this topic was discussed in an earlier thread with some conflicting statements, I would like to make sure that I understand this 100% (http://www.analystforum.com/forums/cfa-forums/cfa-level-i-forum/91349493)
Say I am capitalizing a lease, then the Cash Flow effects will be (according to US GAAP):
Principal Payments: CFF
Interest Payments: CFO (under IFRS, these could alternatively be under CFF)
no effect on CFI
In the above mentioned thread, it was mentioned that interest payments would be under CFF and principal payments would be CFI , which is why I am confused. Accounting is really not my strong suit, so please correct me if I am wrong here.
Capitalising will lead to an increase in asset, and subsequent lease principal payment will hit the CFF as well. Under US. GAAP, Interest payment goes directly into CFO, thus reducing it.
Are you sure about that, because 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….”
Besides, the total cash flows have to be equal to the actual lease payments. If add in CFI in there, that won’t be the case anymore, right?
Say a company leases a truck, and the annual payments are $20,000. If we capitalize we compute the PV of the lease obligations and use that to determine the principal and the interet portion of the lease payment.
Let’s say that $15,000 is the principal which is part of CFF while $5,000 is the interest which is part of CFO. Then we would have (of course these would all be negative ):
for US GAAP: CFO+CFF= $5,000+$15,000=Total Cash Flow =$20,000
for IFRS : CFO+CFF= $5,000+$15,000=Total Cash Flow =$20,000 or CFO+CFF= $0+$20,000=Total Cash Flow =$20,000
And if decided to use an operating lease:
CFO=$20,000=Total Cash Flow
I don’t see where CFI comes in. Am I doing something wrong?
Sorry, no effect on CFI, principal payment hits CFF.