The Times' story had me confused on two fronts; maybe someone can help me grasp it.
First, it presented a general discussion of the [questionable] practice of taking early write-offs. I have always considered the use of scheduled depreciation to be a method by which the government manages to impose taxes more than anything else. I understand the principle, but I know very well in my mind that, for instance, when I buy a $2000 computer for my office, I have essentially SPENT that money. It has a liquidation value of zero. If I were forced to sell my business, the buyer would let me know that my brand new machine is worth nothing to him, and that it would actually cost him money to have it auctioned off. I would love to take 2K off the top of my income, but the government only allows me 1/3. To be sure, if I were to write off the whole thing in one year, I'd have a prettier next year (assuming I bought nothing new), but that's just the way it is. In other words, early write-offs strike me as essentially conservative, making the current year look the worst possible, then hoping for better times in the future. So there's my first question --do we as investors consider early write-offs to be a great sin, or is it just a way to recognize reality and hope for a better future?
Second, the article dropped the issue it had just presented and goes into the specifics of AMAT. It complains that a licensing fee should have been written off as an operating expense, not as acquired R&D, and that doing it smells of chicanery. It also pointed out that AMAT didn't return their call, the implication being that evil is afoot. Whether written off as acquired R&D or operating expense, isn't the effect the same--that the company may legally represent their profits to be lower than if the cost were spread over a period of years? The point of this second part of the story seems to be contrary to the meaning of the issue the author set up in the first half, hence my bewilderment. (Maybe consistency is a hobgoblin of this small mind.)
Am I as a shareholder not happy that I have achieved capital deepening
at the same time as reducing my tax bill? Am I distraught that when the earnings are high in the future owing to the lack of depreciation that I'll have a big tax bill? Maybe management will find a way to make the company even bigger yet write off a new 'expense' at that time. Someone please disabuse me of my optimism.
-Alan |
