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US GAAP vs. IFRS in Valuation and Financial Modeling [REVISED]
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- Опубликовано: 15 авг 2024
- In this tutorial, you’ll learn the key differences between U.S. GAAP and IFRS and how they directly affect companies' financial models and valuations.
Resources:
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Table of Contents:
0:00 Introduction
3:07 Part 1: Differences on the Financial Statements
8:14 Part 2: How to “Convert” IFRS Cash Flow Statements
14:45 Part 3: Leases, Valuation Multiples, and the DCF Analysis
21:31 Part 4: More Advanced Topics
23:33 Recap and Summary
Lesson Outline
Under both major accounting systems, the Income Statement and Balance Sheet are largely the same. Some items may have slightly different names, but the Income Statement still starts with Revenue, shows Expenses, and finishes with Net Income or After-Tax Profits.
The Balance Sheet still has Current and Non-Current Assets and Liabilities and an Equity section, and Assets = Liabilities + Equity.
The differences emerge mostly on the Cash Flow Statement. U.S. companies typically start with Net Income and adjust for non-cash items, but non-U.S. companies might start with Operating Income, Pre-Tax Income, or direct cash receipts and payments instead.
Items may also be in more random locations, such as Dividends appearing in Cash Flow from Operations.
Leases are also quite different because the Operating Lease Expense is split into Interest and Depreciation elements under IFRS, while it is just a simple Rental Expense on the Income Statement under U.S. GAAP.
To fix these issues, you need to find a reconciliation in the company’s filings that shows the bridge between Operating Income, Pre-Tax Income, or Net
Income and Cash Flow from Operations.
You can then rearrange the Cash Flow Statement so that it starts with Net Income, adjusts for non-cash charges, includes the Change in Working Capital, and then proceeds to Cash Flow from Investing and Financing, neither of which should change much.
In terms of valuation multiples and the DCF analysis, Operating Lease Assets and Liabilities appear directly on the Balance Sheet under both accounting systems now, but the Income Statement and Cash Flow Statement presentations differ.
Under U.S. GAAP, if you count Operating Leases as a Debt-like item in Enterprise Value, you can no longer use EBIT and EBITDA because you must exclude the full Rental Expense in the denominator of valuation multiples.
So, the appropriate pairing is TEV Including Operating Leases / EBITDAR.
Under IFRS, a metric like EBITDA already excludes the full Lease Expense, so it’s easiest to count Operating Leases as Debt in Enterprise Value and pair Enterprise Value with EBITDA directly.
When comparing U.S. and non-U.S. companies, stick to TEV Including Operating Leases / EBITDAR to make things as simple as possible.
In a DCF analysis, it’s easiest to deduct the full Lease Expense, which is easy under U.S. GAAP since there’s already a full deduction for it in Operating Income.
Under IFRS, it’s trickier because Operating Income (EBIT) deducts only the Depreciation element.
Therefore, you need to adjust by deducting the Interest element from EBIT, and then you multiply that by (1 - Tax Rate) to calculate NOPAT for use in the Unlevered FCF calculation.
When you add back D&A, you cannot add back the Depreciation element of the Lease Expense! So, you must review the filings and add back only the non-lease portions of Depreciation.
If the company does not disclose these, you could approach this process differently by adding back the Lease Depreciation in Operating Income to exclude the Lease Expense in EBIT and NOPAT completely.
You would then count the Operating Leases as a Debt-like item at the end of the analysis in the Implied Enterprise Value to Implied Equity Value bridge.
However, if you do this, some people might argue that you would also have to count Operating Leases in the WACC calculation, which is very subjective. Therefore, we prefer to deduct the full Lease Expense to avoid this problem.
