IFRS Foundation published Issue 5 of the investor publication “The Essentials.” The issue highlights attributes of free cash flow (FCF) measures reported by lessees that limit comparability with FCF measures reported by companies that buy assets. The publication demonstrates the incomparability through a simplified case study and offers an adjustment approach to compute comparable FCF measures that makes use of new information provided under IFRS 16 on leases. Investors may find this adjustment approach useful in making cross-company comparisons.
The article helps in exploring approaches to calculate or adjust reported FCF measures of lessees. The article will help to develop a better understanding of the financial reporting similarities and differences between lessee companies and companies that make outright purchases of assets. Moreover, it will help to develop an understanding of how to use information contained in the new disclosures under IFRS 16 to adjust lessee FCF measures to compare them with the FCF measures of companies that buy assets.
Investors and company managers generally view FCF as excess cash generated by the company that is available for distribution or reinvestment into the business. Consequently, these measures are widely used in analyzing companies’ financial health and intrinsic value. FCF is one of the most widely used non-GAAP performance measures by professional investors. It is common for companies to report such non-GAAP measures, although investors calculate them independently from the information provided in the financial statements. When calculating FCF for a lessee company from the information provided in its financial statements, investors need to pay special attention to how cash flows related to leases are reflected in the statement of cash flows. Comparing the FCF of lessee companies with companies that make outright purchase of assets may require analysts to perform adjustments to the amounts presented by lessee companies in the statement of cash flows.
Keywords: International, Banking, Securities, Accounting, IFRS 16, Leases, Free Cash Flow, Non-GAAP Performance Measures, IFRS
Previous ArticleIAIS Publishes Newsletter for February 2019
BoE published a statistical notice (Notice 2020/9) explaining the approach for treatment of payment holidays on the profit and loss return or Form PL.
BoE updated the known issues document for the statistical reporting Forms AS and FV.
BIS published an update on the G20 TechSprint Initiative, which was launched in April 2020 and aims to highlight the potential for technologies to resolve regulatory compliance (regtech) and supervisory (suptech) challenges.
FED announced individual capital requirements for 34 large banks and these requirements go into effect on October 01, 2020.
SRB published a set of documents to give operational guidance to banks on implementation of the bail-in tool.
OSFI published a letter that provides an update on the milestones for the implementation of the IFRS 17 standard on insurance contracts.
EBA updated the report on the implementation of selected COVID-19 policies.
The Financial Stability Institute (FSI) of BIS published a brief note that examines the supervisory challenges associated with certain temporary regulatory relief measures introduced by BCBS and prudential authorities in response to the COVID-19 pandemic.
BCBS is consulting on the principles for operational resilience and the revisions to the principles for sound management of operational risk for banks.
BoE updated the reporting template for Form ER as well as the Form ER definitions, which contain guidance on the methodology to be used in calculating annualized interest rates.