How do I forecast Operating Lease Assets and Liabilities on the Balance Sheet?
Hey guys,
Ever since the FASB has made it mandatory to report Operating Lease Assets and Liabilities on the Balance Sheet, I've not been sure how to forecast it reasonably. I understand that you can find the PV of Lease Payments and subtract interest expense for liabilities, or subtract depreciation for assets, etc. But when the lease payment is actually due (current year), do we just count that as principal repayments and have the remaining lease payments PV on the balance sheet?
Would love clarity on forecasting this, if anyone should have the insight. Thanks!
bump. curious about this as well
your explanation sounds right to me, for ballpark figure. often times in my experience companies don’t bother estimating that and just flatline both the asset and liability side for their projections. usually fine for our purposes but not precise obviously
I go back 10 years and capitalize leases each year so I can get a sense for how their leased assets have changed over time (usually pretty consistent) and then going forward I grow leased assets as a percentage of sales and treat the change similar to capex. I add back the implied interest expense to EBIT and I assume that the lease liability is the same as the lease asset as a % of sales (usually the only difference is a deferred rent expense component that gets rolled into the lease liability, and the difference often is not very large). Even with companies beginning to report under the new lease accounting standard I still prefer to capitalize leases myself and then compare what I have to what the company has reported. I don't do anything with the rent expense, I assume that the non-interest component of rent expense is just a normal operating cost (cost of operating the asset) and already captured in my margin assumptions.
Can you screenshoot your excel model with lease assets and liabilites projections?
http://pages.stern.nyu.edu/~adamodar/
Go to tools > corporate finance > Scroll down to all-in-one valuation models > download fcffginzu.xls
In there he has a tab for capitalizing leases that is pretty good and very similar to what I have incorporated into my models. To forecast operating leases forward, go % of sales like you would for working capital items. Same with Lease Liabilities. Just note that if a company defers rent payments consistently, the lease liability will be larger than the ROU asset they report.
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