Couple of key reminders concerning FSA...

mcf

New member
Joined
Jun 18, 2026
Messages
0
Reaction score
0
- 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.
 
Even though a capital lease will initially report lower net income, operating income will be higher because the operating lease payment will be reclassified as both interest and depreciation. Interest falls outside of operating income into non-operating items.
 
gdiddy Wrote:
-------------------------------------------------------
> Even though a capital lease will initially report
> lower net income, operating income will be higher
> because the operating lease payment will be
> reclassified as both interest and depreciation.
> Interest falls outside of operating income into
> non-operating items.

Not to be confused with the impact to CFO, which will include the interest impact (but not the depreciation).
 
I'm bumping this thread for all you slackers out there.
 
Interest capitalization overstates CFO, understates CFI
why understates CFI?
gdiddy Wrote:
-------------------------------------------------------
> daj224 Wrote:
> --------------------------------------------------
> -----
> >
> > hate to bother, but could you post the key
> > formulas here, i left my corp fin text @ la
> casa
> >
> >
> > thx
>
> For credit line: (Interest + Commitment Fee) /
> Loan Amount ------> Make sure interest and
> commitment fee are stated in terms of the
> borrowing period (monthly, quarterly, etc.)
>
> For all inclusive borrowing: Interest / (Loan
> Amount - Interest)
>
> For CP: (Interest + Dealer Commission + Backup
> Cost) / (Loan Amount - Interest) ----> Again,
> adjust the costs to the period used.
 
There is a tax benefit when an asset is assumed in a capital lease by an entity with a higher tax bracket.
did not get this point
 
Why "loss on the sale of an asset would be part of normal operating activities"? I think gains and loss should be nonoperating items?
Can anyone provide more clues? Thanks.
 
That confuses me as well. I think of it as the gain or loss from the sale of an asset that you used as part of your normal activities should be included. (Not sure if that is factually acurate, but it helps me remember)

Basically just look for key words like "Extraordinary" and "Discontinued" - all of these events should not be included in normal earnings.
 
Here is what I remember for adjusting Balance Sheet Items:

1) LIFO - If firm uses LIFO, Add LIFO Reserve to Inventory and Equity.

2) Leases - If operating lease exists, add PV lease to Net PPE and LT Debt.

3) Goodwill - Remove Goodwill. Subtract from Intangible Assets and Equity.

4) Long Term Debt - Adjust to Fair Market Value. If this increases LT Debt, reduce Equity.

5) Deferred Tax Liab - If the Liabilty is unlikely to reverse, reduce Liability, increase Equity.

That should cover all of the most likely adjustments. If I am unsure of the offsetting adjustment, I adjust Equity by default.

I also keep in mind the underlying BS Equation. (A=L+E)
 
"Interest capitalization overstates CFO, understates CFI. "

Can you explain this please? I can't wrap my head around this...
 
it's talking about how you would "analyze" the interest capitalization.
When you capitlize interest, you effectly remove it from CFO, so CFO is higher, and put it into CFI, which makes it lower, the net effect is zero, but when you analyze it, you should reverse the affect, but first you must recognize that CFO is over stated (becuase there is less interest expense now) and CFI is understated (because the interest is capitalized there)
 
i thought interest expense was part of CFF? That is where I am confused.
 
Just think capitalize anything -> CFI
Don't confuse this with Bonds, which would be CFF
for premium bonds, CFF is overstated, and CFO is understated
for discount bonds, CFF is understated, and CFO is overstated
 
I am so confused right now. So is interest expense part of CFO or CFF?
 
interest expense outflow would be CFO under GAAP
it could be either CFO or CFF under IFRS
 
bump.

i wish i can print this entire thread and take it with me...
 
Back
Top