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1、P1:OTA/XYZP2:ABCc28JWBT347/MckinseyJune9,201013:32PrinterName:Hamilton28CapitalizedExpensesWhenacompanybuildsaplantorpurchasesequipment,theassetiscapital-izedonthebalancesheetanddepreciatedovertime.Conversely,whenacom-panycreatesanintangibleasset,suchasabrandn
2、ame,distributionnetwork,orpatent,accountingrulesdictatethattheentireoutlaymustbeexpensedimmediately.Forfirmswithsignificantintangibleassets,suchastechnologycompaniesandpharmaceuticalfirms,failuretorecognizeintangibleassetscanleadtosignificantunderestimationofacomp
3、any’sinvestedcapitaland,thus,overstatementofreturnoninvestedcapital(ROIC).Toillustratewhyandhowtocapitalizeexpenses,inthischapterwefocusononecategory,researchanddevelopment(R&D)expenses.Forthepurposesofmeasuringacompany’seconomicperformance,anyex-pensewithbene
4、fitslastingmorethanayearshouldbetreatedasaninvestment,sinceithascreatedadurableintangibleasset.WerecommendcapitalizingR&Dexpensesforthreereasons:1.Torepresenthistoricalinvestmentmoreaccurately:Byexpensingitemswithlong-termbenefits,theaccountingstatementswillunde
5、rstatethecom-pany’shistoricalinvestment.Thisunderstatementofcapitalcanar-tificiallyboostROICinlateryears,makingabusinessappearmoreattractivethanitreallyis.(Intheexampletofollow,ROICdropsfrom42percentto13percentwhenR&Dexpensesareappropriatelycapital-ized.)2.Topr
6、eventmanipulationofshort-termearnings:WhenR&Disexpensed,reductionsincurrentR&Dflowimmediatelythroughtheincomestate-ment,soundertraditionalaccounting,amanagerlookingtomeetshort-termearningstargetscansimplyreduceR&D.WhenR&Discapitalized,however,short-termearnings
7、areunaffectedbychangesinR&D.Onlylong-runearningsareaffected,throughamortization.Thus,reducingR&Dwillleadtoimprovedprofitabilityonlyiflong-termoperatingperformanceimproves.593P1:OTA/XYZP2:ABCc28JWBT347/MckinseyJune9,201013:32PrinterName:Hamilton594CAPITALIZEDEXP
8、ENSES3.Toimproveperformanceassessmentsoflong-terminvestments:Manycompa-niessetR&Dbudgetsatafixedpercentageofrevenue.ForcompanieswithstablecostsandafixedR&Dbudget,operatingmarginswill
