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
HKMA is consulting on revisions to the Supervisory Policy Manual module CR-G-14 on margin and other risk mitigation standards for non-centrally cleared over-the-counter (OTC) derivatives transactions.
PRA provided further information on the application of regulatory capital and IFRS 9 requirements to payment holidays granted or extended to address the challenges arising from COVID-19 outbreak.
HKMA announced the publication of a report on fintech adoption and innovation in the banking industry in Hong Kong.
BIS published a working paper that examines the drivers of cyber risk, especially in context of the cloud services.
ECB launched consultation on a guide specifying how the Banking Supervision expects banks to consider climate-related and environmental risks in their governance and risk management frameworks and when formulating and implementing their business strategy.
ECB published an opinion (CON/2020/16) on amendments to the prudential framework in EU in response to the COVID-19 pandemic.
EBA published a report that examines the interlinkages between recovery and resolution planning under the Bank Recovery and Resolution Directive (BRRD).
SRB published the final Minimum Requirements for Own Funds and Eligible Liabilities (MREL) policy under the Banking Package.
US Agencies (FDIC, FED, and OCC) published a final rule that makes technical changes to the March 31, 2020 interim final rule that provides a five-year transition period for the impact of the current expected credit loss (CECL) methodology on regulatory capital.
ECB published results of the March 2020 survey on credit terms and conditions in euro-denominated securities financing and over-the-counter (OTC) derivatives markets.