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Ibs211 lp7 Preclass

The document outlines a scenario involving a drug company's financials under two setups: Original and Alternative. It details the impact of capitalizing 50% of SG&A on operating income, assets, and key financial metrics such as Operating Margin, Asset Turnover, and Operating ROA. The CEO must consider the accounting rules when deciding whether to partially capitalize SG&A.

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9 views2 pages

Ibs211 lp7 Preclass

The document outlines a scenario involving a drug company's financials under two setups: Original and Alternative. It details the impact of capitalizing 50% of SG&A on operating income, assets, and key financial metrics such as Operating Margin, Asset Turnover, and Operating ROA. The CEO must consider the accounting rules when deciding whether to partially capitalize SG&A.

Uploaded by

ealhosani76
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as XLSX, PDF, TXT or read online on Scribd
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Scenario

A drug company spends significant sums each year on Research & Development (R&D), which is classified as SG&A.
Under the 'Original Setup' below, the income statement and asset figures are for the company with all SG&A expensed (require
Under the 'Alternative Setup', the financial figures are modified assuming the company capitalizes 50% of its SG&A and amortiz
Fill in the missing numbers (?) and calculate Operating Margin, Asset Turnover, and Operating ROA (equals OperatingIncome/
If the CEO has a choice, should the CEO partially capitalize SG&A? (in reality, the company must follow the relevant accountin

Original Setup
(AED, mil) 2015 2014 2013 2012 2011
Revenue 1,898 1,725 1,650 1,250 1,045
COGS 569 518 450 375 300
Gross Income 1,329 1,207 1,200 875 745

SG&A 380 345 300 260 200


Operating Income 949 862 900 615 545
Assets 1,898 1,725 1,550 1,250 1,000
Operating Margin 50% 50% 55% 49% 52%
Asset Turnover 1.0 1.0 1.1 1.0 1.0
Operating ROA 50% 50% 58% 49% 55%

Alternative Setup
SG&A Capitalized (%) 50%
Amortization Period (yrs) 10
(AED, mil) 2015 2014 2013 2012 2011
Expensed portion of SG&A 190 173 150 130 100

Capitalized portion of SG&A 190 173 150 130 100


Amortization for Capitalized 2011 SG 10 10 10 10
Amortization for Capitalized 2012 SG 13 13 13
Amortization for Capitalized 2013 SG ? ?
Amortization for Capitalized 2014 SG ?

Expensed SG&A + Amortized SG&A 213 196 173 140 100


Operating Income 1,116 1,012 1,027 735 645
Cumulated Capitalized SG&A 743 553 380 230 100
Cumulated Amortization 79 56 33 10
Net Capitalized SG&A 664 497 347 220 100

Assets 2,562 2,222 1,897 1,470 1,100


Operating Margin 70.0211 69.971 72.7273 70 71.2919
Asset Turnover 4.99474 5 5.5 4.80769 5.225
Operating ROA 50 49.971 58.0645 49.2 54.5
opment (R&D), which is classified as SG&A.
are for the company with all SG&A expensed (required under US GAAP rules).
he company capitalizes 50% of its SG&A and amortizes it over 10 years (possibly permissible under IFRS).
over, and Operating ROA (equals OperatingIncome/Assets).
lity, the company must follow the relevant accounting rules)

<- Portion of SG&A that's not capitalized is expensed

<- Capitalized SG&A must be amortized over subsequent years

<- SG&A on Income Statment includes current year expensed SG&A plus amortized
SG&A from prior years

<- SG&A on Balance Sheet includes prior capitalized SG&A that has not been amortized

<- Assets now include net capitalized SG&A


<- Operating Margin under alternative setup calculated using new Operating Income
<- Asset Turnover under alternative setup calculated using new Assets

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