EBIT/I for Chorus for FY2020 using method 2 (Attempt 2)
Time to eat a bit of 'humble pie' this evening and admit when I did my EBIT/I covenant calculation (post 4 on this thread) - where I adjusted for the effect of any 'lease interest deductions' (that are partially reflective of the old 'rent' charge under the old pre-IFRS16 accounting standard)- I got it wrong.
The 'wrong' calculation I have quoted below.....
Quote:
Originally Posted by
Snoopy
Now let's look at the alternative calculation method 2, where 'lease interest' (as part of 'Other Interest') is not taken into account when calculating EBIT.
EBIT now changes to $246m + $27m = $273m
With this iteration we have chosen not to take the lease interest into account as earnings. So instead we must include 'Other interest' as part of the total interest bill due by not subtracting it. This means the 'Total Net Finance Expense' for our purposes is now:
-$12m + $185m - $29m = $144m
So the calculation of EBIT/I for Chorus for FY2020 becomes: $273m/$144m = 1.89 (using method 2)
That isn't grossly different, except there is a 'rule of thumb' that says an EBIT/I ratio above 2 is passable, while anything below that is dodgy. So is 'method 1' or 'method 2' the better way of calculating this ratio? I don't know the answer. My solution is to curse IFRS16 and go to bed.
.....while the changes I wish to introduce are summarized below (thanks to Ferg for pointing this stuff below out to me).
Quote:
Originally Posted by
Snoopy
OK this is where you and I have rather different adjusted EBIT calculations.
I hadn't considered depreciation before. Because as we were talking about EBIT, I had considered the 'D'epreciation' part of the EBITDA to EBIT calculation already dealt with. But now I see you are correct Ferg, because the 'depreciation of the lease liability' did not exist under the old accounting rules. So to make a comparison with previous years, you have to increase the EBIT by any depreciation that was not present and in fact did not even exist at all under the old accounting rules.
Under the new accounting rules, what were 'rent payments' (an operating cost) have turned into <added> 'lease liabilities' (an operating cost) and </added> 'lease interest liabilities' (a finance cost). Under the new rules of EBIT, all financing costs are yet to be subtracted before NPAT is calculated. Under the old accounting rules the equivalent of 'lease interest liabilities', (<added> part of </added> the old 'rent') would have already come out of the EBIT figure. This means in consideration of interest payments only, that to convert the EBIT you see published in the annual accounts under IFRS16, back to the lower EBIT figure we would have seen under the old accounting rules, we have to subtract the 'lease interest liability' from the EBIT figure quoted. So it looks like you are right again Ferg.
So let's go through this 'step by step', adjusting EBIT back to what it was in the 'old days' (pre IFRS16 reporting standards), to make sure I don't 'stuff up' again.
Declared EBIT |
= $246m |
(AR2020 p22) |
add 'Right of Use Asset' Depreciation |
+ $14m |
(AR2020 p26) (Non existent asset under old regime, so not there to depreciate) |
subtract 'Rent Paid' |
- $20m |
(AR2020 p38, $23m exGST) (post IFRS16 EBIT is not adjusted for the old 'rent' concept) |
equalsAdjusted EBIT |
= $240m |
(Calculated) |
Previously I had also added back a couple of one off interest charges
add 'Amortisation Loss' |
+ $5m |
(AR2020 p47) (One off Swap reset reversed: difference between fair value and proceeds realised) |
add 'Restructuring Loss' |
+ $1m |
(AR2020 p47) (One off cost to restructure interest rate swaps reversed) |
However, these are interest charges, not directly related to Covid-19. While they do produce a higher normalised profit at NPAT, they do not produce a higher profit at EBIT level. So I think, it is best to leave these changes out of my EBIT adjustment.
The interest calculation is therefore as follows:
Declared Interest Expense |
= $185m |
(AR2020 p47) |
subtract Interest Income |
- $12m |
(AR2020 p27) |
subtract 'Amortisation Loss' |
- $5m |
(AR2020 p47) (One off Swap reset reversed: difference between fair value and proceeds realised) |
subtract 'Restructuring Loss' |
- $1m |
(AR2020 p47) (One off cost to restructure interest rate swaps reversed) |
subtract 'CIP Notional Interest' |
- $29m |
(AR2020 p47) (This is an artificial accounting construct based on defined CIP construction and is never paid in practice) |
equals Adjusted Net Interest Bill |
= $138m |
(Calculated) |
So EBIT/I = $240m/$138m = 1.74
SNOOPY