Question on Equity - FCFF valuation

Hi All,

One query - Under US GAAP when we calculate FCFF, the concept is CFO + non cash charges (depn,etc) + int (1-t) + inv in FC + inv in WC,

the same under IFRS (if interest is treated as financing expense), the concept is CFO + NCC(depn) + inv in FC + inv in WC… no need to add interest as treated as financin exp.

Don’t you guys think, there’s a flaw here on interest treatment i.e. under US GAAP, first full interest amount is subtracted for calculating CFO, but then to come up with FCFF only net interest after tax is added??? , so if we were to do a reconcilition between IFRS and USGAAP, we would have a net diff as int * Tax rate while computing FCFF?

Please shout…


I believe that you’re mistaken: full interest _ is not _ subtracted for calculating CFO, interest net of taxes is subtracted.

Full interest is subtracted to get to EBT, but the tax expense is reduced by (int × tax rate), so net income (the starting point for CFO using the indirect method) is reduced by (int × (1 - tax rate)), and that’s the amount you add back on your way to calculating FCFF.

Hey, got the logic of your magic absolutely right…

Thanks a lot… Highly appreciated…


I see your logic but I’m not certain it would work that way. correct me if I am wrong but for CFA purposes, I dont believe they ask us to reconcile the difference between GAAP vs IFRS as it relates to computation of FCFF. Having said that, wouldnt you have to factor in adjustments for capitalised interest on FCinv, different depreciation charges because of the diff in assets, and finally other adjustments made to CFO relating to different allocations to CFF/CFI? I guess what I’m getting at is, the adjustment is out of the scope for test purposes.

Under GAAP FCFF = CFO + Int(1-t) - Capex you don’t need to add back D&A cause it’s already done to get to CFO and no need to substract Inv in NWC cause it’s already taken care of through CFO.

Under IFRS if int exp are part of CFF no need to add them back, and to your question about reconciliation there is no flaw because adding back interest to CFO on GAAP will make the firm loose some of the tax saving so we need to capture that; remeber tax expense are part of CFO under GAAP.

I think it was just a typo on his part, I think he meant NI.

Good to hear!

My pleasure.

Back atcha!