AASB 16 Accounting Standards Distortions

[galumay]

Impact of AASB 16 accounting standard on valuations via FCF.

If, like me, you use FCF as an input into a valuation model, its essential to understand the impact of the AASB 16 accounting standard. Basically it makes traditional FCF calculations completely incorrect and therefore massively distorts valuations (to the more expensive side.) This is true for any business that has significant leases.

Because nearly all research services use a traditional means of measuring FCF so they are nearly all incorrect!

This article is the best explanation I have seen to date.

http://lawbitrage.xyz/2020/10/free-cashflow-calculation-in-a-post-ifrs-16-world/

Also,

[galumay]

Case study in Beacon. BLX.AX



As we can see, in FY 2020, with the introduction of IFRS 16, the depreciation jumps massively, due to the property leases now being treated in this totally distorted way. This causes a huge jump in so called "Operating Cashflows".

It also shows up in the financing section of the cash flow statement where 'other' is actually lease repayments, which is actually just the property lease payments, so this is the minus to offset the distorted plus of the 'depreciation' - but of course when FCF is traditionally calculated we dont look at the financing section, we just take OCF, and then subtract PP&E as a proxy for Capex. So basically the real FCF is about half what it looks like due to the stupidity of IFRS 16. Now we can no longer rely on services like Quick FS for FCF, we have to go through the Annual Reports and hand calculate for every business. As well as looking for other distortions like SBC & Software capitalisation as Andrew pointed out in his tweet.

So from the AR we have to dig into the notes to uncover the depreciation that is relevant - "Depreciation ? right of use assets" in this case about $22m that directly boosted the fake FCF!



Then we go back to the CF Statement and subtract this 'depreciation' from the OCF, $61m-$22m=$39m then $39m-$7.9m PP&E = $31.1m



so $31.1m/223,321,000 shares on issue, 14c per share FCF, compared to the reported FCF of 24c

For FY22 their FCF has dropped to 9.5c per share against 19c reported