Non-cash transactions on the cash flow statement
Theoretically this seems like a simple question, but my colleagues can't agree on the answer. A company acquires fixed assets (let's say a building worth $100) in a non-cash transaction: it issues $50 in new shares to the building's owner and takes on $50 in debt attached to the building. It's clear enough what happens on the balance sheet, but what about the cash flow statement? Effectively no cash changes hands. So is the transaction "invisible" here, or do we simulate the skipped steps (e.g. the company raises $50 in debt and $50 from equity issuance, and then sees $100 outflow for capex)?
You do not simulate anything on the CF stmt for this transaction you described (assuming Target debt and issuing Acquirer equity to Target). In reality, the example you gave is unlikely to occur. I wouldn't expect an Acquirer to dilute its ownership in acquiring a hard asset such as a building (maybe in RE investing, which I'm unfamiliar with) and existing debt typically have a change-of-control provision (maybe there are portability rights in RE, again not familiar with RE investing).
Thanks. This is not a hypothetical, this is a real transaction. My understanding is that the acquirer will take ownership of an SPV that owns the $100 asset and has $50 in debt. The seller of the SPV will receive the shares worth $50 (and will no longer have to repay the $50 in debt, which was taken on to build the asset). Presumably the lawyers have worked out any change-of-control issues.
depends on how you model it .. generally in M&A models (since you mentioned an SPV) balance sheet adjustments are made and the cashflow for the adjusted year is not included, because the model flow would be reversed .. normally the cash at the end of the cashflow flows into the cash of the balance sheet.. so the debt assumed (if debt is refinanced then it is paid off hence removed), can be paid off for the projected years using a schedule, any additional debt you take on will need to be paid off in the projected years, the asset will be added to PPE, you can go through the Goodwill calculation and the purchase premium if you would like for building a typical M&A model and calculate the DT, depreciation, interest charge, etc .. however, if you want you could take in the adjusted year's change for calculating cashflow changes for that year in the same way projections are done for a bank .. just follow typical ways of modelling and you will end up getting your answers
however if there is not an SPV based transaction then it should be a simple acquisition and all the transactions should be shown (via projections) for year in which the building is being acquired, since it is just a piece of property and not a separate entity, the shares issued will be recorded as well (in the company's notes it willl be stated why the shares are issued)
Financial modelling Basics - where do you link those non-cash related b/s item movement in cashflow statement. (Originally Posted: 10/24/2017)
Hi Guys,
Please help me with this.
An typical example is lease.
When you have the capital lease in your book, you assume the assets with lease liabilties directly on your book. In theory, you shall not link the increase of those leased assets with any capex item you create in the CFI section.
However, almost all the financial modelling books/course just link it to the capex anyway.
There are other B/S items that increase/decrease without influencing cashflow (for example, pension assets or liabilties). What are the best practice to deal with them when you create a model?
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