Leases and IFRS16

[Snoopy]

The question I have is, under IFRS16, do I use method 1 or method 2 to calculate EBIT/I? Or do I have a choice which method I use?

Sometimes the easiest way to make sense of these 'theoretical questions' is to do an example. I will do the calculation of "EBIT/I" for Chorus over the last reported year, FY2020.

AR2020 p27 tells us that :

1/ 'Other interest expense' includes $21m of 'lease interest', $5m of amortisation and a $1m restructuring expense due to interest rate swaps. That works out to a total of $27m.
2/ Now, if we go back to p24 of AR2020 and look under the 'expenditure commentary' we can see an entry 'Other $27m'. which ties in.
3/ Back a couple of pages further to p22 of AR2020. Right under the main 'Management Commentary' header you can see how the earnings are calculated. The first step is to take the 'operating revenue' and remove the 'operating expenses'. These are the same 'operating expenses' we have just looked at in a more detailed way on page 24.

These three steps show me that 'lease interest' has already been subtracted from profits. This means we should use 'Method 1' from my previous post when calculating EBIT/I.

EBIT is easy to find, it is listed as $246m on p22 of AR2020.

The slightly more tricky thing is figuring out the 'I' bit.

On page 27 of AR2020 we can see a 'Total Finance Expense' of $185m. But this is not the figure we use.

1/ Right at the top of the page we see 'Finance Income' of $12m that we have to offset against out finance expense.
2/ We must subtract from the 'net interest total' the $29m of 'CIP securities notional interest', because this is an accounting construction that is never actually paid (this is all explained on the Chorus thread, but for the purposes of this exercise please trust me on this point).
3/ Look further up the column and you will see the 'Other interest expense' of $27m that we have been discussing. That $27m has already been used in calculating EBIT. So we have to remove that from the interest bill as well , because if we did not we would, in effect, be counting it twice.
This means the 'Total Net Finance Expense' for our purposes is:

(-$12m + $185m) - $29m - $27m = $117m

So the obvious calculation of EBIT/I for Chorus for FY2020 is: $246m/$117m = 2.10 (using method 1)

SNOOPY