February 8, 2024

Capital expenditures are payments made for goods or services that are recorded or capitalized on a company’s balance sheet instead of expensed on the income statement. A capital expenditure (“CapEx” for short) is the payment with either cash or credit to purchase long-term physical or fixed assets used in a business’s operations. The expenditures are capitalized (i.e., not expensed directly on a company’s income statement) on the balance sheet and are considered an investment by a company in expanding its business. What is meant by Capital Expenditure? Capital expenditure refers to the funds used by a company to upgrade and maintain fixed assets as well as the money expended on undertaking new projects and investments. Capital expenditure is the money spent on acquiring fixed assets like new equipment, machinery, land, plant etc. and intangible assets such as patents or licenses, upgrading an existing asset, repairing an asset or repayment of loan. It is recorded on the balance sheet instead of the income statement as it is more of an investment that will derive returns in the long term than an expenditure. What is the Purpose of Capital Expenditure? Capital expenditures lead to the creation of assets in the long term. Capital expenditures are made by companies to increase the scope of operations of the company. It is also undertaken to add economic benefit to the operations. Features of Capital Expenditure The current decisions on capital expenditure will influence the future activities of the company – it provides direction to the company’s activity. It is an irreversible expenditure. These expenses are expensive, especially in industries such as production, manufacturing, telecom, utilities, and oil exploration. The capital invested undergo depreciation over a period of time. The accounting process related to capital expenditure is complicated. Uses of Capital Expenditure Capital expenditure can be used to derive a lot of important information regarding the company. For instance, the cash flow to capital expenditures ratio can be used to determine the company’s ability to acquire long term assets using free cash flow. It will show the fluctuations that the business will undergo through cycles of large and small expenditures. A ration that is greater than 1 implies that there is sufficient money to fund asset acquisitions. It is also used in calculation of free cash flow to equity (FCFE) which is the amount of cash that will be made available for distribution to the equity shareholders. A lower FCFE is a product of higher capital expenditure of the firm. Types of CapEx Buildings may be used for office space, manufacturing of goods, storage of inventory, or other purposes. Land may be used for further development. Accounting treatment may be different for land specifically held as a speculative long-term investment. Equipment and machinery may be used to manufacture goods and convert raw materials into final products for sale. Computers or servers may be used to support a company’s operational aspects, including the logistics, reporting, and communication of operations. Software may also be treated as CapEx in certain circumstances. Furniture may be used to furnish an office building to make the space usable by staff and customers. Vehicles may be used to transport goods, pick up clients, or used by staff for business purposes. Patents may hold long-term value should the right to own an idea come to fruition through product development. Formula and Calculation of CapEx CapEx=ΔPP&E+Current Depreciationwhere:CapEx=Capital expendituresΔPP&E=Change in property, plant, and equipment​ Capital expenditures are also used in calculating free cash flow to equity (FCFE). FCFE is the amount of cash available to equity shareholders. The formula for FCFE is: FCFE=EP−(CE−D)×(1−DR)−ΔC×(1−DR)where:FCFE=Free cash flow to equityEP=Earnings per shareCE=CapExD=DepreciationDR=Debt ratioΔC=ΔNet capital, change in net working capital​FCFE=EP−(CE−D)×(1−DR)−ΔC×(1−DR)where:FCFE=Free cash flow to equityEP=Earnings per shareCE=CapExD=DepreciationDR=Debt ratioΔC=ΔNet capital, change in net working capital​ Alternatively, it can be calculated as:  FCFE=NI−NCE−ΔC+ND−DRwhere:NI=Net incomeNCE=Net CapExND=New debtDR=Debt repayment​FCFE=NI−NCE−ΔC+ND−DRwhere:NI=Net incomeNCE=Net CapExND=New debtDR=Debt repayment​ What is the Difference Between Capital Expenditure and Operating Expenditure? Operating expenses are the costs incurred by the company in order to meet the day-to-day expenses of the company. It is a short-term expense that can be fully deducted from the company’s taxes in the year that the expense is incurred. Capital expenditure on the other hand, is an expense that has a life greater than one year and improves the useful life of an asset. Also, capital expenditures are not tax deductible, but can be deducted indirectly by way of the depreciation they generate. FAQs Why is Capital Expenditure important for businesses? Capital Expenditure is crucial for maintaining and improving a company’s productive capacity. It can enhance efficiency, competitiveness, and the ability to generate future revenues. How is Capital Expenditure financed? Companies can finance CapEx through a combination of internally generated funds, debt financing, and equity financing. The chosen method depends on the company’s financial situation and strategy. How is Capital Expenditure accounted for? Capital Expenditures are typically capitalized on the balance sheet, which means they are recorded as assets. The costs are then depreciated or amortized over the useful life of the asset. 