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

Related Articles
News

US Agencies Adopt Rule to Exclude Community Banks from Volcker Rule

US Agencies (CFTC, FDIC, FED, OCC, and SEC) adopted a final rule to exclude community banks from the Volcker Rule, in line with amendments to certain sections of the Economic Growth, Regulatory Relief, and Consumer Protection (EGRRCP) Act.

July 22, 2019 WebPage Regulatory News
News

US Agencies Adopt Amendments to Simplify Regulatory Capital Rules

US Agencies (FDIC, FED, and OCC) adopted a final rule that reduces regulatory burden by simplifying several requirements in the regulatory capital rules for banks.

July 22, 2019 WebPage Regulatory News
News

IA of Hong Kong Delegates Inspection and Investigation Powers to HKMA

HKMA and IA of Hong Kong jointly issued a statement announcing the delegation of the inspection and investigation powers of IA to HKMA, pursuant to the statutory regulatory regime for insurance intermediaries under the Insurance Ordinance.

July 19, 2019 WebPage Regulatory News
News

FSB Extends Implementation Timeline for Policy Recommendations on SFTs

FSB announced adjustments to the implementation timelines for its recommendations on securities financing transactions (SFTs), specifically those related to the minimum haircut standards for non-centrally cleared SFTs.

July 19, 2019 WebPage Regulatory News
News

EBA Single Rulebook Q&A: Third Update for July 2019

EBA published answers to six questions under the Single Rulebook question and answer (Q&A) tool this week.

July 19, 2019 WebPage Regulatory News
News

EBA Report Assesses Regulatory Framework for Fintech Activities

EBA published the findings of its analysis on the regulatory framework applicable to fintech firms when accessing the market.

July 18, 2019 WebPage Regulatory News
News

OSFI Revises Capital Requirements for Operational Risk for Banks

OSFI is revising its capital requirements for operational risk, in line with the final Basel III revisions published by BCBS in December 2017.

July 18, 2019 WebPage Regulatory News
News

OSFI Consults on Revised Principles for Management of Liquidity Risk

OSFI proposed revisions to Guideline B-6 on the principles for the management of liquidity risk.

July 18, 2019 WebPage Regulatory News
News

ESMA Guidance on Disclosures for Credit Rating Sustainability Issues

ESMA published the technical advice on sustainability considerations in the credit rating market, along with the final guidelines on disclosure requirements applicable to credit ratings.

July 18, 2019 WebPage Regulatory News
News

FASB Issues Q&A on Estimation of Expected Credit Losses by Firms

FASB issued a second question-and-answer (Q&A) document that addresses more than a dozen frequently asked questions related to the Accounting Standards Update No. 2016-13 titled “Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.”

July 17, 2019 WebPage Regulatory News
RESULTS 1 - 10 OF 3482