- Since capitalizing an operating expense creates an
asset,theamortizationofthisassetshouldbeadded
to depreciation for the current period. Thus,
capitalizing R&D creates a research asset, which
generates an amortization in the current period. - Ifweareaddingthecurrentperiod’sexpensetothe
capitalexpendituresandtheamortizationoftheasset
tothedepreciation,thenetcapitalexpendituresofthe
firm will increase by the difference between the two:
Note that the adjustment that we make to net capital
expenditure mirrors the adjustment we make to operating
income. Sincenetcapital expenditures aresubtracted from
after-taxoperatingincome,weare,inasense,nullifyingthe
impactoncashflowsofcapitalizingR&D.Why,then,dowe
expendthetimeandresourcesdoingit?Whilewebelievethat
estimatingcashflowsisimportant,itisjustasimportantthat
we accurately identify how much firms are earning and
reinvesting.
ILLUSTRATION 3.8: Effect of Capitalizing R&D: Cisco
InIllustration3.2,wecapitalizedCisco’sR&Dexpensesand
createdaresearchasset.InIllustration3.6,weconsideredthe
additional taxbenefit generatedby thefactthat Cisco can
expensetheentireamount.Inthis illustration,wecomplete
theanalysisbylookingattheimpactofcapitalizationonnet
capital expenditures.