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Hi!!!
ACCA SBR , In past paper Mar/Jun 2019, Q3) b) ii) :
1) the answer said that the Interest Cover: there will be an increase in the earnings and increase in interest. Why the impact of IFRS 16 will affect the earning increase and interest increase?
2) the answer (Return on capital employed) said that increase in capital employed. Is it the new IFRS 16 change the operating lease to finance lease, so the operating expense change to asset, and entry into the financial position? So the capital employed increase?
But I don’t know why operating profit increase? Is it operating profit is equal to EBIT?
I look forward to your early reply.
Q1
Under the old standard the whole lease rental would have been an operating expense. Under the new standard only the depreciation element would be an operating expense. So EBIT will increase.
Under the old standard nothing was charged to interest. Under the new standard the finance cost element of the lease expense will increase interest expense.Q2
OP = EBIT
Bear in mind that that they won’t really ask you about the old standard now.
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