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Hello Sir Gromit, i hope you are doing well 🙂
I am slightly confused about how to treat operating leases
From what I understand is that operating leases should be treated as finance leaser for the purpose of EVA. This means capitalizing it and adding to ROCE. Hence why 115 was added to ROCE. So, why wasn’t depreciation of 28.8(115/4) deducted from ROCE like it was from the NOPAT?
Also for example if we have to calculate EVA for 2015. The Company(in my example) enters into an operating lease amounting 100 for a period of 4 years starting in 2013.
Will we then capitalize an amount of 100 or 75 in the ROCE figure?Thanks a lot for your help sir 🙂
In EVA calculations the capital employed is the OPENING capital employed. So you need to calculate the value of the leases at the start of the period.
Well sir, the question never told us when the lease agreement was signed(or maybe i missed it). Do we assume it was signed in the previous year(to be included as full amount in the opening capital employed) ?
So then what about the treatment of depreciation if it was in an earlier year?You make a fair point. The lease could have been taken out in the y/e 30/6/2015 in which case it would not need to be added back to opening capital employed.
I can’t see that there is anything in the question that would mean that assumption isn’t possible.
Hello Sir,
Can I please ask where does this 115 come from? annual operating lease exp is 40, average life 4 yrs, why it becomes 115?
Many thanks,
115 is mentioned in the question – at the bottom of the bottom of the column of figures in Appendix 1.
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