> prefers to expense everything off
What does that mean?
What does that mean?
When a company makes a profit, it pays taxes on that income. The dividends are then either 1. distributed proportionally to the shareholders, or 2. reinvested into the company.
The general idea is that reinvestment will generate more profit in the long term. In this case, the company reinvests the income into operations and growth during the next fiscal period and onwards. This method of reinvestment, however, still requires some taxes to be paid on the income.
As an alternative, a company can fill their income statement each quarter with expenses that will ~match their income. This way, they're essentially reinvesting in their operations and growth just the same, however they don't have to pay the taxes if the expenses are generated in the same quarter. This method makes the company look unprofitable, but in reality is merely an accounting choice (and arguably, a good one).
A random article I found that explains some of the strategy: http://www.businessinsider.com/analysts-wrong-about-amazon-p...
From an a16z partner:
> So, though we can’t be sure, it looks like the capex is not going up because Amazon’s existing business has become more expensive to run, but because Amazon is investing the growing pool of operation cash flow into the future. All of this brings us back to the beginning - Amazon’s business is delivering very rapid revenue growth but not accumulating any surplus cash or profits, because every penny of cash is being ploughed back into expanding the business further. But, this is not because any given business runs permanently at a loss - it is because the profits from what is already there are spent on making new businesses. In the past, that was mostly in operations, but in recent years the investment firehose has again been pointed at capex.
Source: http://ben-evans.com/benedictevans/2014/9/4/why-amazon-has-n...
There is a bit of flexibility in when things are expensed, but there are rules. You cannot buy a building and expense it today. On the other hand, you can spend a lot in marketing or some forms of R&D and you have to expense them now (they cannot be capitalised, even though in fact the return on the investment will come in the future).
Say you land a long term contract to provide a service for 5 years and you need to buy extra hardware to fulfill this service, you can choose to expense the hardware immediately in the first year while you let the earnings come in over the next 5 years. In the first year you would be taking a huge loss (on paper), and in the following four years you would see larger than average profits (on paper).
Alternatively, you could acknowledge the full value of the contract immediately. Or another alternative is to expense the hardware over time.
I'm not an accountant, but this analogy is my basic understanding of the flexibility that companies have.
In the case you provided, the revenue must be booked when it is payable under the contract - if it’s invoices in yearly installments, then it comes onto the books at that point. The capital expense for the equipment must be depreciated over its useful life, not when it is purchased.