What does capitalize mean?

http://blog.accountingcoach.com/capitalize/

The word capitalize means to record the amount of an item in a balance sheet account as opposed to the income statement. (The accounts in the general ledger and in the chart of accounts consist of two types of accounts: balance sheet accounts and income statement accounts.)
To illustrate, let’s assume that your company purchases a new computer printer for your office. Its cost is $700. If your company is a small company, it might capitalize the cost of the printer. That means the printer will be included in an equipment account and will be reported in the property, plant and equipment section of the balance sheet. Its cost will be depreciated over the printer’s useful life. A larger company might decide that $700 is an immaterial amount and will not capitalize the printer as an asset. Rather, the large company will expense the printer immediately. (This larger company might have a policy of not capitalizing any asset with a cost of less than $1,000 because of the materiality convention. This is allowed because no reader of the financial statement is going to be misled because the $700 will appear in the year the printer is purchased instead of $140 in that year and $140 in each of the subsequent four years.)
Another example of capitalize involves leased equipment. If your company leases a forklift truck, is the lease a rental agreement, or is the lease really a disguised purchase and financing arrangement? If it is the latter, then the forklift truck and the lease should be capitalized. The forklift truck should appear on the balance sheet as part of the company’s equipment, and the amount of principal owed needs to be reported as a liability on the balance sheet.

http://www.investopedia.com/terms/c/capitalize.asp#axzz2BYLxOunM

Definition of 'Capitalize'

An accounting method used to delay the recognition of expenses by recording the expense as long-term assets.

In general, capitalizing expenses is beneficial as companies acquiring new assets with a long-term lifespan can spread out the cost over a specified period of time. Companies take expenses that they incur today and deduct them over the long term without an immediate negative affect against revenues.

Investopedia explains 'Capitalize'

If a company capitalizes regular operating expenses, it is doing so inappropriately, most likely to artificially boost its operating cash flow and look like a more profitable company. Because a company can't hide its expenses forever, such a practice will fail in the long run.

It is important not to confuse capitalize with capitalization.

 

 

http://www.accountingtools.com/questions-and-answers/what-does-capitalize-mean.html

You capitalize an item when you record an expenditure as an asset, rather than an expense. This means that the expenditure will appear in the balance sheet, rather than the income statement.
You would normally capitalize an expenditure when it meets both of these criteria:

• Exceeds capitalization limit. Companies set a capitalization limit, below which expenditures are deemed too immaterial to capitalize, as well as to maintain in the accounting records for a long period of time. A common capitalization limit is $1,000. The materiality principle applies to the capitalization concept.
• Has useful life of at least one year. If an expenditure is expected to help the company generate revenues for a long period of time, then you should record it as an asset and then depreciate it over its useful life, which agrees with the matching principle.

Here are several examples to illustrate the concept:

• A company pays $500 for a notebook computer. The computer has a useful life of three years, but it does not meet the company's $1,000 capitalization limit, so the controller charges it to expense in the current period.
• A company pays $2,000 for maintenance on a machine. The payment exceeds the company's capitalization limit, but it has no useful life, so the controller charges it to expense in the current period.
• A company pays $3,000 for a router. The router has a useful life of four years and surpasses the corporate capitalization limit of $1,000, so the controller records it as a fixed asset and begins depreciating it over its useful life.

A special situation is an asset that is being paid for under a leasing arrangement. If the intent of the lease is essentially to finance the purchase of an asset by the lessee, and it meets with the capitalization criteria noted above, then you should record it as a fixed asset. This type of lease is known as a capital lease.

U.S. GAAP and IFRS Revenue Recognition

Revenue Recognition (U.S. GAAP)[1]

Revenue should be recognized when it is realized (or realizable) and when it is earned.

(1)    All four criteria must be met before any revenue can be recognized

(a)    Persuasive evidence of an arrangement exists – signed contract;

(b)   Delivery has occurred or services have been rendered; – risk & rewards transfer

(c)    The price is fixed and determinable;  – no price contingencies

(d)   Collection is reasonably assured; –  standard collection terms

(2)     Revenue from the sales of products or the disposal of other assets is recognized on the date of sale of the product or other asset (i.e., the delivery date). Generally, the following criteria apply for a sale (exchange) to take  place:

(a)    Delivery of goods or setting aside goods ordered (which would result in a simultaneous recognition of revenue and expense), and/or

(b)   Transfer of legal title.

