February 27, 2019

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