CAPEX · OPEX and Depreciation
CAPEX, OPEX and Depreciation
What are CAPEX and OPEX?
- Asset acquisition is CAPEX; operating consumption is OPEX
- Depreciation is a non-cash expense
- The same amount affects profit and loss differently depending on treatment
Which account you write on the proposal changes the approval path from the start. Buy KRW 50 million (≈ US$37,400) of equipment and it goes through an investment review and is paid from the capital budget; spend the same money as a KRW 4 million (≈ US$2,990) monthly fee, and many companies handle it within a department’s SG&A limit. Because approval difficulty and the timing of P&L recognition move together, practitioners should first check whether the spend remains on the books as an asset before they request quotes. As subscription contracts spread, items that used to be equipment purchases now often shift entirely into monthly expenses, and even though the same cash goes out, the amount hitting this year’s operating profit differs.
Whether something is an asset or an expense is decided by criteria, not by the preparer’s judgment. Most companies set an asset recognition threshold in internal policy (for example, KRW 1 million (≈ US$750) or more per item and a useful life over one year) and fix useful lives: 4–5 years for servers and PCs, 5 years for fixtures, and 20–40 years for buildings. The line also matters when more money goes into equipment already in use. If the spend increases performance or extends useful life, it is capital expenditure and is added to the asset; repairs that merely restore the original condition are expensed in the current period. Since lease accounting (K-IFRS 1116) now applies, office and vehicle leases also appear as right-of-use assets and lease liabilities, so the common belief that renting is always OPEX no longer holds.
The most common misconception is that capitalizing a cost improves profit. If you push current-year expenses onto the balance sheet, operating profit rises that year, but depreciation then follows for the entire useful life starting the next year, and if an audit flags it, prior financial statements must be restated. Mistakes in the opposite direction are just as frequent. One is treating a cloud migration as 'cheaper because it is OPEX.' When usage is steady and the horizon is long, there is a clear stretch where buying costs less over five years. If business units are evaluated only on operating profit, there is also an incentive to draw on assets whose depreciation burden stays with headquarters, so investment reviews should present total cost of ownership alongside the five-year P&L.
Jinho DanAccounting instructor who makes financial statements, costing, and tax easy to understand
Eunpyo HongExpert in company analysis, startups, and investment fundraisingIt comes from the accrual accounting principle of separating assets from expenses: when an expenditure’s benefits arise over several periods, it is recognized as an asset and allocated over its period of use, following the revenue–expense matching principle.
Company A, a mid-sized parts manufacturer with 320 employees and KRW 120 billion (≈ US$89,780,000) in annual revenue, reached the end of the useful life of its 7-year-old ERP server and had to replace it. The IT team pushed for buying a new KRW 300 million (≈ US$224,500) server, while the finance team favored moving to the cloud. Because the approval routes and the way each option hits the income statement differ, the decision had been stuck for three weeks. (Hypothetical example)
- The IT director filed a proposal to buy a KRW 300 million (≈ US$224,500) server, arguing that 'it will last five years, so it should be booked as an asset.' The CFO rejected it, saying only KRW 100 million (≈ US$74,800) of this year’s investment budget remained.
- A finance manager recalculated the five-year totals. The purchase option came to KRW 400 million (≈ US$299,300): KRW 300 million (≈ US$224,500) for equipment plus KRW 20 million (≈ US$15,000) a year in maintenance. The cloud option, at KRW 4.5 million (≈ US$3,370) a month, came to KRW 270 (≈ US$1) million, so the purchase option cost KRW 130 million (≈ US$97,300) more in total.
- They also compared the income statement impact side by side. The purchase option came to KRW 80 million (≈ US$59,900) a year (KRW 60 million (≈ US$44,900) in straight-line depreciation plus maintenance), versus KRW 54 million (≈ US$40,400) a year for the cloud, a KRW 26 million (≈ US$19,500) annual difference in operating profit.
- The head of production pointed out that “if next year’s orders fall, system usage will drop too.” The finance team went back to the vendor and added a contract clause that adjusts fees if usage falls by 30%.
- The accounting department head concluded that the KRW 18 million (≈ US$13,500) data migration cost does not qualify for capitalization and is a current-period expense. The tax advisor confirmed it, and the basis was noted in the approval request.
- Company A chose the cloud. First-year cash outflow fell from KRW 300 million (≈ US$224,500) to KRW 72 million (≈ US$53,900), and the remaining KRW 220 million (≈ US$164,600) went to replacing aging machining equipment that had been put off.