- Interest expense must be capitalized as relate to construction costs under GAAP. However, CFA insists it must be adjusted for, adding back this expense to interest as not all firms are levered / have the same cost of capital.
- Amortization of intangibles cannot exceed 40 years
- Land is not depreciated
- Impairment frequently leads to the creation of a DTA, not a tax refund!
- The book value of debt is always reported at the market rate at issuance regardless of how rates move thereafter.
- The coupon is the sole determinant of actual cash flow during the tenor of a bond. Changes in principal are non-cash items.
- Convertible debt, when determining if it should be treated as debt or equity, should be evaluated based on the liklihood of the conversion option being exercised.
- It is unlikely that there will be a benefit to refinancing debt when rates rise and bond prices fall. While you can buy back debt at a lower price, you will most likely have to issue new debt at a higher coupon to finance this purchase. In the end, there's not true benefit. On the contrary, with callable bonds, even if you may take an accounting loss when retiring such bonds, you will likely have a economic gain.
- While capitalizing costs results in higher net income than expensing costs, capital leases in the early years will have lower net incomes than operating leases (i've seen a lot of people confused impacts of capitalizing costs and capital leases).
- There is a tax benefit when an asset is assumed in a capital lease by an entity with a higher tax bracket.
- The asset and liability portions of capital leases will amortize differently. The asset will amortize (under almost all circumstances) according to a straight-line depreciation whereas the debt portion amortizes at a decreasing rate (reflecting the interest expense calculated off the balance sheet liability which amortizes over time).
- There is a current liability portion to capital leases -- the current portion of the lease expense. Be aware of current portions of lease expenses when asked about the impact on current, quick, and cash ratios.
- NO CASH FLOW IS RECOGNIZED AT THE INCEPTION OF A CAPITAL LEASE despite the recognition of the balance sheet asset and liability.
- Amortization of intangibles cannot exceed 40 years
- Land is not depreciated
- Impairment frequently leads to the creation of a DTA, not a tax refund!
- The book value of debt is always reported at the market rate at issuance regardless of how rates move thereafter.
- The coupon is the sole determinant of actual cash flow during the tenor of a bond. Changes in principal are non-cash items.
- Convertible debt, when determining if it should be treated as debt or equity, should be evaluated based on the liklihood of the conversion option being exercised.
- It is unlikely that there will be a benefit to refinancing debt when rates rise and bond prices fall. While you can buy back debt at a lower price, you will most likely have to issue new debt at a higher coupon to finance this purchase. In the end, there's not true benefit. On the contrary, with callable bonds, even if you may take an accounting loss when retiring such bonds, you will likely have a economic gain.
- While capitalizing costs results in higher net income than expensing costs, capital leases in the early years will have lower net incomes than operating leases (i've seen a lot of people confused impacts of capitalizing costs and capital leases).
- There is a tax benefit when an asset is assumed in a capital lease by an entity with a higher tax bracket.
- The asset and liability portions of capital leases will amortize differently. The asset will amortize (under almost all circumstances) according to a straight-line depreciation whereas the debt portion amortizes at a decreasing rate (reflecting the interest expense calculated off the balance sheet liability which amortizes over time).
- There is a current liability portion to capital leases -- the current portion of the lease expense. Be aware of current portions of lease expenses when asked about the impact on current, quick, and cash ratios.
- NO CASH FLOW IS RECOGNIZED AT THE INCEPTION OF A CAPITAL LEASE despite the recognition of the balance sheet asset and liability.