Leases and IFRS16

[Snoopy]

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 = $152
EBIT/I = 240 / 152 = 1.58

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?

To answer my own question.....

$21m is taken off the interest bill. This is because working from the income statement, and being referenced back to Note 4, the interest bill is broken down in great detail. There is an item of $27m covering 'Other Interest Expense' from the expense table and the text below this table shows this $27m includes $21m of 'lease interest expense'. Thus this $21m is directly related to the reporting policy of adopting IFRS16. Before adopting IFRS16 this part of the interest bill did not exist.

EBIT means Earnings Before Interest and Tax. Pre-IFRS16 EBIT considered all expenses prior to 'Interest' and 'Tax' being deducted. 'All expenses' included the old 'rent' which is represented on the cashflow statement as a 'net outflow of leases' on the cashflow statement of $23m (including GST) which translates to ($23m/1.15=) $20m before GST (commercial rent payments, unlike rent on suburban day to day household properties normally include GST) .

However, because the reported 'lease interest expense' in any year does not necessarily line up with the 'rent' being paid under the old pre-IFRS16 system, it is necessary to adjust the 'total interest bill' and the 'EBIT' by different amounts.

SNOOPY