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Challenges With Capital Expenditures: 1. Measurement Problems

Capital expenditures have challenges related to measurement problems, unpredictability, and a temporal spread of costs and benefits. Measurement can be complicated as not all impacts are captured in financial statements and intangible benefits are hard to measure. Predictions of outcomes from capital investments are uncertain and mistakes can occur. Benefits spread over a long period, making equivalence and cost estimation difficult. Revenue expenditures mainly provide short-term benefits within an accounting period and do not capture a firm's overall financial position as capital expenditures do. During the first half of 2020-2021, India's total expenditures remained contained through reallocation and spending cuts, with revenue spending growing modestly but capital expenditures contracting due to lockdowns and monsoon season.

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94 views

Challenges With Capital Expenditures: 1. Measurement Problems

Capital expenditures have challenges related to measurement problems, unpredictability, and a temporal spread of costs and benefits. Measurement can be complicated as not all impacts are captured in financial statements and intangible benefits are hard to measure. Predictions of outcomes from capital investments are uncertain and mistakes can occur. Benefits spread over a long period, making equivalence and cost estimation difficult. Revenue expenditures mainly provide short-term benefits within an accounting period and do not capture a firm's overall financial position as capital expenditures do. During the first half of 2020-2021, India's total expenditures remained contained through reallocation and spending cuts, with revenue spending growing modestly but capital expenditures contracting due to lockdowns and monsoon season.

Uploaded by

Saket Shankar
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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CapEX and RevEX Challenges

Challenges with Capital Expenditures

1. Measurement Problems

Balance sheet doesn’t capture some results of capital expenditures, such as


boosting employee morale because they are intangible and it can be complicated to
measure all related costs. For an example, a driver’s salary is Operating Expense,
and that expense must be considered along with fuel, insurance and other costs to
decide whether purchasing is better than hiring a contractor.

Therefore as a conclusion, the accounting process of identifying, measuring, and


estimating the costs relating to capital expenditures may be quite complicated.

2. Unpredictability

Predictions are not guaranteed when it comes to investing in capital assets, because
no one can see into the future. Although companies can and are using risk
management principles and insurance to predict and offset the possibility of potential
losses related to capital assets, it’s impossible to eradicate
uncertainty. Organizations making large investments in capital assets hope to
generate predictable outcomes. However, such outcomes are not guaranteed, and
as a result losses may be incurred. The costs and benefits of capital expenditure
decisions are usually characterized by a lot of uncertainty.

Even the best forecasters sometimes make mistakes. During financial planning,
organizations need to account for risk to mitigate potential losses, even though it is
not possible to eliminate them.

3. Temporal Spread

Benefits related to capital expenditures are generally stretched over a longer period
and can lead to problems when it comes to establishing equivalence and estimation.
Cash invested in capital equipment is no longer available for potentially more
advantageous opportunities. The costs, as well as benefits related to the capital
expenditure, are usually stretched over a relatively long period of time for both
industrial projects and infrastructure projects. Such a temporal spread leads to
problems in discount rate estimation and the establishment of equivalence.
Challenges with Revenue Expenditures

1. The benefits yielded by RevEx in the short-term that are mostly limited to one

accounting period.

2. RevEx only helps to determine the current financial standing of the firm.

3. RevEx are only concerned with generating revenue within a given period.

4. It does not necessarily provide an accurate picture of a firm overall financial

standing.

A part of the additional expenditure requirement has been met by re-allocation of


funds from other heads of expenditure. The government also undertook expenditure
rationalisation measures during Q1-Q3 (2020-2021) to target spending in priority
areas over avoidable outgoes (these expenditure curbs on various Central ministries
and departments have now been relaxed). As a result, total expenditure remained
contained at 48.6 per cent of BE during H1(2020-21), as against 53.4% during the
same period of last year, despite pandemic related expansionary measures. In
absolute terms, revenue spending during H1(2020-2021) was almost at last year’s
levels, recording a modest growth of 1% over the previous year, despite collapse in
receipts, with Q1 registering a sharp pick up reflecting pandemic related revenue
expenditure thrust coupled with its front-loading and Q2 witnessing a sharp fall.
Capital expenditure, on the other hand, contracted by 11.6 per cent during H1(2020-
2021), deterrents being lockdown in Q1 and monsoon in Q2.

Reference:
• https://www.accountingformanagement.org/capital-and-revenue-expenditures/
• https://www.rbi.org.in/Scripts/BS_ViewBulletin.aspx?Id=19959#CH9

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