sharetrader
Page 2 of 4 FirstFirst 1234 LastLast
Results 11 to 20 of 31
  1. #11
    On the doghouse
    Join Date
    Jun 2004
    Location
    , , New Zealand.
    Posts
    9,203

    Default

    Quote Originally Posted by Snoopy View Post
    Spark went to the trouble of rewriting their FY2018 and FY2017 results to show the impact of IFRS16 (and also IFRS15 on realigning income and expenses to the appropriate time period) on their income statements of those two years.

    https://investors.sparknz.co.nz/Down...204/291769.pdf

    It is useful to have a fully worked actual example of the implementation of the IFRS16 rules such as this.
    Time for a bit more detail from the above referenced document. I will rewrite page 5 of that document in a non-Spark specific way.

    1/ IFRS16 replaces 'NZIAS17 Leases' and removes the distinction between operating and finance leases. Similar to the current finance lease model, this results in the recognition of 'right of use' assets and related lease liability balances.
    2/ As a result, rental payments for leases previously recorded in relation to operating leases - including corporate property leases, and customer equipment leases will move from being included in operating expenses (within EBITDA) to depreciation and and finance expenses outside of EBITDA.
    3/ The impact on net earnings before income tax from an individual lease over its term is unchanged.
    4/ However, the new standard results in a higher interest expense in early years and lower interest expense in the later years of a lease , compared to the previous straight line expenses profile of operating leases, similar to a 'table mortgage'.

    What is a table mortgage?

    From the NZ Finance Act of 1933
    "the term table mortgage means a mortgage in which provision is made for the payment of interest and the repayment of principal by periodical installments, consisting partly of principal and partly of interest."

    Impact on Reported Financials

    1/ This results in the combined depreciation and interest expense, for any lease in the early years of its cycle, being higher than the operating expenses previously recognised. With long term corporate property leases, being in the early years of their lease period, both net earnings before tax and retained earnings subsequently decrease following application of IFRS16.
    2/ There is a change in the treatment of leases where the reporting company acts as the intermediate party e.g. in a back-to back lease.

    What is a back-to-back lease?

    https://www.bdo.com.au/en-au/account...k-arrangements

    The seller receives a lump sum financing amount from the buyer on entering into the sale and leaseback transaction, and the seller (who is now the lessee), makes periodic payments to the buyer (who is now the lessor). Nevertheless the asset being sold and leased back, remains on the original sellers premises at all times.

    In order to determine the appropriate accounting treatment under IFRS 16, the sale must first be assessed to determine whether it qualifies as a sale in accordance with the requirements of IFRS 15 (Revenue from Contracts with Customers). For the transaction to qualify as a sale the selling company must:

    1/ Completely derecognise the asset in the books (remove from the accounts all traces of ownership) and apply lessee accounting requirements (set up a 'right of use asset' on the asset side of the balance sheet offset with a 'lease liability' on the debt side of the balance sheet).
    2/ Measure the right-of-use asset as the retained portion of the previous carrying value. Then recognise a gain/loss on the rights transferred to the lessor.

    IFRS 16 requires that any profit or loss on the sale side of the transaction from the seller-lessee’s perspective (and initial measurement of the asset purchased from the buyer-lessor’s perspective) to be determined by reference to the fair value of the asset, not the stated contractual sale price. Seller-lessees therefore need to determine the fair value of the asset in order to ensure they recognise the correct profit or loss on sale.

    If it is determined that the fair value of the asset is less than, or greater than, the contractual sales price, the difference is accounted for by the lessee as an additional borrowing or a prepayment, respectively.

    SNOOPY
    Last edited by Snoopy; 03-09-2021 at 09:00 AM.
    Watch out for the most persistent and dangerous version of Covid-19: B.S.24/7

  2. #12
    On the doghouse
    Join Date
    Jun 2004
    Location
    , , New Zealand.
    Posts
    9,203

    Default

    Time to leave my 'safe printed documents' and 'wallow into the wilderness.'

    I am turning my attention now to another actual example, 'Vital Communications Limited' (ticker NZX:VTL) and how they reported on making their IFRS16 transition in AR2020. I choose VTL as an example, because they are a smaller company that appear to have made a relatively clean transition. FY2020 for them began on 1st July 2019, and here are the changes to their opening balance sheet position. (Ref VTL AR2020 p18)

    Right of Use Assets $27.969m
    Deferred Tax Asset $7.831m
    Deferred Tax Liability ($7.831m)
    Lease liabilities $27.969m

    I like that. It shows that fiddling around reclassifying leases as assets has made no net difference to the balance sheet as a starting point, which is intuitively as it should be. (Although I am a little confused as to why the deferred tax liability is put in brackets (in accounting conventions, that normally means a negative value) yet the associated lease liability is not.)