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Advisory shares are a type of equity compensation given to company advisors in lieu of (or on top of) a professional fee. Similar to employee stock options, issuing advisory shares to those key inception-phase advisors are common practice for early-stage startups. Advisory shares are a type of equity instrument that are used to provide advice and consultation to the company. These shares do not confer voting rights, and the holder is not entitled to receive any dividends or other distribution of profits. In India, advisory shares are becoming increasingly popular, particularly among start-ups and early-stage companies Provisions of Advisory Shares in India There are no specific provisions regarding advisory shares in the Companies Act, 2013 or under SEBI guidelines in India. Advisory shares can be issued by a company to a person who has expertise or experience in a specific area, and who is willing to provide advice and consultation to the company. The holder of advisory shares does not have any voting rights, and is not entitled to receive any dividends or other distribution of profits. The shares can be converted into equity shares at a later date, subject to the approval of the company’s board of directors and shareholders.However, companies in India can still issue shares to their employees or directors through various schemes, such as Employee Stock Option Plans (ESOPs) or Stock Appreciation Rights (SARs), which function similarly to advisory shares in providing equity-based compensation. These schemes are governed by their own specific regulations and guidelines.ESOPs, for example, are regulated by the Securities and Exchange Board of India (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999, as well as the Companies Act, 2013. These guidelines specify the maximum number of shares that can be granted to employees and the lock-in periods for those shares. Similarly, SARs, which allow employees to receive the appreciation in the value of the company’s stock over a specified period, are regulated by the Reserve Bank of India (RBI) under the Foreign Exchange Management Act (FEMA) Regulations, 2017. Types of Advisory Shares Restricted Stock Units (RSUs)- An RSU is a form of common stock that a company promises to deliver to an employee at a future date, depending on various vesting and performance conditions. RSUs are not received until these restrictions are over or conditions are met. An employer will promise to give an employee stock under certain conditions, such as meeting particular work goals or being at the company for a particular amount of time. Taxes on RSUs apply when the shares are delivered – at the time of vesting. They require you to pay ordinary income tax on their market value when the shares are delivered to you (usually as soon as they vest), even if you do not sell them at that time.  This includes federal, state and local taxes. Sometimes companies allow employees to sell a portion of the vested shares in order to cover the amount in taxes. Following that, the employee can choose between holding the rest of the shares to sell later, or selling them right away. Selling the shares of course means paying any capital gains taxes on any appreciation, or increase in value between the selling price and the fair market value when the person vested. Stock Options- This type of compensation, which is granted to employees, contractors, consultants and investors, is a contract. It gives the recipient the right to buy, or exercise, a set number of shares of the company stock at a preset price, also known as the grant price. This offer doesn’t last forever, though. You have a set amount of time to exercise your options before they expire. Your employer might also require that you exercise your options within a period of time after leaving the company. The number of options that a company will grant its employees varies, depending on the company. It will also depend on the seniority and special skills of the employee. Investors and other stakeholders have to sign off before any employee can receive stock options. How Advisory Shares Work Advisors are usually granted options to buy shares rather than given the actual shares. That helps avoid a potential tax obligation if the company grants advisory shares worth a considerable amount. Advisory shares are often used as incentives for advisors to invest in a company’s long-term success. Company executives and managers, on the other hand, may receive shares instead of options. Stock options will usually vest within a year or two. That allows the company to delay transferring ownership to advisors while keeping them focused on the company’s long-term success. Importance of Advisory Shares in India Advisory shares can be an effective way for start-ups and early-stage companies to attract experienced professionals who can provide valuable advice and guidance. In many cases, these professionals may not be able to invest large amounts of capital in the company, but they may be willing to provide their expertise in exchange for equity. Advisory shares can also be used to incentivize key employees and consultants. By offering these shares, the company can align the interests of these individuals with those of the company, and encourage them to work towards the long-term success of the business. Another important advantage of advisory shares is that they can help the company conserve cash. By issuing equity instead of cash payments to advisors and consultants, the company can reduce its cash outflows and conserve capital for other purposes. However, it is important for companies to be careful when issuing advisory shares. These shares do not confer voting rights, which means that the holder does not have any say in the management of the company. Therefore, it is important for the company to ensure that the holder of the advisory shares is truly providing valuable advice and guidance, and that their interests are aligned with those of the company. Who Issues Advisory Shares? Most companies that issue advisory shares are startups. The company may be little more than an idea at the time. The issuer also may be in the later

