Changes in Working Capital for FCF
I have seen the calculation for change in WC on CF stmt done many different ways for calculating FCF. For context, some FCF analysis I've looked at takes into account the change in all operating assets and liabilities from CF while others remove items such as change in Op lease liabilities from the calculation of change in WC. Can someone explain what's the logic behind the exclusion/inclusion criteria for the same items in different deals.
This is for commercial banking if it helps.
If it's on the balance sheet, then it's not an operating lease. Op leases can be capitalized for pro forma debt calculations, but then debt would not be part of your WC calculation, therefore not part of your FCFF, but would be part of your FCFE calc.
My understanding was that given both operating leases and finance leases have to be capitalized on the balance sheet since the implementation of ASC 842, however, for operating leases the lease/rent payment is factored into the operating expenses hence the usage of EBITDAR by some institutions. I can see why in that case we exclude the change in Op lease on the CF statement from our change in WC calculation.
I'm having a hard time with this because I see a lot of FCF calculations which take into consideration the entire change in operating assets and liabilities from CF. And I have also seen it where folks exclude it and when I asked their reasoning was that the approach is to exclude long-term items from the WC calc.
If it's not apparent, I'm very confused on who's right and wrong cause it can't just be a matter of preference....
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