    From VTL AR2020 p24. "Deferred tax is measured at the tax rates that are expected to be applied to the temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date."

    Now if you look at the above table: $27.969m x 0.28 (the NZ corporate tax rate) = $7.831m

    So I get where that number come from. I can see that over time, a portion of the lease expenses will go into the statement of income, (so decreasing balance sheet company lease liabilities) coupled with an offsetting decrease in 'Right of use assets' on the other side of the ledger. Presumably the attached 'deferred tax liability' and 'deferred tax asset' go down as well at the same time? As far as I can tell the 'deferred tax assets' and 'deferred tax liabilities' look like accounting constructs that are never actually paid or refunded. And if I am right about that, why do 'deferred tax assets' and 'deferred tax liabilities' in relation to these lease arrangements even exist? Can anyone answer me that?

    SNOOPY
    Last edited by Snoopy; 09-01-2022 at 08:18 PM.
    Watch out for the most persistent and dangerous version of Covid-19: B.S.24/7

  3. #13
    DFABPCLMB
    Join Date
    Jul 2020
    Posts
    691

    Default

    Quote Originally Posted by Snoopy View Post
    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.
    Hello Snoopy

    Why are you adding the lease interest to EBIT? I saw your explanation in the earlier post, but it does not make sense. I believe you are tying yourself in knots when the numbers we need are in the cashflow statement.*

    How does one find the post I put up for you in another thread explaining IFR16?

    I view the 2 options as being:
    1) take the numbers as is, or
    2) adjust the numbers back to the old method

    Under method 1 you would use the published numbers - which I freely admit are "corked" due to the inclusion of lease interest and you lose the ability to compare to prior periods which did not have IFRS16.

    Under method 2 we would adjust EBIT down (not up) for the rent payments (ie the total lease payments outflow from the cashflow statement, less GST = $23/1.12 = $20) and adjust EBIT up by the depreciation component of leased assets (i.e. $14), and would adjust "I" down for the lease elements only (i.e. $21).

    EBIT: $246 - 20 + 14 = $240
    I: $173 - $21 = $151
    EBIT/I = 240 / 152 = 1.58

    *Also, any differences between the P&L and cashflow will be due to accrual accounting.

    FERG
    Last edited by Ferg; 02-01-2022 at 01:39 PM.

  4. #14
    On the doghouse
    Join Date
    Jun 2004
    Location
    , , New Zealand.
    Posts
    9,203

    Default

    Quote Originally Posted by Ferg View Post
    How does one find the post I put up for you in another thread explaining IFR16?
    As you have put it yourself, albeit not quite in these words: Seeking any rational explanation on the conceptualization and implementation of IFRS16 is a task that is, almost by definition, impossible.

    However, to answer your search question, go to 'Search', then 'Advanced Search'. A box will pop up where you can put in a 'term to be searched for' (I put in 'IFRS16') then the name of the post author (I put in 'Ferg'). That search will then pull up a link to all posts that you have authored that mention IFRS16.

    That lead me to your post 13827 on the Heartland thread.

    https://www.sharetrader.co.nz/showth...l=1#post848304

    I don't know if that was the one you were looking for?

    SNOOPY
    Watch out for the most persistent and dangerous version of Covid-19: B.S.24/7

  5. #15
    Speedy Az winner69's Avatar
    Join Date
    Jun 2001
    Location
    , , .
    Posts
    37,692

    Default

    If one is looking at EBIT comparisons I just take the lease components of the I and move them up to Operating Expenses or the like. To me that way better reflects the old fashioned premise of rent being an operating cost…..and I don’t need to rework history.

    Re cash flow statements I take the lease bits out of the Financing bit and move them up to Operating Cash … again reflects old fashioned reality ….esp for stocks like retail with a high rent/lease cost.
    “ At the top of every bubble, everyone is convinced it's not yet a bubble.”

  6. #16
    On the doghouse
    Join Date
    Jun 2004
    Location
    , , New Zealand.
    Posts
    9,203

    Default

    Quote Originally Posted by Ferg View Post
    Hello Snoopy
    Why are you adding the lease interest to EBIT? I saw your explanation in the earlier post, but it does not make sense.
    To contextualize this discussion, we are talking about the FY2020 results of Chorus and I am trying to decide whether to add lease interest payments to EBIT or not. The post you quote (post 4) is my 'method 2' calculation where I do add the lease interest to EBIT. The post you do not quote is my 'method 1' calculation (post 3) where I do not add the lease interest to EBIT. It sounds like you favour my 'method 1' (post 3) calculation, of my two options.

    Although we are talking about EBIT, I am considering how that figure is useful in evaluating banking covenants - in particular EBIT/I.

    Quote Originally Posted by Ferg View Post
    I believe you are tying yourself in knots when the numbers we need are in the cashflow statement.*

    I view the 2 options as being:
    1) take the numbers as is,

    Under method 1 you would use the published numbers - which I freely admit are "corked" due to the inclusion of lease interest and you lose the ability to compare to prior periods which did not have IFRS16.
    OK under method 1, I just used the published figure of EBIT which is $246m (AR2020 p22). The contentious factor in doing this is that what used to be classed as 'rent' has now been moved to a 'finance expense' under 'Other interest expense' header of $27m (AR2020 p27). In the text further down that same page we find that $27m figure includes $21m of 'lease interest' (formerly called rent). I notice that in your own adjusted 'method 2' calculation (quoted further down this page), you have adjusted for this. But you did not adjust for the rest of the 'Other interest expense' (again refer to AR2020 p27) where $5m of 'amortisation arising from the difference between fair value and proceeds received from interest rate swaps' and $1m of 'one off expense in FY2020 for restructuring forward interest rate swaps'. Of course that $5m and $1m are not directly related to IFRS16, which may be why you did not mention them. But in the context of the EBIT/I banking covenant, I considered those one off charges that any bank would look through, which is why I added those back to the EBIT as well (my post 4).

    However with the aim of keeping this discussion 'on topic' to IFRS16, I will forgo those other adjustments and go with your figure of $21m

    Quote Originally Posted by Ferg View Post
    or 2) adjust the numbers back to the old method

    Under method 2 we would adjust EBIT down (not up) for the rent payments (ie the total lease payments outflow from the cashflow statement, less GST = $23/1.15 = $20)
    I think you made a typo in that GST calculation (now corrected). When I corrected the GST rate from 12% to 15% it worked, giving the $20m figure you quoted.

    Quote Originally Posted by Ferg View Post
    and adjust EBIT up by the depreciation component of leased assets (i.e. $14),
    OK I see that $14m 'right of use asset' depreciation, listed in the Depreciation & Amortisation break down in AR2020 on p26

    Quote Originally Posted by Ferg View Post
    and would adjust "I" down for the lease elements only (i.e. $21).
    "lease interest of $21m" in the text in AR2020 p27, - gotcha

    Quote Originally Posted by Ferg View Post
    EBIT: $246 - 20 + 14 = $240
    I: $173 - $21 = $152
    EBIT/I = 240 / 152 = 1.58
    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 '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' (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. (note: Typo on your interest calculation corrected).

    What slightly puzzles me is why you have chosen to reduce the interest bill by the 'lease interest liability' ($21m), yet reduced the EBIT figure by an interest figure derived from the cashflow statement ($20m). Shouldn't these two numbers be exactly the same?

    Quote Originally Posted by Ferg View Post
    *Also, any differences between the P&L and cashflow will be due to accrual accounting.

    FERG
    You refer to the difference between $21m of "lease interest" (AR2020 p27) and the 'net outflow from leases' of $23m in the cashflow statement (AR2020 p38) ?

    SNOOPY
    Last edited by Snoopy; 10-01-2022 at 07:11 PM.
    Watch out for the most persistent and dangerous version of Covid-19: B.S.24/7

  7. #17
    DFABPCLMB
    Join Date
    Jul 2020
    Posts
    691

    Default

    Hi Snoopy

    You have understood my post correctly and yes I ignored the other interest elements to just focus on IFRS16.

    Thanks for picking up on the GST typo - that often happens when you don't look while using the keypad numbers (numbers out by 3 is very common in such situations).

    Depreciation - your logic is correct, that's why we need to adjust for it.

    This is where your interpretation is not quite correct:
    "Under the new accounting rules, what were 'rent payments' (an operating cost) have turned into 'lease interest liabilities' (a finance cost)"

    The old rent payments are NOT interest payments. The $20 was the old rent payment (after adjusting for GST given cash flow statements are usually GST inclusive), but the $21 is the new lease interest under accrual accounting (not cash). The fact they are close is a fluke.

