Definition
Capitalisation (Costs)
Capitalisation is recording an expenditure as an asset on the balance sheet rather than an immediate expense, to be written off over future periods.
Costs are capitalised when they create future economic benefit, such as building a factory or developing qualifying software. Capitalised costs are then expensed gradually through depreciation or amortisation, smoothing their impact on profit.
Aggressive capitalisation, such as capitalising costs that should be expensed, can inflate near-term profit and assets, an earnings-quality red flag. Ind AS sets strict criteria, for example allowing capitalisation of development costs only when technical and commercial feasibility is demonstrated.
Related terms
- DepreciationDepreciation is the systematic allocation of the cost of a tangible fixed asset over its useful life, reflecting wear and obsolescence as an expense.
- AmortisationAmortisation is the systematic write-off of the cost of an intangible asset, such as software, patents or goodwill, over its useful life.
- Intangible AssetsIntangible assets are non-physical assets with economic value, such as patents, trademarks, software, licences and goodwill.
- Capex vs OpexCapex is spending on long-lived assets that is capitalised and depreciated over time, while opex is day-to-day operating expense charged fully in the period incurred.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.