(3)    Revenue that stems from allowing others the use of the entity’s assets (e.g., interest revenue , royalty revenue, and rental revenue) is recognized when the assets are used (i.e., as the time passes)

(4)    Revenue from the performance of services is recognized in the period the services have been rendered and are able to be billed by the entity.

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Revenue Recognition (IFRS)[2]

Four categories are divided. Each category has its own revenue recognition rules.

Sale of Goods

When all the following conditions have been met:

(1)    Revenue and costs incurred for the transaction can be measured reliably

(2)    It is probable that economic benefits from the transaction will flow to the entity

(3)    The entity has transferred to the buyer the significant risk and rewards of ownership

(4)    The entity does not retain managerial involvement to the degree associated with ownership or control over the goods sold

Rendering of Services

Using the percentage of completion method, all of the following conditions have been met:

(1)    Revenue and costs incurred from the transaction can be measured reliably;

(2)    It is probable that economic benefits from the transaction will flow to the entity;

(3)    The stage of completion of the transaction at the end of the reporting period can be measured reliably;

Revenue from interest, Royalties, and Dividends

All the following conditions have been met:

(1)    Revenue can be measured reliably

(2)    It is probable economic benefits from the transaction will flow to the entity

Interest revenue is recognized using the effective interest method

Royalties are recognized on the accrual basis

Dividends are recognized when the shareholders’ rights to receive payment are established

Construction Contracts

Using the percentage of completion method, all of the following conditions have been met:

(1)    The contract revenue and contracts costs attributable to the transaction can be measured reliably;

(2)    It is probable that economic benefits from the transaction will flow to the entity;

(3)    Both the contract costs to complete the contract and the stage of contract completion at the end of the reporting period can be measured reliable.

An expected loss on a construction contract is recognized immediately as an expense.

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[1] Becker Professional Education, CPA Exam Review, Financial 2

[2] Becker Professional Education, CPA Exam Review, Financial 2

Differences between IFRS and US GAAP

http://post.nyssa.org/nyssa-news/2010/04/current-major-differences-between-ifrs-and-us-gaap.html

Current Major Differences between IFRS and US GAAP 

At last year's meeting in Pittsburgh, Pennsylvania, representatives of the G-20 renewed their commitment to complete convergence in accounting standards by June 2011—less than two years away. While the group did not explicitly propose worldwide adoption of IFRS (International Financial Reporting Standards), that is the implication, because it hardly seems likely that the rest of the world will drop IFRS in favor of GAAP (US Generally Accepted Accounting Principles). The following table offers a side-by-side comparison of the two standards. 

	US GAAP	IFRS	Impact
Inventory Valuation	Permits LIFO, FIFO, weighted average cost, or specific identification. Inventory carried at lower of cost or market.	Permits FIFO or weighted average cost; LIFO not permitted. Inventory carried at lower of cost or net realizable value.	Companies that use LIFO must revalue inventory, which could result in major tax liabilities due to the IRS’s LIFO conformity rule.
Asset Impairment	Two-step impairment.	Single-step impairment.	Write-downs are more likely under IFRS.
Asset Valuation	Assets can be written down, but not written up. PP&E is valued at historical cost.	Allows upward revaluation when an active market exists for intangibles; allows revaluation of PP&E to fair value.	Book values are likely to increase under IFRS.
Revenue Recognition	Provides very specific general and industry guidance about what constitutes revenue, how revenue should be measured, and the effect of timing on recognition.	Not specific about the timing and measurement of recognition; lacks industry-specific guidance.	Revenues are likely to increase with less detailed guidance.
Contingencies	Contingent liabilities must be disclosed.	Can limit disclosure of contingent liabilities if severely prejudicial to an entity’s position.	May result in fewer disclosures.
Debt Covenants	Permits curing debt covenant violations after fiscal year end.	Debt covenant violations must be cured by fiscal year end.	Debt covenants may need to be amended, resulting in related transaction costs.
Research & Development	R&D costs must be expensed.	Allows capitalization of R&D costs.	Development costs will be deferred and amortized.
Entity Consolidation	Consolidation is based on who has the controlling financial interest.	Consolidation is based on which entity has the power to control.	Companies are likely to consolidate more entities.
Securitization	Allows certain securitized assets and liabilities to remain off a corporation’s books.	IFRS requires most securitized assets and liabilities to be placed on the balance sheet.	May result in very different balance sheet values.
Financial Instrument Valuation	Fair value based on a negotiated price between a willing buyer and seller; not based on entry price.	Several fair value measurements. Fair value generally seen as the price at which an asset could be exchanged.	Financial assets and liabilities will be measured differently.
Depreciation	Methods allowed: straight-line, units of production, or accelerated methods (sum of digits or declining balance). Component depreciation allowed but not commonly used.	Allows straight-line, units of production, and both accelerated methods. Component depreciation required when asset components have different benefit patterns.	Assets with different components will have differing depreciation schedules, which may increase or decrease assets and revenue.

