free cash flow valuation...please help guys...thank u very very much

CFA Level II
#1

hi guys…it says

on calculating FCFF from net income:

  • Provisions for restructuring charges and other noncash losses should be added back to net income. However, if the firm is accruing these costs to cover future cash outflows, then the forecast of future free cash flow should be reduced accordingly.

i dont get the however part…please explain…thanks.

#2

The firm has made provisions for possible restructuing which will occur at some point in the future. For example redundancy costs of £1m. If the firm is also constructing a cash flow forecast or p&l then they will need to account for these redundancy costs in those finanical statements.

Hence, any future free cash flows will need to be reduced by the £ amount of provisions which occur in that period.

#3

It means the outflow should get reflected in that particular years ffcf. Provisions are made several years ahead so that shouldn’t happen on the contrary add them back now and show them in the year they occur, the full amount. Hope that helps.

#4

thanks !!