CapEx, OpEx and depreciation
Finance classifies every IT dollar before anyone judges it. The classification decides where the cost lands on the statements and when it hits profit.
| CapEx (capital expenditure) | OpEx (operating expenditure) | |
|---|---|---|
| What | Asset with useful life over 1 year | Cost consumed in the period |
| IT examples | Servers, storage arrays, network gear, capitalized software build, data center fit-out | Cloud consumption, SaaS subscriptions, support contracts, salaries of run staff, repairs |
| Statement | Balance sheet asset, then depreciation expense on the P&L | P&L expense in full, this period |
| Cash | Large outflow up front | Spread with use |
| Profit effect | Smoothed over useful life | Immediate |
Straight-line depreciation spreads the asset's cost over its useful life:
- Annual depreciation = (Cost − Salvage value) / Useful life
- $120,000 server cluster, $0 salvage, 4 years → $30,000 a year on the P&L
- Book value after year 2 = $120,000 − 2 × $30,000 = $60,000
Software follows its own rule. Under US GAAP (ASC 350-40), internal-use software costs in the application development stage are capitalized and amortized; preliminary project and post-implementation costs are expensed. Cloud computing arrangements (SaaS) are a service contract: subscription fees are OpEx, though certain implementation costs can be capitalized and amortized over the contract term.
| Shift | Effect on the CFO's view |
|---|---|
| On-premises to cloud | CapEx falls, OpEx rises; EBITDA falls because the cost now sits above the depreciation line |
| Perpetual license to SaaS | Up-front asset becomes a recurring subscription |
| Buy hardware to lease | Operating vs finance lease treatment under ASC 842 decides whether a right-of-use asset appears |
Lower CapEx is a different cost profile, not a lower cost. Compare total cost over the same period before calling a move to OpEx a saving.
Word bank
All definitions →- Amortization
- The same allocation for intangible assets, such as capitalized software.
- Book value
- Cost minus accumulated depreciation.
- CapEx
- Spending on an asset that delivers value over more than one year; capitalized and depreciated.
- Depreciation
- Allocation of a tangible asset's cost over its useful life.
- OpEx
- Spending consumed in the current period; expensed in full.
Knowledge check
A $90,000 storage array, 3-year life, no salvage. Annual straight-line depreciation?
Moving a workload from owned servers to IaaS mainly does what to the cost profile?
Monthly fees for a SaaS CRM are normally treated as: