Develop a Financial Plan

We all have a different vision for our golden years – and we are also on individual financial tracks to meet our financial goals for retirement. But if you’re not where you think you should be by age 50, consider ways to step up your efforts. Some ideas frequently recommended by financial planners include the following:

Reduce Your Expenses

You could give up some streaming services and your Friday night out with friends, but those are not likely to be impactful moves. Besides, let’s face it, those will be important entertainment and social outlets once you are in retirement, so you might not want to give them up now. A better move would be to reduce big-ticket expenses. These include your home (mortgage payments, insurance, taxes, maintenance); your car/s (payments, insurance, taxes, maintenance); tuition payments; and expensive vacations.

If it helps, break down these expenses into purposes to put them in perspective. A home provides shelter. A car gets you from point A to point B. Tuition is to educate your children and set them on a course for a meaningful life. Vacations enhance your daily life, expose you to new places and help you bond with loved ones. Now ask yourself this: Can you achieve those four functions with a less expensive home, car, college or vacation destinations? It would be tough to say no.

Once you’ve identified these savings opportunities for a more financially secure retirement, it’s up to you to decide what to do about them. And remember, if you are considering relocation at any point – even in retirement – it is better to move sooner than later. This gives you more time to assimilate to new surroundings and make good connections (family, friends, doctors, social activities) to accompany you throughout retirement.

Invest Smartly

It’s a good idea to work with an experienced retirement financial planner who will take the time to understand your needs and objectives and make appropriate recommendations. Tip: To be assured of objective advice, consider hiring an advisor who charges by the hour rather than one who earns income via sales commissions.

Bear in mind that investing smartly can include a lot of different strategies. It could mean diversifying a current stock-dominant portfolio to include more bonds and cash – but adding a few well-researched, aggressive stocks for high-growth potential. It could mean moving a portfolio laden with high expenses to less expensive options, such as exchange-traded funds. At some point, your advisor will likely recommend transitioning your portfolio to more conservative holdings for the duration of your retirement.

And of course, use this time before retirement to max out your retirement plan contributions: In 2024, up to $23,000 + $7,500 catch-up (age 50 and older) for employer plans; up to $7,000 for a traditional and/or Roth IRA (combined total) + $1,000 catch-up.

Consolidate Your Accounts

Plan to have your accounts consolidated by the time you retire. It will be a lot easier for you (and eventually, your power of attorney and estate executor) to manage your finances if they are all in one or two places, such as a bank and/or an investment portfolio custodian.

Auto Pilot

Note that many retirement planners recommend you put your financial life on autopilot at some point in your 70s, based on neurological studies that show decreased cognitive functioning as we age. But honestly, there is no reason why you shouldn’t start earlier.

Thanks to today’s technology, our financial lives are made easier no matter what age we are. We can program our bills to be paid automatically each month. We can balance our checkbook and check our credit card, savings and investment balances online. We can have money sent to us (free of charge) via direct deposit, Venmo and Zelle. We can schedule automatic investments, conduct buy and sell trades online, and have distributions transferred directly into our accounts.

All the methods of putting finances on autopilot that will benefit you in retirement will also benefit you right now. So, you if you’re not using them yet, learn them and stay up-to-date with new technology so it won’t be intimidating as you get older. And as always, find a retirement planner who you trust to guide you in this process.