WorldCom Inc. – Capitalized Costs and Earnings Quality

September 12, 2012

Concepts a. (i.) According to FASB Statement of Concepts No. 6, paragraph 25, assets are probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events. They represent probable future economic benefits controlled by the enterprise. According to FASB Statement of Concepts No 6, paragraph 80, expenses are outflows or other using up of assets or incurrences of liabilities (or a combination of both) during a period from delivering or producing goods, rendering services, or carrying out other activities that constitute the entity's ongoing major, or central, operations. Expenses are gross outflows incurred in generating revenues. (ii.) SCON No. 6, paragraph 148, states that costs should be expensed when they are used up or have expired and when they have no future economic value which can be measured. SCON No. 6, paragraph 178-181, states costs should be capitalized or recorded as assets when the costs have not expired and they have future economic value. b. According to GAAP Accounting Principles, cost capitalization is observed if a major expense merits recognition as an investment of capital funds instead of being recognized as an expense for the year. A capitalized cost does not appear on the income statement, but instead appears as a debit on the long-term assets account and a credit on the cash account of the balance sheet. However, the depreciation expense related to the capitalized cost will appear as an expense on the income statement. Since the long-term assets account is larger due to the effect of capitalization, the depreciation costs are also proportionately larger. Thus, the timing of expense recognition is changed, but eventually all expenses do get recognized on the income statement.
Process
c. The