Due to accounting accurals we need to adjust the balance sheet before calculating firm value using a RI model because this will change the book value of the firm. One of the adjusments listed is capitilzing operation leases. Won’t the increase in assets and liabilities just wash leaving BV (equity) unchanged? What am I missing?
I think it will change you NI initially due to the sum of interest cost and depreciation which will change RE?
Good point. So it won’t change BV at time zero, but it will decrease NI in the early years which will in turn affect RI projections (and consequently BV after T=0) in future years. Does that look right to you Nib?
I’m no accountant but thats what I was thinking. I also think this would tend to reduce the sum of the PV of RI since NI will increase into the future rather than have higher NI now.
Capping the lease will definelty reduce NI in the early years and that will affect RI since it is based directly from it, so I think we are pretty safe with these conclusions.
don’t forget that for the RI model, goodwill is NOT eliminated - I can see CFAI tricking us with that…
I think there was a question on it in one of the samples
I doubt CFAI will be testing those adjustments. Were any of those adjustments on sample exams/mock exams?
You are probably right. I haven’t seen any yet, but I haven’t taken most of the mocks.