Capitalization of long-lived assets

· When a firm concludes that a resource being acquired is a long-lived asset, its cost can be capitalized and then amortized over its life.
· Long-lived assets typically include property, plant (building and land) and equipment (PP&E). These assets are reported at cost (book value) at initiation, and are depreciated over time (except for land).
· Once an asset has started to depreciate, it is said to be reported at its carrying value. If an asset becomes obsolete before its time or it has lost its revenue-generating ability, it must be written off and this is referred to as asset impairment.

Some implications:
· Expenditure is over 1 year in general and in form of depreciation -> NI variability lower;
· Profitability-return on sales higher,
· profitability-ROA/ROE higher in early year but lower in later years;
· CF higher due to tax, if ignore tax->no change in net CF as expense-> decrease CFO & captization-> decrease CFI; Leverage ratio Lower