mployees State Insurance Corporation (ESIC) of India is a significant multifaceted social system designed to provide socio-economic security to workers and their dependents. The system ensures that the workers and his family do not suffer in case of unseen, unfortunate circumstances. Employees’ State Insurance Corporation is a statutory corporate body set up under the ESI Act 1948, which is responsible for the administration of ESI Scheme. The ESI is a self-financed social security comprehensive scheme devised to protect the employees against financial distress such as sickness, disablement or death due to employment injuries. EPF stands for Employee Provident Fund that is a scheme for providing monetary benefit to all salaried employees which act as the best investment methods After taking registrations it is mandatory to file the returns on time as required under the statute otherwise there are prescribed penalties that have to be borne by the employer. Introduction To promote the attitude of savings amongst the employees and also to benefit them during retirement a social security system of Provident fund was introduced. Contributions towards the PF are made by both the employer as well as the employee every month. The contribution made towards the PF can be only drawn by the employee only during the time of his or her employment, but there are a few exceptions. The employers that have PF registration have to file the PF returns monthly. The PF return filings are to be completed by the 25th of each month. Here we will talk about the various forms used for PF return filing in detail. The employers can easily file the PF return through the Unified portal. Eligibility Employee State Insurance scheme-is applicable to all the factories and establishments where: Organization having count of employees 10 or more and. Their monthly salary should not exceed Rs. 21,000 and Rs. 25,000 for people with disability. Employee Provident Fund scheme- is applicable to all the factories and establishments where: Organization having count of employees 20 or more and. Their monthly wage is not more than Rs 15000. Advantage of ESI/PF Returns ESI Benefits Medical benefit Sickness benefit Maternity benefit Disablement benefit Dependents benefit Funeral expenses Rehabilitation allowance Due Dates of Filing ESI Return- The due date for ESI payment is 21st of every month and the returns are filed on half yearly basis which are as follows :April-September : 11th of NovemberOctober – March : 11th of May EPF Benefits Tax Benefits Premature withdrawal Pension Benefits Financial Support Contribution by employee Long Term Planning Interest benefits Due Date of filing PF Return- The due date for PF payment is 15th of every month and the returns are filed on a monthly basis by 25th of the following month. Also an annual return is required to be filed by the 25th of April of the following financial year. Documents Required Digital Signature Certificate Employee wise breakup of contributions Copy of Challan Payments Any accidents or mis-happening details Employee wage register Any other details, as required Registration and Filing of Returns An employer who is eligible to be registered as per the Employee State Insurance Act 1948 (“Act”) must do so by abiding by the following steps: An employer needs to keep all documents ready for reference. Next, an employer must file Form 1, which is available in PDF format on the ESIC website. ESIC will verify all the details and issue a 17 digit unique number. This unique number is required for all filings. Every employee will receive an ESI card post submission of the form stating all details by the employer. The documents required for registration are: PAN card of the business. Address proof of business. The license obtained under Shop and Establishment Act or Factories Act. Basic documents required as per the nature of entity – Articles of Association, Memorandum in case of a company, partnership deed in case of a partnership and Limited Liability Partnership. Details of all directors, partners, and shareholders. Details of all employees along with their salary information. Bank details. On successful registration of the establishment, returns can be filed online by the employer. To file ESI returns online, the employer must follow the below-mentioned procedure: The login credentials will be available once registered. The same will be required for the online filing of returns. Once the login credentials are available, the employer must log in to the official website that is www.esic.nic.in. Once he is able to log in using the credentials, there is a list of actions that are available. For instance, modify employee details, report an accident and so on. To file the return, the employer must first verify if all the employee details are up to date and then file the return. The employer must then fill the bank details and submit them to file the returns. After that, the employer can go to the ‘List of Actions’ and ‘Generate Challan’. The challan must be downloaded and documented for future reference and inspections. The website also offers various actions that the employer can take like modify employee details, report accidents, add new employees, and so on. The contributions towards employee state insurance are very beneficial to employees, and hence the provisions for nonpayment or delayed payment are very stringent. The half-yearly return of ESIC for the period April to September is due by 12 November, and October to March is due by 12 May. ESI Employers have the responsibility to contribute to the ESI fund by deducting the employees’ contribution from wages and combining it with their own contribution. Employers have to deposit the combined contributions within 15 days of the last day of the Calendar month. The payments can be made online or to authorized designated branches of the State Bank of India and some other banks. EPF Employers have the responsibility to contribute to the EPFO fund by deducting the employees’ contribution from wages and combining it with their own contribution. Employers have to deposit the combined contributions within 15 days of the last day of the Calendar month. The payments can be made online