forfinancialexpensessuchasoperatingleasesexpensesthat
are treated as operating expenses. This affects the
measurement of operating income but not net income.
Theotherfactortoconsideristheeffectsofthephenomenon
of so-called managed earnings at these firms. Technology
firmssometimesuseaccountingtechniquestopostearnings
thatbeatanalystestimates,resultinginmisleadingmeasures
of earnings.
Capital Expenses Treated as Operating Expenses
While, in theory, income is unaffected by current-period
capital expenses, the realityis that there are a number of
capitalexpensesthat aretreatedasoperatingexpenses. For
instance,asignificantshortcomingofaccountingstatements
is the way in which they treat research and development
expenses.Undertherationalethattheproductsofresearchare
toouncertainand difficulttoquantify,accountingstandards
havegenerallyrequiredthatallR&Dexpensesbeexpensedin
the period in which they occur. This has several
consequences,butoneofthemostprofoundisthatthevalue
oftheassets createdbyresearchdoes notshow up onthe
balancesheetaspartofthetotalassetsofthefirm.This,in
turn,createsrippleeffectsforthemeasurementofcapitaland
profitabilityratiosforthefirm.Weconsiderhowtocapitalize
R&Dexpensesinthefirstpartofthesectionandextendthe
argumenttoothercapitalexpensesinthesecondpartofthe
section.
Capitalizing R&D Expenses