Our previous column reviewed the improvements in financial reporting that will follow from a new standard requiring capitalization of all material leases. When that reform is implemented, it will replace a 30-year-old standard with practices that should have been put in place, well, 30 years ago.As we described, moving to capitalization will have many effects, the most obvious being the introduction of a new liability to the lessee's balance sheet. It will also put a new asset into the base of the reported return on assets ratio at an amount that currently cannot be estimated from the footnote.
Capitalization will also move amounts around in the income statement and cash flow statement. Specifically, rent expense will be disaggregated into interest and depreciation, thus increasing the reported EBITDA; this change will also increase operating margins by moving the interest component from operating to financial income. In terms of cash flow, the reform will increase the reported operating cash inflow while increasing the reported financing cash outflow.
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