Is there any type of Off Balance Sheet Item where if you reclassify it as ON Balance Sheet, Equity increases or decreases? Sorry if that is confusing. But let’s say we have an operating lease and we are going to reclassify it to a finance lease. Assets and Liabilities both increase by PV (MLP). So equity is not affected. Can someone give an example of when Equity IS affected? Reason being, we know Residual Income model depends on BV of Equity, and so many ratio’s, so I can see them asking a question about impact of a specific type of off B/S financing and what it does to equity once u adjust… thanks
Of course. If you capitalize your NI goes up the first time, which means equity is up more than if you just went with operating lease.
not sure what you mean? if you take an operating lease and classify it as finance lease, the only discrepancy between the two is the fact that dep exp + int exp (finance lease) will be > rental expense (op lease) in the early years of the lease, and then revert in the latter years … that would be the only impact on net income, and not a major one at that side note: impact on CFO is significant i meant more in terms of just the B/S effect … like even if you consolidate a VIE that you used to securitize assets… the impact is basically a reversal of the transaction…so equity wouldn’t be affected?
Sometimes there is equity component to the VIE in the form of minority interest that must be accounted for when it is consolidated. Leverage ratios will worsen and you will also see interest coverage decline as a result of the increased interest expense.
I guess you and I just got the same mock question wrong. http://www.analystforum.com/phorums/read.php?12,1265670 CFAI says it doesn’t affect equity, but they don’t give any reason. From my understanding the retained earning should be adjusted accordingly.
Book value is the sum of Common stocks and retained earnings. If you adjust for off-balance sheet items, it may not be included in the mentioned items and so unaffected. For example, the change of OCI will not affect BV, and so RI.