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Incorrectly treating a lease rental as an operating expense is likely to have what impact on ratios?
Please explain the answer…Hi,
If it incorrectly treated as an operating expense as a short-term/low value rental then the correct treatment will be to capitalise the asset (right of use) as a lease. There will be depreciation on the asset that will go through operating expenses and interest on the lease liability that will hit finance costs.
There will therefore be changes to operating profit and profit before tax through profit or loss. On the SFP there will be an increase in assets and an increase in interest bearing debt.
Have a think of what ratios this will impact given what you’ve now been told.
Thanks
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