Non-operating expense is a kind of expense that is not related to core business operations, e.g. selling products or services. There are four types of non-operating expenses: depreciation, amortization, interest charges, other costs of borrowing.
If the non-operating expenses are low, they can be excluded from standing analysis. An example of measure that ignores non-operating costs is EBITDAR.
However, sometimes it is convenient to use non-operating costs to optimize taxes. Using higher rate of depreciation or amortization will increase costs and decrease tax burden. The cash flow will remain the same. Therefore, the optimization won't impact financial measures that are related e.g. with liquidity or credit score.
Amortization- in the balance sheet and tax law means the cost associated with the gradual wear of fixed assets and intangible assets. Amortization is a cost that does not involve cash outflow. Depreciation combines the concept of redemption. The redemption is the consumption of a fixed asset (intangible and legal value) from the beginning of its use expressed in value. According to tax law, depreciation must begin on the first day of the month following the month in which the component was entered in the register. Fixed assets are entered into the register no later than the month of their transfer for use. Depreciation is subject to property, plant and equipment: real estate, machinery, equipment, means of transport and other things; improvements in foreign fixed assets; live inventory as well as intangible and legal assets, i.e. Non-monetary, undefined activities: computer software, development costs, licenses, patents, commodity patterns, goodwill. Methods for depreciation of vital assets:
Interest - cost charged for using the borrowed capital to its owner; the standardized measure of this cost per unit of capital and the annual useful life is the interest rate.The amount depends on the percentage, the size of the capital, the time for which it was given. The applied interest rate calculation calendar is also relevant. use days in the year used for calculations.Methods of determining interest:
- simple interest - calculated on the capital in proportion to the interest period, charged after accruing (from below),
- compound interest - after accrued period accrued interest is added to capital, after the next period interest is calculated on their total amount,
- interest accrued on a continuous basis, applicable, for example, in the valuation of derivatives (options, futures contracts, etc.)
- discount - interest is calculated and charged in advance.
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Author: Magdalena Pawłowska