![What is Free Cash Flow? [REVISED] Meaning, Calculations, Variations, and IFRS Differences](http://i.ytimg.com/vi/A1lS4KnANBw/mqdefault.jpg)
Files & Resources:
youtube-breakingintowallstreet-com.s3.amazonaws.com/105-25-US-GAAP-vs-IFRS-Slides.pdf
youtube-breakingintowallstreet-com.s3.amazonaws.com/105-25-US-GAAP-vs-IFRS.xlsx
youtube-breakingintowallstreet-com.s3.amazonaws.com/105-25-EasyJet-Financial-Statements.pdf
youtube-breakingintowallstreet-com.s3.amazonaws.com/105-25-Vivendi-Key-Extracts.pdf
youtube-breakingintowallstreet-com.s3.amazonaws.com/105-25-Target-Financial-Statements.pdf
youtube-breakingintowallstreet-com.s3.amazonaws.com/105-25-Telstra-Financial-Statements.pdf
youtube-breakingintowallstreet-com.s3.amazonaws.com/105-25-Tencent-Financial-Statements.pdf
Table of Contents:
0:00 Introduction
3:07 Part 1: Differences on the Financial Statements
8:14 Part 2: How to “Convert” IFRS Cash Flow Statements
14:45 Part 3: Leases, Valuation Multiples, and the DCF Analysis
21:31 Part 4: More Advanced Topics
23:33 Recap and Summary
This was excellent! And the supplemental materials also fantastic! 🙏
Thanks for watching!
Here’s a confession: I love you! Thanks so much ❤️
Thanks for watching!
Quite helpful as always!. I do appreciate very much your contents.
Thanks for watching!
Very good explained. İf possible can we have the Excel file for the download? Many thanks.
Thanks. If you click "Show More" under the video and follow the links, you can get the files.
i didn't get why operating lease is accounted just as an expense in the ASC 842 and not as depreciation & amortization (RoU)+ interest, because since 15 Dicember 2021, I think IFRS 16 and ASC 842 are very similar and in your video gonna change the entire speech.
I'm not sure what you're referring to because everything here reflects ASC 842 and IFRS 16, both of which went info effect for many companies in 2019.
The treatment of leases is quite different *on the financial statements* because under U.S. GAAP, companies record the Operating Lease Expense as "Rent" or a simple straight-line expense on the Income Statement. But under IFRS, they split it into Interest and Depreciation elements, so effectively Operating Leases and Finance Leases are treated the same way. Feel free to verify this by looking at the statements of any U.S. vs. international company.
Behind the scenes, off the financial statements, the ROU Asset and Lease Liability on U.S. GAAP financial statements *change* the same way, i.e., by calculating Lease Depreciation, Lease Interest, and Lease Principal Repayments, and carrying them through those Balance Sheet line items. But you do not see any of that directly on the statements, at least not for Operating Leases. Please see:
mergersandinquisitions.com/lease-accounting/
@@financialmodeling oh Sorry, I gotcha just now, thank you!
Amazing explanation! Really, thank you so much!
Thanks for watching!
Thank you So Much for Download Option
Great Work 👍❤
This is great! Thank you very much
Thanks for watching!
Good video. Thank you very much
Thanks for watching!
Just to clarify, in US GAAP, if we consider operating lease in the WACC calculation, we could no longer use EBITDA in order to calculate enterprise value, but would need to use EBITDAR. Then deduct lease liability from enterprise value to get the fair market value of equity ? what would be the easiest way, to include lease liability or exclude from the debt structure ? thanks !
Yes, that is correct, but you are mixing and matching some concepts that don't really go together - if you're calculating WACC, you're valuing a company with a DCF, not with simple multiples. So this EBITDA vs. EBITDAR distinction doesn't really matter.
The easiest method, by far, is to simply not count the lease liability in the bridge and not add it to Enterprise Value. That simplifies everything, makes WACC easier to calculate, and it means you can use normal EBITDA and EBITDA multiples. Treating leases as "capital" adds nothing and over-complicates the analysis for no gains.
it's hard to convert from direct to indirect method of cashflow in my country because the accounting policy is almost based on IFRS and most public companies don't provide reconciliation on financial statements. Any solutions?
watching it :)
Thanks for watching!
Do u Have any website for downloading the supporting excel sheets used in ur videos? Ur work is enlightening. Keep it Up!
Click "Show More" and scroll down to click the links and download the Excel files.
I try to find documents about US GAAP. Could you please share or give a help?
Sorry, not sure what you are asking for... you can do Google searches to find documents from the Big 4 accounting firms.
Tell me please, why interest expense and other income from non-core business activity is a part of CFO?
is it operating activity?
It's because the company is adjusting CFO to reflect the net interest expense if it starts CFO with something like Operating Income rather than Net Income. Although interest if financial in nature, most companies do deduct it from their Cash Flow from Operations.
You will know why if your investing universe are debt intensive companies.....
could you please share the excel file in your video?
Click "Show More" and click the links.
@@financialmodeling thank you