Скачать или смотреть How to Adjust Valuation EBIT for Operating Lease Interest

Should you adjust operating income (EBIT) in investment valuation when dealing with operating leases? The answer is absolutely YES. In this video I show you the difference between operating and finance leases. I also go over an example of how to make operating lease interest adjustment.

Because any type of lease is debt, there is an embedded interest component sitting in lease payments. International financial reporting standards (IFRS) rightfully treats all leases as finance type. Finance leases accounting require companies expense separately lease interest and asset depreciation on income statement.

Unfortunately, US generally accepted accounting principles (US GAAP) preserved the definition of operating leases along with finance leases. Moreover, operating lease requires a distinctly different classification and treatment of rent payments vs. finance leases.

In particular, US GAAP wants to subtract the entire rent expense from operating profits. However, there is a interest expense component. This effectively understates EBIT for valuation purposes. The task of an equity analyst is to estimate and add back operating lease interest.

Many authoritative books on investment valuation advise analysts to add back operating lease interest. Among them is Valuation by McKinsey & Company. This book is by far the most comprehensive and complete guide to investment valuation I have come across.
🔸 Valuation by McKinsey & Company: https://amzn.to/46tSbs6

If you'd like to read more on lease accounting, take a look at FASB's ASC 842: https://www.fasb.org/page/PageContent...

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Timestamps:
00:00 - Intro
00:22 - Difference between Operating Lease vs. Finance Lease
00:55 - Lease Accounting
03:46 - Example of Adjusting for Operating Lease Interest

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This video content is for informational purposes only and should not be viewed as legal, tax, investment or financial advice. Please, do your own due diligence and keep your money safe.

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