4 Ways To Sort Out Operating Expense From CapEx

CapEx For HotelsSince hotels daily encounter a multitude of issues that involve Operating Expense (OpEx) and Capital Expenditures (CapEx), it should not be a surprise that these two categories are occasionally an area of misunderstanding. Even so, most items found in a hotel can clearly be applied to one of the two above categories. However, for those times of confusion, the following tips may assist you in successfully resolving this issue.

It should first be mentioned that the philosophies regulating OpEx and CapEx will vary within each company due to the different approaches of upper management and corporate accounting staff. Even at times, specific circumstances will affect how policies are applied to Operating Expense or Capital Expense items.

  1. Monetary threshold – If the item or project will be “depreciated” in the company’s accounting process, in most applications it will be considered “Capital”. To better define this, most companies will establish a “minimum dollar amount” in which individual items or projects must exceed to be recognized as “Capital” (ie: Items or projects of $2,000 or more can be capitalized. If less, they are “expensed” at the hotel level, as operating costs).
  2. Lifecycle threshold – The item of concern will need to meet or exceed the company’s guideline for useful life. Most companies will consider anything with a useful life of less than 3 years to be Operating Expense. CapEx items usually face 3, 5, 7 or 10 year lifecycles. Computers, PMS, guest room furnishings will fall into the short to mid lifecycles; while major pieces of mechanical equipment should experience lifecycles ranging from 10 to 20 years.
  3. Items combined – A group of similar expenditures may qualify as “Capital” where those same items listed separately would not. An example of this would be reupholstering the seats of 45 restaurant chairs. This is generally considered “Expense”, as it simply repairs a small portion of the chair and does not set it up for a new depreciation schedule. However, some accountants will accept the re-upholstery as “Capital” if the restaurant is under-going a major renovation (replacing carpet, light fixtures, waitress equipment, wall coverings, etc.,) and the existing chairs were to remain but be reupholstered. In this case, the entire restaurant renovation is considered capital, even if some portion “by itself” would generally have been considered “repair expense”. Along with newly purchased capital items; this major renovation project might also include as CapEx such items as painting, refinishing millwork, repairing doors, etc. The philosophy of the above example is that the work combined as a renovation will give the asset an extended “life” and warrants a new depreciation schedule. Without the major renovation, the chair simply gets a repair of worn components. It is often contended that the new upholstered seat by itself can give the chair an extended life. However, without its “surroundings” receiving an improvement, it’s life cycle is not substantially extended .
  4. Established guidelines – Based on the items discussed above, each organization should have “official” guidelines that clearly define Operating Expenses versus CapEx. This is the groundwork that allows all team members to work toward the same objective. These company policies should be effectively communicated to each associate involved in the process. Well written guidelines by themselves will answer a high percentage of CapEx questions and leave only a small percentage of “grey area” issues. These doubts can then be addressed by upper management on an individual basis.  You should also know that a publication titled “GAAP” (Generally Accepted Accounting Principles) is useful for more indepth reference and guidance on this and many other hospitality accounting questions.

Question:  What criteria have you used to identify CapEx from OpEx?  Post your comments by clicking here.

 

Comments

  1. Mike Yochim says

    Good over view and setting of general principles. Sounds like each project needs to be reviewed and discussed as to scope and categorization of the items involved. What is the general concept for replacing televisions? As part of PIP’s I have seen replacement of televisions to current industry requirements, size, LCD, etc. Some say CapEx, some not. I would also think that as part of initial discussion should be reserve for replacement. What, if any, has been put aside.

    • John Fulton says

      Replacing a television or a few sets might fall under “operating expense”. However, I feel like most hoteliers would want to captialize and depreciate any purchases that require an outlay of more than $2,000. Any organization that practices “Capital Reserves” is a step ahead on strategy! They have an established fund in which to more accurately match a detailed “scope of work”. Thanks for mentioning this, I will address Capital Reserves in more detail on future blogs.

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