3 ms·
This is something I never quite fully understood. So as they depreciate those assets over time, that goes against their profits? Why would a company want to do
by marcamillion 16y ago
This is something I never quite fully understood. So as they depreciate those assets over time, that goes against their profits?
Why would a company want to do this? Is it just for tax purposes?
- nostrademons 16y agoIt's for accounting purposes, so that companies are all measured by the same yardsticks. It's not that they want to do this - it's that they're required to, under GAAP, at least if they have public investors. Imagine that companies were not required to amortize capital expenditures over the life of the equipment. Then imagine that you have two gigantic web companies, each big enough to require thousands of servers. Company A rents their servers from Amazon.com through EC2. Company B builds their own datacenter. Company A's earnings are straightforward: take their revenues and then subtract out the fees they pay for hosting (and all the other stuff, like salaries, licensing, etc.) Company B, however, has this massive cash hit in the first year, and then pays nothing (well, except for power, cooling, etc.) in subsequent years. If they weren't required to amortize their CapEx, Company B would look drastically worse than Company A in year 1, and then drastically better for all subsequent years, even though they do the exact same thing. Investors would be misled into investing in Company A, and then complain when Company B's earnings shot up once they no longer report their cap-ex. Ask an accountant for more details.
- marcamillion 16y agoThat is an AWESOME explanation. Thank you. I had the gist, but I guess I was focusing on the IT in EBITDA rather than the DA - because I forgot about the massive CapEx they have to do initially.