Capitalizing interest cost on INTEREST COVERAGE RATIO

CFA Level II
#21

Thank you.

#22

appreicate that but the reading still sames the ratio is the same after adjustment for capitalising and expenses. found the below in a different thread…

Would You Look … Mar 26th, 2014 4:43pm

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  • CFA Level III Candidate
  • 761 AF Points

They provide a pretty clear explanation in the solution to question 8. “To provide a true picture of a company’s interest coverage, the entire amount of interest expenditure, both the capitalised portion and the expensed portion, should be used in calculating interest coverage ratios.” - This says when calculating a company’s interest coverage ratio, regardless of how they classify interest (as a capitalized item or an expense), the ratio should be unchanged, because, as an analyst, you are to consider ALL interest payments a company makes (both capitalized and expensed). For example, if a company has EBIT of $100 and total interest payments of $10, their interest coverage ratio is $10. If all $10 of the interest was capitalized and $0 was expensed… the ratio remains the same - 10x. If $5 of it was capitalized and $5 was expensed, the ratio is still the same… 10x. If all $10 was expensed… the ratio is still… 10x. The gist of of the point is, as an analyst, you are to consider ALL interest outlays when calculating the interest coverage ratio, regardless of what it’s categorized as, because the company still has to pay interest on the debt, whether they expense it or capitalize it means nothing to you when calculating the ratio, you should only care about total interest paid.

#23

I THINK THIS IS WRONG!!!

#24

The paulian’s calculation is OK, he is only wrong for the formula for interest coverage ratio. There is financial ratio list in the beginning of the FRA book, you can check there.

#25

What is the conclusion? Expensing vs. Capitalizing does not impact Int. Coverage Ratio? I think it would change

#26

So is this an argument about the interest coverage ratio considering all interest payments in the first place, therefore, the reclassification of capitalized interest as expensed has no impact? But then supposing that’s the case, what we’re saying here is that nothing happens in the numerator either… Which would be wrong if we had previously capitalized interest costs being amortized…EBIT will be sensitive to whatever we report as depreciation no?

#27

I HAVE NO IDEA WHAT YOU JUST SAID! AT THIS POINT! I GOING TO MEMORIZE THAT THERE IS NO IMPACT! LOL

#28

i thought paulian was quoting from the manual.

is there someone who can direct to something definate?

(or if they are part of KS ask them?)

#29

i’m quoting CFAi!!!

long-lived assets chapter EOC questions!