Investments in Noncurrent
Operating assets are not the assets that come out of daily operations (cash, accounts
receivable, etc.). Rather, they are plant (fixed) assets and other assets required by
businesses for the long haul. Without them, the day-to-day operations may not exist.
Examples include property, plant, equipment, and intangible assets.
What are these noncurrent operating assets and how do they get recorded on the
books? That is what this chapter covers. The accounting for these transactions isn’t
always as simple and straightforward as some other transactions like the recording of
revenue or the receipt of cash. Sometimes these assets are acquired in basket
purchases or as acquisitions of entire companies. Other times payment is deferred so
(long-term) debt is affected. Some are not outright purchased but are leased in such a
way that the company must account for the lease as though a purchase was made.
Although many companies don’t self-construct their own assets, some do. When they
do so and have interest expense, a portion, or all, of their interest expense is capitalized
(turned into part of the building as an asset) rather than expensed. This calculation can
be somewhat complicated, especially for companies with multiple debt sources.
In terms of the financial statement appearance, there is a big difference between
capitalizing a cost and expensing it. When capitalized, it shows up as an asset, which
makes the balance sheet look healthier. When expensed, it shows up as a deduction
from revenue, which reduces net income and makes the income statement look weaker.
Hence, it is important that true expenses are not capitalized. Only costs incurred to
create assets should be capitalized. The chapter covers a variety of potential costs and
whether each should be expensed or capitalized.
When solitary intangibles are acquired, the accounting is simple. But in many cases,
multiple intangibles are acquired simultaneously, intangibles are acquired with parts of
other companies, or they are acquired as part of the acquisition of an entire company.
Under these instances, the treatment can become more complicated. Although
intangibles are frequently created, they are not always, or even usually, recorded.
Generally, intangibles need to be purchased to be reflected on a company’s books.