    The rent payments are now payments due on lease liabilities. (<- notice the word 'interest' is missing) These payments which reduce the lease liabilities may be more or less than the interest cost on those same liabilities, usually more but they can be less. The interest calculation on the lease is separate from the amount paid under the old rent method and will differ on most occasions but there may be the odd occasion where they match which would be a fluke. Keep in mind any changes in the PV of future payments due to a changed discount rate would, I believe, go through the interest line under IFRS liabilities, and appear in the P&L accordingly. They would then be part of any difference between cash flows and interest charges. This is why I was trying to find my old post that stepped you through all the journals - it was two below the one you quoted. This post explains the journals and you will see the old rent cash outflow differs to the interest charge:
    https://www.sharetrader.co.nz/showth...l=1#post848564

    Lastly, the comment around accrual accounting was in response to your post #9 where you say:
    "although I do notice a discrepancy of $18m between 'Payments to suppliers and employees' being $329m in the cashflow statement (AR2020 p38), and 'Total Operating Expenses' of $311m (AR2020 p24)"

    Having differences between payments to suppliers and expenses per the P&L is extremely common - it would be rare to not have a difference. It's not what I would call discrepancy, rather it is there due to accrual accounting rules.

  8. #18
    On the doghouse
    Join Date
    Jun 2004
    Location
    , , New Zealand.
    Posts
    9,203

    Default 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 View Post
    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 View Post
    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
    Last edited by Snoopy; 16-01-2022 at 12:30 PM.
    Watch out for the most persistent and dangerous version of Covid-19: B.S.24/7

  9. #19
    On the doghouse
    Join Date
    Jun 2004
    Location
    , , New Zealand.
    Posts
    9,203

    Default

    Quote Originally Posted by Ferg View Post
    This is where your interpretation is not quite correct:
    "Under the new accounting rules, what were 'rent payments' (an operating cost) have turned into 'lease interest liabilities' (a finance cost)"

    The old rent payments are NOT interest payments. The $20 was the old rent payment (after adjusting for GST given cash flow statements are usually GST inclusive), but the $21 is the new lease interest under accrual accounting (not cash). The fact they are close is a fluke.

    The rent payments are now payments due on lease liabilities. (<- notice the word 'interest' is missing) These payments which reduce the lease liabilities may be more or less than the interest cost on those same liabilities, usually more but they can be less. The interest calculation on the lease is separate from the amount paid under the old rent method and will differ on most occasions but there may be the odd occasion where they match which would be a fluke.
    Right, I am a bit slow with this. But I have FINALLY figured out what you and Winner are on about grabbing the 'rent' from the cashflow statement. I was all tied up with comparing 'pre-IFRS16' and 'post-IFRS16' when it suddenly hit me that the whole IFRS16 thing is nothing more than accounting construct that has relevance to how a business reports, but little relevance to how a business operates day to day.

    When you said Ferg
    "The $20 was the old rent payment (after adjusting for GST given cash flow statements are usually GST inclusive)",

    the message you were trying to communicate to me was that this $20m is the 'current annual rent payment' (net of GST), as it would have been reported had the old pre-IFRS16 standards still been in place. Why? Because landlords don't care about IFRS16. They just want their rent money, paid in cash, And this 'net outflow from leases' entry in the cashflow statement of $23m (or $23m/1.15 = $20m rent net of GST) is that rent money, paid in cash.

    Over the course of a lease:

    1/ the multi-year cashflow reported 'rent payments' and
    2/ the multi-year accounting standard reported 'lease liabilities' and associated 'lease interest liabilities'

    both add up to the same total. But because of the way IFRS16 demands these payments are reported, on a year by year basis 'Total 1/' generally does not equal 'Total 2/' for any given year.

    IFRS16 requires rent contracts to be capitalised as a 'Right to Occupy Asset' with an offsetting 'Lease Liability' to appear on either side of the balance sheet. However, a rent contract over many years means that the 'Lease Liability' must be reflected on the balance sheet taking into account a 'time value of money' discount. This is because rent money due in ten years time (say) has a lesser present day value than rent due 'this year'. Doing this upsets the offsetting balance sheet effect of the 'Right to Occupy Asset' and the 'Lease Liability' (these two constructs are no longer equal). So to fix this on the balance sheet, we introduce a third artificial liability construct called the 'Lease Interest Liabillity'.

    As far as day to day running of the business goes, rent is paid as before. But as for reporting that rent payment according to IFRS16, the accounts show that a 'lease liability' and an associated 'lease interest liability' has been paid. And because of the discounting rate applied to this lease liability, the sum of that 'lease liability expense' and the associated 'lease interest liability expense' will NOT in general equal the actual rent paid in any particular year.

    Ferg, you say the fact that quantum of the 'old' (meaning under the old standard) rent payment' at $20m and the 'Interest on lease payable' of $21m (AR2020 p48) being similar is a fluke. I offer an alternative assessment that -to the contrary- you would expect these two figures to be similar, because they are really alternative measures of the same thing, (with a slight valuation time shift in one of the measures).

