TECHNICAL SCHEME COMPARISON
Capitalizing Operating Expenses vs. Depreciation Abuse
Transferring routine operating expenses to balance sheet PP&E versus slowing down annual depreciation charges.
KEY FACTS
- Capitalizing expenses reclassifies routine period operational costs (e.g., telecom line access, routine maintenance) directly into balance sheet capital assets.
- Depreciation abuse leaves past costs on the balance sheet but lowers annual amortization charges by extending asset service lives or inflating salvage values.
- Capitalizing expenses immediately creates an artificial spike in operating margin and Operating Cash Flow (CFO).
- Depreciation manipulation inflates net income while leaving operating cash flow unchanged, creating an accrual divergence.
SCHEME A expenses-and-reserves
Capitalising Operating Expenses ↗
Recording routine ongoing operational costs as long-term capital assets rather than expensing them immediately in the income statement.
Accounts Affected:
Property, Plant & Equipment / Construction in Progress (Asset) Operating Expenses / Cost of Services (Income Statement)
Typical Journal Entry:
Converting ordinary telecommunications transmission access fees into capital equipment, converting a massive operating loss into billions in fictitious operating profit.
Dr.
Cr.
Precedent Enforcement Actions:
SCHEME B expenses-and-reserves
Depreciation and Useful Life Extension ↗
Extending the depreciable life of fixed assets or exaggerating residual salvage values to reduce current periodic depreciation expense.
Accounts Affected:
Depreciation Expense (Income Statement) Accumulated Depreciation (Contra-Asset)
Typical Journal Entry:
Arbitrarily pushing out asset lifespan estimates for trucks, machinery, or software to cut yearly depreciation expense by tens of millions.
Dr.
Cr.
Precedent Enforcement Actions: