R18; Example 4

[MuditD]

Hi L2 Aspirants:

R18 Example 4 ( Software development costs) , I am not very clear how this example deals with the Amoritisation of capitalised software development expense. The cirriculum says " The company would have reported no amortisation of prior years software costs, which would have increased operating income by 2000". How this number is working in, I am not very clear with it. It also shows "includes capital expenditure of" does this number has to do anything with the calculation of Earnings?

Help needed.

Regards

Mudit

[Chintan Dave]

Dear Mudit,

In example 4, Adjusted EPS is calculated by expensing software development charges (which were earlier capitalised) , thus $6000 is now considered as operating expense which reduces the EBIT by $6000 Plus, now, the software development expenses are not capitalised so there would be no amortisation of these expenses....to remove the amortisation which was considered to calculate EBIT, we add it back (During Capitalising, this amortisation was deducted from EBIT) Finally, the net effect is EBIT reduces by $4000 (Less $6000 as software development expenses and Plus $2000 as amortisation) Now, the EBIT is $13,317 - $4000 = $9,317. After paying taxes of 28.72%. PAT/NI = $6,641. Adjusted EPS = $6641/$6780=$0.98.

Capital expenditure details has nothing to do with the above calculation.

In case, i have made any mistake in the above explanation please rectify me.

Regards,
Chintan Dave