Assess the effect on financial statements and ratios of a particular change in accounting standards, methods or assumptions
The idea
A change in standards, methods or assumptions alters reported numbers without changing cash flows. Recognising leases on the balance sheet raises assets and debt, lowers asset turnover and, under IFRS where lease cost becomes depreciation plus interest, raises EBITDA and operating profit; under US GAAP an operating lease keeps a single straight-line cost in operating expense. Switching from expensing to capitalising costs raises current profit and assets. Lengthening useful lives cuts depreciation. A higher pension discount rate lowers the obligation. The analyst must restate prior periods or peers on the same basis before judging trends. The trap is treating an improvement in a ratio caused by a new standard as an improvement in the business.
In the app: 3 practice questions on this outcome, a narrated walkthrough with diagrams, spaced review that brings it back before you forget it.
Take the free diagnostic →More in Integration of Financial Statement Analysis Techniques
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