Previous Year Question
With reference to the expenditure made by an organisation or a company, which of the following statements is/are correct?
Acquiring new technology is capital expenditure.
Debt financing is considered capital expenditure, while equity financing is considered revenue expenditure.
Select the correct answer using the code given below.
Only 1
Only 2
Both 1 and 2
Neither 1 nor 2
Correct Answer: A
Detailed Solution
Statement 1 is correct.
Capital Expenditure or CapEx is expenditure through which a company acquires a long-term asset, enhances its capacity or expects to obtain economic benefits over more than one accounting period.
Acquisition of new technology may include:
purchase of machinery and automation systems;
acquisition of manufacturing technology;
purchase of a patent, copyright or technology licence;
acquisition of long-term software or an enterprise system; and
a technology upgrade that increases the production capacity or useful life of an existing plant.
If the acquired technology is expected to generate economic benefits for several years and its cost can be measured reliably, the expenditure is capitalised as an asset. Tangible technology may be recorded as plant and equipment, while technology in the form of a patent, licence or software may be recorded as an intangible asset.
The entire cost is not treated as a revenue expense in the year of acquisition. It is progressively recognised as an expense through depreciation or amortisation over the asset’s useful life.
For example, if a company acquires automation technology for ₹10 crore with a useful life of 10 years, annual depreciation under a simplified straight-line calculation may be ₹1 crore, ignoring residual value and other accounting adjustments.
However, every technology-related payment is not CapEx. Regular software subscriptions, annual maintenance, repairs, employee training and ordinary technical support are generally revenue expenditure because they do not create a separately identifiable long-term asset.
The statement specifically refers to acquiring new technology; therefore, Statement 1 is correct.
Statement 2 is incorrect.
Debt financing and equity financing are not categories of expenditure. They are sources through which funds are raised.
Item | Accounting effect |
Debt financing | Cash or assets increase, together with an increase in liabilities. |
Equity financing | Cash or assets increase, together with an increase in share capital or equity. |
Capital expenditure | The funds are used to acquire or develop a long-term asset. |
Revenue expenditure | Expenditure is incurred in daily operations, such as salaries, rent and routine maintenance. |
If a company takes a loan of ₹100 crore and purchases machinery, the ₹100 crore loan represents debt financing, whereas the purchase of machinery represents capital expenditure. These are separate transactions.
Similarly, if a company raises ₹100 crore by issuing shares and purchases a plant, the share issue is equity financing, while the plant purchase is capital expenditure. Equity financing itself is not revenue expenditure.
Interest paid on debt may generally be recognised as a finance cost or revenue expense. However, borrowing costs relating to the construction of a qualifying asset may be capitalised as part of the asset’s cost, subject to the prescribed conditions. Repayment of the loan principal is also not revenue expenditure; it reduces both cash and the corresponding liability.