Capital Expenditure
Capital is any short-term asset with the ability to generate new or increased value. Capital expenditure – abbreviated as “CapEx” involves purchasing, investing or developing long-term assets to improve a business’s operations. This may involve improving long-term assets or purchasing fixed assets to improve capacity. Fixed assets in a company can be buildings, furniture, plant, machinery, or land that generates benefits for more than one fiscal year. Long-term assets improve efficiency or increase capacity in a company or its operations. They are tangible fixed assets such as plants, property, equipment, or infrastructure whose useful life exceeds one year.
Business Case and Accountability
The business case for infrastructure projects includes benefits like investment opportunities, employment opportunities, and regeneration. Infrastructure assets are essential physical assets required for daily life like hospitals, railways, bridges, roads, highways, aviation, or housing that are critical for economic development and growth. Infrastructure assets are the critical systems that are necessary for the smooth running of an economy and for maintaining our daily way of life. This includes roads, water, power, electricity, energy, telecoms, and wireless infrastructure. Infrastructure can be financed through taxes, private investments and public-private partnerships. Investments in infrastructure are non-cyclical and offer a more predictable return of investment and cashflows to investors. This means that those responsible for these fixed assets are accountable to investors and funders for cost assurance on these Capex projects.
Accounting and Finance for Capex
Fixed assets are long-term tangible assets that are essential for the operations of a business. They generate long-term financial benefits, value and have a useful life of over one year. In the financial statements, such assets are classified as property, plant and equipment on the balance sheet at netbook or historical value. This is the original cost of the asset and the use, consumption or depletion in value is depreciated and amortised over time. Capital expenditure is recorded at the point of the initial capital outlay while revenue is recorded as used up or consumed. Capital expenditure involves using funds for the purchase, improvement, or development of long-term assets. Capital expenditure is capitalised this means that the cost is transferred to the balance sheet, and it should increase the value of the business. This is different to operating expenditure which is expensed and transferred to a company’s income statement or profit and loss account.
Cost Assurance Audits and Capital Controls
Both cost of these investments and the returns can be high, but they benefit both the economy and investors. These major projects often require teams that are multidisciplinary in nature such as engineers, finance, accounting and project experts, quantity surveyors, lawyers, and auditors. Due to complexity, such large projects require a public-private partnership/alliance. With contractual arrangements between two or more parties e.g. DFT, local councils and private sector, they require legal contracts that can correctly share risks and rewards amongst the parties. Inflows from capital expenditure may be used for a company’s operating expenses, or it can be used to enhance growth, build the financial reserves of the company or for investment in research and innovation to safeguard the future of the company and to achieve longer-term strategic objectives.
Revenue v Capital Expenditure
People often get confused between capital and revenue expenditure. Revenue expenditure is the cost is incurred on an activity or fixed asset that has already been brought into service to keep that asset in operational or working condition. Examples of revenue expenditure are employee salary, heating maintenance, and the servicing of office plants or equipment. It can be difficult for people to identify the differences between capital and revenue expenditure but the primary difference between both is that capital expenditure aims to enhance, upgrade, or purchase new assets or services whereas revenue expenditure aims to improve and maintain present services or products.
UK Government Capital Expenditure
As per the Institute for Government, capital spending fell substantially after 2009/10. It was cut sharply by 36.3% between 2009/10 and 2012/13 as part of the coalition governments overall public spending cuts. Then 2015 proved to be a remarkable year with capital spending increasing consistently due to changes in government policy in the year 2013 to spend more on economic infrastructure which took place in the context of low and falling borrowing costs. The changes brought on a pipeline of projects and the creation of the national productivity investment fund that further announced increased spending on housing, R&D and economic infrastructure in the year 2016. The capital spending rose further in the year 2020 and it is projected to continue at the same rate until the year 2024.
Railway and Local Government Capex Spend
Below is government spending in the railway industry within the United Kingdom from the year 2009 to 2021. According to Statista, public spending on railways in the UK was £27.14 billion in 2020/21, compared with £18.46 billion in the previous year. Before 2015/16, railway spending fluctuated between a low of £7.4 billion in 2010/11 and a high of £9.33 billion in 2014/15, before a significant year-on-year increase of £5.46 billion saw spending reach 14.79 billion pounds in 2015/16. These included the Thameslink and Crossrail projects. Data on the total local government identifiable expenditure on services in the UK during the 2019/2020 financial year, by region, shows that at the end of March 2020, London local government had the highest identifiable expenditure on services amounting to £29.03 million. Northern Ireland had the lowest identifiable expenditure on services at £807 million.
Top Examples of Capital Expenditure
- Transport – rail, road and bridges
- Water – supply and sewage, waterways, flood and environment
- Energy & Power – power stations, wind turbines, gas and solar
- Telecoms – telephone, broadband and wireless infrastructure
- Security – courts, police, prisons and defence structures
- Education – schools, colleges, universities and training institutes
- Health – hospitals, clinics, fitness and wellbeing facilities
- Recreational – parks, beaches, historical sites and nature reserves
- Innovation R&D – science and technology, driverless technology
- Environmental – net zero, renewable energy and electric vehicles
Key Tips for Reporting Capital Expenditure
- Alignment with long term strategic goals and objectives
- Funding and the cost of capital of the Capex investment
- Realistic initial investment authority and budgets
- Revenue budget/resources required like staff and labour
- Accuracy of data on outflows, inflows and outturn cost
- Timeliness of data and forecast outturn cost reports
- Ability to inform current and future decision making
- Managing risk and change early on in the project cycle
- Capex controls, policies and gateway approvals
- Technology suitable budgeting and reporting software
Benefits of Capital Expenditure
- Opportunity to increase capacity, efficiency and to boost production
- Generating significantly increased value, revenue and profits
- Sustaining current operating expenses of a business
- Critical to remain sustainable and viable for the long term
- Creating long-term assets, innovation and sustainable value
- Opportunities for strategic goals, funds, and development
- Increasing competitive advantage for growth versus competitors
- Stimulating the economy and regenerating city centres and towns
- Strengthening the balance sheet, finances and boosting reserves
- Raising funds, funding and attracting infrastructure investors
How can CFBL help you?
For real-life case-based training on how your commercial, finance, procurement teams and your supply chain can embed ESG factors in business strategy and implement protocols for emerging ESG costs like carbon contact ce************@cf*************.com. Cecelia is a strategic partner of the Sustainability Institute. Cecelia Fadipe, director of CFBL Consulting, is an economist, chartered global management accountant fellow of CIMA and cost consultant. CIMA is a signatory to the UN Global Compact, being a part of the Global Compact is a voluntary commitment to upholding the initiative’s ten principles, in the areas of human rights, labour, the environment and anti-corruption.
Our Services
- Cost Assurance Training
- Cost Assurance Audits
- Capex Protocols & Controls
- Capex Strategy Cost & Reporting
- ESG Finance & emerging costs
References
- https://www.statista.com/statistics/298673/united-kingdom-uk-public-sector-expenditure-railways/
- https://www.instituteforgovernment.org.uk/sites/default/files/publications/capital-investment-governments-spending-plans_0.pdf
- https://www.statista.com/statistics/651550/local-government-identifiable-expenditure-on-services-by-region-united-kingdom/
- https://corporatefinanceinstitute.com/resources /knowledge/accounting/capital-expenditures/
- https://www.freecodecamp.org/news/capital-expenditure-what-is-capex-definition-and-meaning/