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  1. #21
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    Quote Originally Posted by Ferg View Post
    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
    Quote Originally Posted by Snoopy View Post
    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
    Last edited by Snoopy; 14-01-2022 at 08:03 PM. Reason: Corrected Ferg line 2 typo
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  2. #22
    Contrarian Investor Ferg's Avatar
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    Spot on.

    Although I have just seen a typo in my calculation. That second step should read 173 - 51 = 152, thankfully I carried the correct figure through to step 3.
    Truth does not mind being questioned, whereas a lie does not like being challenged.

  3. #23
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    Quote Originally Posted by winner69 View Post
    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.
    And the depreciation of IFRS16 created lease liabilities? How does that fit into your adjusted EBIT picture?

    SNOOPY
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  4. #24
    Speedy Az winner69's Avatar
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    Quote Originally Posted by Snoopy View Post
    And the depreciation of IFRS16 created lease liabilities? How does that fit into your adjusted EBIT picture?

    SNOOPY
    Included in Depreciation and Line - so already part of EBIT

    That's one reason why EBITDA is a bit of a nonsense these days but you can adjust EBITDA by allowing for depreciation/amortisation of leases
    . To say extreme valuations are “justified” is also to say that long-term market losses are “justified.” .

  5. #25
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    Quote Originally Posted by Snoopy View Post
    And the depreciation of IFRS16 created lease liabilities? How does that fit into your adjusted EBIT picture?
    Quote Originally Posted by winner69 View Post
    Included in Depreciation and Line - so already part of EBIT
    I get that Depreciation and Amortisation have already been removed in transforming EBITDA to EBIT in the FY2020 accounts. However, the depreciation removed in the FY2020 accounts, during the EBITDA to EBIT calculation, as printed, includes the 'depreciation of the right to occupy' which did not exist before IFRS16. IOW the depreciation pre-IFRS16 and depreciation post-IFRS16 are not the same thing. So if you are converting the figures in the FY2020 report back to a pre-IFRS16 comparison figure, don't you need to add the 'depreciation of the right to occupy', the difference between depreciation pre-IFRS16 and depreciation post IFRS16 (the new increment of depreciation that did not exist before), back?

    SNOOPY
    Last edited by Snoopy; 17-01-2022 at 05:49 PM.
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  6. #26
    Speedy Az winner69's Avatar
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    Quote Originally Posted by Snoopy View Post
    I get that Depreciation and Amortisation have already been removed in transforming EBITDA to EBIT in the FY2020 accounts. However, the depreciation removed in the FY2020 accounts, during the EBITDA to EBIT calculation, as printed, includes the 'depreciation of the right to occupy' which did not exist before IFRS16. IOW the depreciation pre-IFRS16 and depreciation post-IFRS16 are not the same thing. So if you are converting the figures in the FY2020 report back to a pre-IFRS16 comparison figure, don't you need to add the 'depreciation of the right to occupy', the difference between depreciation pre-IFRS16 and depreciation post IFRS16 (the new increment of depreciation that did not exist before), back?

    SNOOPY
    Sorry Snoops, you’ve lost me now

    But own up to talking on a general basis …whereas you and Ferg talking about Chorus …yes?

    And confess I haven’t been following the detail of that conversation
    . To say extreme valuations are “justified” is also to say that long-term market losses are “justified.” .

  7. #27
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    Quote Originally Posted by winner69 View Post
    Sorry Snoops, you’ve lost me now

    But own up to talking on a general basis …whereas you and Ferg talking about Chorus …yes?

    And confess I haven’t been following the detail of that conversation
    Yes we have been discussing Chorus, as an example. But the particular post you responded to of mine did not mention Chorus. And that is because I was commenting on a general principal of IFRS16, with no reference to Chorus. Namely that the calculation of depreciation pre IFRS16 is different to the calculation of depreciation post IFRS16, because IFRS16 introduces a new item to depreciate the 'Right of Use of Assets' that was not there before.

    Thus claiming that you don't have to worry about the 'D' bit in EBIT, because the 'D' bit has been subtracted out as EBITDA transformed to EBIT is not giving the full picture. Because the D bit you subtracted out is larger than it was before. And that gives you a comparative EBIT that you are comparing with earlier pre-IFRS16 EBIT figures, that is smaller than it should be..

    Far from being a curiosity connected to Chorus, this point relates to every company that adopts IRFS16 and has a lease (and a consequent 'Right of use asset' on the balance sheet).

    SNOOPY
    Last edited by Snoopy; 17-01-2022 at 09:01 PM.
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  8. #28
    Contrarian Investor Ferg's Avatar
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    Quite right Snoopy. It's almost a pre and post IFRS16 world. I fear we can't keep adjusting forever.
    Truth does not mind being questioned, whereas a lie does not like being challenged.

  9. #29
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    Quote Originally Posted by Ferg View Post
    Quite right Snoopy. It's almost a pre and post IFRS16 world. I fear we can't keep adjusting forever.
    Ah but we can, and perhaps the banks will? Because as every banker knows, there is no need to worry about the value of the 'lease liability' on the balance sheet, because it is balanced out by the equally large 'right to occupy' asset on the other side of the balance sheet. So no doubt every banker worth hiser financial pay grade, will continue to look through the lease liability debt, and any consequent lease liability interest bill, when considering how much money they can lend a company?

    The alternative suggestion of what we should be doing from a pre IFRS16 perspective can be found here:

    https://www.whitecase.com/publicatio...-are-you-ready

    "Rather than treating IFRS 16 as the elephant in the room, it would be advisable for borrowers and lenders, particularly for new transactions, to embrace IFRS 16 in original financial statements and the related base case models, with financial covenants, thresholds, baskets and ratios being adjusted accordingly."

    Now we have arrived in the IFRS16 world, has anything been done? Because if the answer is no,

    e.g. used on this thread , Chorus over FY2020:

    Case (a) Pre IFRS16: EBIT/1= 2.1 (refer post 3)
    Case (b) Post IFRS16: EBIT/1= 1.7 (refer post 18)

    then the banks have just agreed to be more generous with their lending policies, with a proportionate increased in lending risk for bank shareholders that they have not been told about!

    SNOOPY
    Last edited by Snoopy; 21-01-2022 at 12:14 PM.
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