Treatment of Operating leases reported, problems, remember

AnalystAlan

EBIT Income for Interest Coverage purpose=
EBIT as reported + operating lease - depreciation

remember to add back operating lease amount and then subtract depreciation to get an EBIT income number . Ch 26 of FRA problems 1 to 8.

Depreciation is = NPV of the capital lease/ life of the lease

chandsingh

No, no, because it is EBIT, dont add the Interest Expense portion to get your new EBIT.

Adjusted EBIT = Prev EBIT + regular Lease Rental payment - Depreciation on capitalized lease

Interest portion of the lease payment will be added to the denominator in EBIT Interest Coverage Ratio.

Edit: Thanks janakisri for pointing it out. I think knowing Operating Lease to Capital Lease conversion is very important for L2 exam.



Edited 1 time(s). Last edit at Thursday, May 20, 2010 at 10:11PM by rus1bus.

giorgio10

I think that is what bpdulog meant to say...

CP

OmarAdnan

Yeah, my bad I was referring to the EBIT coverage ratio in case #2.

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