Questions on accounting for OID in BS adjustments and asset capitalization
Should you account for OID by netting it against the par value of the debt (so if company does LBO with 500M in term loan and OID of 6M, then record 494M in debt incurred) or can I record it as a capitalized asset the same way as you would with financing fees?
Also, Im in general confused about what a capitalized asset is and when to record an item as capitalized asset vs. expense. Isn't financing fees a one-time expense so why isnt it taken out of retained capital the same way it is for advisory fees?
I know in tech start-ups, the term capitalized R&D comes up frequently, but I don't know when a company would choose to capitalize its R&D vs. report it on the IS as regular R&D. Is it just to inflate NI given that R&D likely makes up a big chunk of expenses for a tech start-up? But it would also result in a huge dip in FCF since capitalized assets must be included in the calculation given that they are cash spends right?
Should you account for OID by netting it against the par value of the debt (so if company does LBO with 500M in term loan and OID of 6M, then record 494M in debt incurred) or can I record it as a capitalized asset the same way as you would with financing fees? i think either would get you to same result but former (treating it as contraliability) is how it works in real life
Also, Im in general confused about what a capitalized asset is and when to record an item as capitalized asset vs. expense. Isn't financing fees a one-time expense so why isnt it taken out of retained capital the same way it is for advisory fees? Same reason capex isn't taken out as a one time hit - you get the benefit of financing over the life of the loan, so you should amortize the cost of obtaining it over the same time horizon to better reflect economic reality
I know in tech start-ups, the term capitalized R&D comes up frequently, but I don't know when a company would choose to capitalize its R&D vs. report it on the IS as regular R&D. Is it just to inflate NI given that R&D likely makes up a big chunk of expenses for a tech start-up? But it would also result in a huge dip in FCF since capitalized assets must be included in the calculation given that they are cash spends right? if you capitalize R&D you amortize its value over time so you're not really inflating anything, you're deferring recognition of it over its useful life
thanks for clearing up my questions. My point on R&D isnt that it is inflating any financial performance persay, but that theres a big difference between IS and CF because it is capitalized. Am i correct on that capitalized assets must be adjusted for in FCF (cash flow from investing activities)?
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