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Hi, there are several problems concerning the treatments of NOPAT and adjusted CE.
(1) Is non-capitalised lease a kind of operating lease? If yes, when there are current year lease payment and last year of lease valuation given, the payment should be added back to operating profit while the last year valuation balance should be added back to initial CE (this year beginning).(2) The scenario give $16m valued lease each from 2012 to 2014. Is it a value building expenditure that should add back to respective current year CE?
(3) Finance lease would have a initial valuation with amortization charged in each year. Is it correct to treat the net cost valuation (COST LESS CURRENT YEAR AMORTIZATION) as adding back to NOPAT and also add back to subsequent beginning year balance of CE?
(4) Is the above item (3) treatments applied in R&D, IA ? (same information provided in the case)
(5) Are the R&D expenditure, IA, goodwill, non-cash expense a kind of economic assets? If yes, there should be economic depreciations which is hard to estimate and therefore accounting depreciation will be treated as economic depreciation in the case.
(6) Provisions on bad debt, depreciation, inventory obsolescence and deferred tax – Are the following treatments correct?
NOPAT – Add back the expense (increase in provision) charged in income statement
NOPAT – Subtract the income (decrease in provision) charged in income statement
CE – Add back the last year provision balance figure to current year start CE(7) Is EPS the same as ROE?
1 Yes. Correct in everything you say. You want to opening SOFP for the Capital Employed. Here there was no amortisation charge so the only adjustment is to add in the value of the lease at the start of the year.
2 It’s the value of the lease. The idea is that operating/non-capitalised leases do not appear on the SOFP but nevertheless the company is making profits by using those assets so to get a truer CE for performance measurement these assets are added in.
3 Not sure I understand. However, book depreciation or amortisation has to be removed and replaced by economic depreciation. If you are not told what the economic depreciation is, you make not adjustment for book depreciaton/amortisation.
4 Yes. These are not treated a expenses but are treated as investment in assets. So add back to profit and add back to CE.
5 Yes. Either the question gives you economic depreciation or you make no adjustment for depreciation in the NOPAT (what else could you do?). R&D etc are assets not expenses.
6 Yes
7 ROE…. ? Return on equity? No ROE looks at dividends divided by equity so is an earning rate. EPS is earnings per share, an absolute number.
Get back to me if problems remain.
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