In LOS 44.n in Schweser, or LOS 44.3.4.1 in CFAI, there is a description of adjusted CFO. Also see question #20 on page 263 of Schweser book 3. I am confused as to when interest is added back to get adjusted CFO, and its treatment as an operating or financing cash flow under GAAP and IFRS. Can anyone explain when interest adjusted for taxes should be added back, and when it should not be added back to get adjusted CFO?
wait…i think i am wrong
IFRS is flexible so you can report interest expense as either operating or financing cash flow. US GAAP you have no choice so only way to report the interest expense is as an operating activity. Let’s think it this way… you are an analyst and doing a valuation on Goldman Sachs now interest reported can be seen as an operating activity since its a financial firm and engages in thousands of this type of transactions everyday / on the other side you have a company lets say it sells dairy products now engaging in financial transactions is not sort of its operating activity but its reporting in US GAAP so that interest expense is reported as an operating cash flow… So in that case you want to make a “sense out it” so it makes kinda “economic sense” so you will make an adjustment to it(It’s just an example). Actually we can make several adjustments with respect to non recurring items, restructuring charges, amoritaztions… etc etc etc I saw this question (P .263 Schweser Equity Book). He is adding back the nonrecurring expense of 139,870,000. Now if it was non cash charge it would have been added back to CFO but I think it was a cash expense so it was expensed in the income statement. So in that case he added it back to CFO net of taxes to normalize it. Very tricky question I must say. Just my 2 cents
It is a tricky question, and doesn’t tie back to either the Schweser materials or CFAI materials very well. I’m just going to learn that under IFRS you typically want to add interest back to CFO to get adjusted CFO, and under GAAP, you don’t add it back because it has to be counted as an operating cash flow. It seems contradictory though to the LOSs going over how to get to FCFF…
supersunny138 Wrote: ------------------------------------------------------- > IFRS is flexible so you can report interest > expense as either operating or financing cash > flow. US GAAP you have no choice so only way to > report the interest expense is as an operating > activity. > Let’s think it this way… you are an analyst and > doing a valuation on Goldman Sachs now interest > reported can be seen as an operating activity > since its a financial firm and engages in > thousands of this type of transactions everyday / > on the other side you have a company lets say it > sells dairy products now engaging in financial > transactions is not sort of its operating activity > but its reporting in US GAAP so that interest > expense is reported as an operating cash flow… > So in that case you want to make a “sense out it” > so it makes kinda “economic sense” so you will > make an adjustment to it(It’s just an example). > > Actually we can make several adjustments with > respect to non recurring items, restructuring > charges, amoritaztions… etc etc etc > > I saw this question (P .263 Schweser Equity Book). > He is adding back the nonrecurring expense of > 139,870,000. Now if it was non cash charge it > would have been added back to CFO but I think it > was a cash expense so it was expensed in the > income statement. So in that case he added it back > to CFO net of taxes to normalize it. Very tricky > question I must say. > > Just my 2 cents about the same question u r talking about in the notes, the question stated that “company expensed 240 mill interest. CFO includes this effect” so I orignally added back the interest net of taxes and it was wrong lol i guess i miss understood the “includes this effect” part
was there a question related to adjusted CFO in the official text? Also, this might be a noob question, but can someone explain to me why the interest expense shows up as something you add back? would interest actually paid in cash show up as a negative on the CF statement? example of a GAAP CF statement: NI + depreciation expense - increase in A/R + increase in A/P + interest expense - interest paid + taxes - taxes paid = CFO example of an IFRS CF statement: NI + depreciation expense - increase in A/R + increase in A/P + taxes - taxes paid = CFO is this right? is this how it works? If not what am I missing please?
Read page 391 in CFAI text (Equity book) it will make sense to u
391 is just about calculating FCFF using NI as a base; I have that down pat, that’s bread and butter stuff. this adjusted CFO thing, and reconciling GAAP with IFRS on the balance sheet is what’s tripping me up.
I don’t have my books in front of me but i think you guys are making this more complicated than it is. CFO for IFRS does not always include after tax interest expense. Therefore if you are an analyst comparing a company reporting with GAAP and a company reporting with IFRS, you will adjust the CFO of the IFRS company by adding back after tax interest expense.
verse214 Wrote: ------------------------------------------------------- > I don’t have my books in front of me but i think > you guys are making this more complicated than it > is. > > CFO for IFRS does not always include after tax > interest expense. > > Therefore if you are an analyst comparing a > company reporting with GAAP and a company > reporting with IFRS, you will adjust the CFO of > the IFRS company by adding back after tax interest > expense. what about interest paid?