If a company leased long term assets instead of borrowing money and purchasing the same assets, how come CF from investing goes up while CF from financing goes down?
I didn’t think leases effect the investing activities on the CF statement…
Under operating leases, all cash flows (lease payments) are CFO outflows.
Under finance leases, the cash flows (lease payments) are part CFI (principal payments) and part CFF (interest payments).
In Reading 32 Exhibit 2 (p.603) from the 2016 curriculum it actually does NOT mention that capitalized leases affect CFI, but instead only affect CFF and CFO:
"…Finance Lease under IFRS (capital lease under US GAAP):…
Reduction of lease liability is a financing cash outflow Interest portion of lease payment is either an operating or financing cash outflow under IFRS and an operating cash outflow under US GAAP…"
However, CFI is also supposed to include all cash flows to fixed assets, but I think that only applies if we actually paid for the item in cash out of our pocket. Because otherwise, the total cash flows would be not in line with the actual cash flows of that period.
A nice summary can be found on Investopedia:
http://www.investopedia.com/exam-guide/cfa-level-1/liabilities/lease-asset-value-determination.asp
The same thing with different numbers can be found in Schweser 2014 p.271 book 3 (in case you have that available).
I think the reason why CFI goes up when you compare a purchase vs. a lease is that, purchasing the the asset causes a negative CFI (at least this is my understanding of this question).
Say you buy a machine for $10,000 and capitalize it. Then you will have a negative CFI of $10,000, or cash outflow if you will.
Then if you compare this to leasing the asset (where you have CFO+CFF impacted by the corresponding negative amounts but NOT CFI), then in comparison to the first method, your CFI is higher by $10,000.
S2000 exlained (the capitalizing impact on CFI this in this previous discussion):
http://www.analystforum.com/forums/cfa-forums/cfa-level-i-forum/91348746
Can you provide the actual question keep_running? Then we can maybe figure out what exactly they meant by a decrease in CFI?
OPs statement
2 situations -
Situation 1: Company leased asset worth $1,000
Leased asset - Asset is off balance sheet, company has a lease rental paid out say $100 which is part principle, part lease interest payments made.There is no CFI (0), some CFF (part of the $100 which is interest payment portion)
Situation 2: Company borrowed money $1,000, bought asset worth $1,000
CFF inflow +1000, CFI outflow -1000
So comparing situation 1 to situation 2
there is a decrease in CFF ($1,000 almost) and there is an increase in CFI ($1,000)
Not sure if this is what is being stated.
So we all agree that capitalizing the lease has no effect on CFI.
But it was my understanding that under US GAAP the lease payments (if capitalized) consist of CFF (the principal) and CFO (the interest). What you said above (and what S2000 said as well) sounds like the interest payment would be CFF (which it should not be, right?) at least under US GAAP. Under IFRS we can put both, the principal and interest payments into CFF as well if I remember correctly.
In case someone has a similar question and ends up here via Google Search (I know I might be a possible candidate in few months from now after forgetting this again), there is no effect on CFI if the lease is capitalized, only CFO and CFF are affected. Also see discussion here:
http://www.analystforum.com/forums/cfa-forums/cfa-level-i-forum/91349583
Alright.
So under IFRS, what is the CF effect for an operating lease? Is it the same as GAAP, where the entire payment is included in CFO?