http://www.ifrsaccounting.com/ifrsrevenue.html

Accounting for Revenue Recognition
IFRS versus GAAP

Listed below are some of the major differences in accounting for revenue recognition between International Financial Reporting Standards (IFRS) and U.S. GAAP. This material is excerpted from Wiley IFRS 2010: Interpretation and Application of International Financial Reporting Standards.

U.S. GAAP Revenue Recognition	IFRS Revenue Recognition
Conceptual framework offers guidance (major project in process to provide revised standard for revenue recognition based on statement of financial position changes); specific guidance on limited matters (e.g., software development; construction)	Some specific guidance offered under IFRS (a separate standard on revenue recognition exists, unlike U.S. GAAP)
Generally must amortize revenue over service period, no up-front recognition under GAAP	More possibility for up-front revenue recognition when performance has occurred
Revenue recognition deferred on delivered part of multi-element contract if refund would be triggered by failure to deliver remaining elements	Revenue generally recognized on delivered part of multi-element contract even if refund triggered by failure to deliver remaining elements, if delivery is probable
Revenue-cost and gross-profit approaches to percentage-of-completion both allowed for long-term construction contracts; use of completed contract method under certain circum-stances is required	If percentage cannot be reliably estimated, use of cost recovery method required; revenue-cost approach to percentage of completion mandatory; completed contract method banned
Joint project with IASB, likely will adopt new assets and liabilities approach to revenue recognition	Joint project with FASB, likely will adopt new assets and liabilities approach to revenue recognition

http://www.differencebetween.net/business/difference-between-gaap-and-ifrs/

Difference between GAAP and IFRS

GAAPvsIFRS
The IFRS or the International Finance Regulation Standards are defined by the International Accounting Standards Board. The IFRS is increasingly being adopted by companies across the globe for preparing their financial statements. On the other hand, the US GAAP has been developed by the Financial Accounting Standards Board or FASB for listed companies. Chris Cox, former chairman of the Securities Exchange Commission or SEC, has asked US companies to transition to IFRS by 2016.

There are quite a few similarities between IFRS and US GAAP and the differences are rapidly getting reduced owing to the convergence agenda of both these organizations. The differences explained below are just a few significant ones and as of this point of time. These can change due to developments in the convergence agenda of the IFRS and US GAAP.

With respect to revenue recognition, US GAAP has developed a detailed guidance for different industries incorporating standards suggested by the other local accounting standard organizations in the US. IFRS, on the other hand, mentions two main revenue standards along with a couple of interpretations related to revenue recognition as guidance.

There are also some significant differences related to when an expense should be recognized and the amount that has to be recognized. For instance, IFRS recognizes the expense of certain stock options with vesting over a period of time sooner than the GAAP.

There are also some significant differences between the US GAAP and IFRS with respect to the arena of financial liabilities and equity. Instruments that were regarded as equity by the US GAAP will be considered as debt under the IFRS standards.

The US GAAP has several criteria for consolidation whereas under IFRS, a company can consolidate based on the power it can exercise on the financial and operational policies of the other entity. By being responsible for the reporting and performance of these new entities can affect the company’s financing arrangements and several more areas.

Unlike US GAAP, IFRS forbids companies from using the LIFO or the last in, first out method of costing inventory. Companies using LIFO will have to transition to other costing methodologies.

Summary:
1.Regarding revenue recognition, US GAAP is more detailed and industry-specific than IFRS.
2.Expense recognition has some differences with respect to the time period and expense amount that can be recognized by the companies.
3.Some financial instruments that were recognized as equity by GAAP will be recognized as debt under IFRS.
4.The IFRS allows consolidation based on the power exercised by the company on the financial and operational policies of the other entity.
5.IFRS does not allow the use of LIFO method of inventory costing.

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