    "The rent payments are now payments due on lease liabilities. (<- notice the word 'interest' is missing) These payments which reduce the lease liabilities may be more or less than the interest cost on those same liabilities, usually more but they can be less."

    The payments referred to in the above sentence are a result of the balance sheet discounting of the lease liabilities, which seems to lead to the total 'lease liability expense' being greater in the initial years of the lease contract, in comparison with the latter years of the lease contract. I don't really understand the mechanics of that, but this seems to be what is commonly reported. So while the above stated sentence is true, a more detailed expectation would be that on any particular lease, annual lease expenses would start out high (i.e.higher than the annual rent) and then reduce towards the end of the lease term (to below the annual rent). The net effect being that over several years rent contracts are slightly 'front loaded' when reported under IFRS16.

    "The interest calculation on the lease is separate from the amount paid under the old rent method and will differ on most occasions but there may be the odd occasion where they match, which would be a fluke."

    I found my self confused by the above sentence because 'interest' has two meanings. The first meaning is that if you have an 'interest' in an asset, then you have an ownership stake in that asset. The second meaning is that if you are paying 'interest' on an asset, this is a regular payment (to a lender that allows you to gain ownership of an asset via a small capital deposit). Now I am sure that when you wrote that sentence Ferg, you had a clear idea of what you were trying to communicate. But from where I sit, the phrase 'interest calculation' could refer to either meaning. At this point you will say I am playing 'semantics'. But without clarification of what 'interest' means, (or indeed what a 'fluke' means in this context), I genuinely do not understand what you are talking about, or what point you are trying to explain.

    SNOOPY
    Last edited by Snoopy; 12-01-2022 at 08:00 PM.
    Watch out for the most persistent and dangerous version of Covid-19: B.S.24/7

  10. #20
    DFABPCLMB
    Join Date
    Jul 2020
    Posts
    691

    Default

    You are onto it Snoopy and got it mostly right until the very end.

    That sentence that confused you was just reiterating a previous sentence. In hindsight I was not 100% clear with the phrase "The interest calculation on the lease" where if you take the word "interest" out of the sentence and lose the context, then it can have 2 meanings. It was a numerical interest charge calculation on a lease loan, not a legal interest in a leased asset. In other words "The numerical calculation of the interest charge on the lease liability is separate from the amounts paid under the old rent method". The concept of calculating interest on the lease liability here is similar to the concept of calculating the interest component of loan repayments on a mortgage. I don't want to get into more details here because I think we will get bogged down.

    But, what I was trying to convey was the method of calculating the rent payments (under the old method they were rent in the P&L, but now appear in the cashflow statement which you have demonstrated you understand, and are easily calculated by looking at the dollars that came out of ones bank account over the reporting period) are different to the calculation of the interest charges on the lease liability which appears in the P&L (which involves the use of discount rates, a schedule of payments in future reporting periods and a slide rule).

    In other words, the method for determining and/or collating the schedule of rent payments (which is per the lease agreement) differs to the method of calculating the interest charge pertaining to the lease liability (per the IFRS16 rules). Given the two values come from two differing starting points and/or work streams, then the chance of them being identical is small. And if the chance of something occurring is small, but it does actually occur, then that is what I call a "fluke".

    Lastly, the concept of the rent payment amounts almost always being higher than the interest charge is like the concept of a table mortgage - the total $ amount of repayments in any period will always be more than the total $ interest charges over that same period, despite the front end loading of interest charges. Some of the monthly payment is principal, and some is interest. Logically, if the monthly interest amount exceeds the total monthly repayment amount, then the balance would increase and the mortgage would never be repaid. Hence the total payments will always exceed the total interest charges for a mortgage (unless one defaults of course).

    The odd occasion where interest charges on a lease liability may exceed the total lease liability payments (over a single reporting period) is if a lower discount rate is used to revalue the lease liability balance upwards during that reporting period. This results in an additional interest charge and a corresponding increase in the overall lease liability (i.e. debit lease interest in the P&L, credit lease liability in the Balance Sheet) and, for that reporting period, the interest charge in the P&L could exceed the total payments made per the cashflow. How can this be you might ask over a full lease term? How can the total cost of interest over the lifetime of a lease be less than the total cost of the payments over the term of a lease? That is because interest is not the only cost; there is a 2nd cost that also hits the P&L - that is the depreciation on the leased asset. I refer you to the HGH link - you cannot ignore the depreciation when looking at the cost in the P&L.

Bookmarks

Posting Permissions

  • You may not post new threads
  • You may not post replies
  • You may not post attachments
  • You may not edit your posts
  •