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Notes furnace and its lining. The appropriate “cost” is the purchase price plus any costs directly
attributable to bringing the asset to the location and into the condition necessary to operate it as
intended by management. This cost also includes the estimated costs of dismantling and removing
the asset and restoring the site on which it is located.
Most of the companies on the Forbes Global 2000 follow either International Financial Reporting
Standards (IFRS) or U.S. generally accepted accounting principles (US GAAP), and most standards
worldwide are based on one of these standards; therefore, this white paper does not consider
accounting treatments beyond these. Although there are differences between US GAAP and
IFRS, they affect the basis of measurement rather than the level of detail offered. IFRS allows
assets to be valued at their historic cost or on a revaluation (fair value minus accumulated
depreciation and impairment losses), whereas US GAAP generally requires the use of historic
cost. The other big difference is that IFRS allows major inspection or overhaul costs to be
included as part of the cost of an asset, whereas US GAAP expects these costs to be expensed.

When planning for capital expenditures, organizations must also take care to include, where
appropriate, any costs directly related to employees (such as site preparation, assembly, and
professional fees), which can be capitalized.
To ensure that the correct accounting treatment is applied to all the complex assets that make up
significant capital expenditures, both technical expertise (engineering and scientific) and financial
expertise are required.

10.1.2 Challenges Presented by Current Practices for Capital Expenditure
Budgeting

It is clear that budgeting for capital expenditures is a complicated process involving cross-
disciplinary teams and a high degree of inherent uncertainty. Thus, it should come as no surprise
that traditional practices fall short when it comes to planning and budgeting for such large-
scale, long time frame expenditures. Chief among the challenges organizations face today in
trying to plan for capital expenditures is a heavy dependency on manual controls and spreadsheets
and poorly developed processes and audit trails. The following sections describe these challenges
and some of the ways organizations are dealing with them.

Heavy Reliance on Manual Controls and Spreadsheets

Current capital expenditure planning and forecasting practices rely heavily on spreadsheets.
But spreadsheets—though ideally suited to performing complex calculations on behalf of
individuals—are no substitute for complete applications.
What’s more, spreadsheets can present a serious risk of error: Unnoticed flaws in logic and
inadvertently overwritten formulae are just two conditions that can give rise to serious adverse
consequences. Thankfully, many mistakes are spotted early or contained within the boundaries
of the authoring company. On other occasions, however, problems “escape” into the public
domain, leading to serious financial loss or reputation damage. This is particularly true of large-
scale capital expenditure projects such as the preparations for the 2012 London Olympics, which
failed to properly account for value-added tax, adding unexpected millions to the latest budget
estimate.
Poorly Developed Processes and Audit Trails

An even more important limitation of spreadsheets is their limited support for capital expenditure
planning and approval cycles. With different aspects of capital expenditure planning carried out
in functional “silos” (so that, for example, technical and engineering costs and assumptions are

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