FM eBook - Part 2-financial modelling

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Financial Modeling E-book

Part 2 of 4


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Depreciation Schedule Overview

Private and Confidential – Not for Circulation 2

Depreciation Schedule

Create the required line items

Reference net sales as the driver

Enter past capital expenditures

Project capital expenditures estimated over the forecast period

Reference past PP & E balances

Depreciation Expense

• Forecasted depreciation from existing PP & E

• Forecasted depreciation from new Capex

• Calculate the Total Depreciation Expense

Complete Net PP & E table

Calculate relevant ratios

Consider the Capex and PP & E and make adjustments (smoothen the curve!) as required

Link up the following in the model:

• Depreciation Expense to Income Statement

• Depreciation and Capex to Cash Flow Statement

• Net PP & E to Balance Sheet


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Depreciation Schedule - Sample

Set up the Depreciation Schedule

Set up the line items

Reference Net Sales

Input past capital expenditures

Arrive at Capex as a % of Net Sales


Calculations Input Past Capex

Reference from

Income Statement


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Forecasted Capital Expenditures

Sources: research, management projections, MD & A

Capex as % of Sales in case no management guidance is available

Use your judgment based on industry knowledge and other reasonable drivers


Input, based on research,

management guidance Common driver if

projected Capex is not available

Forecast


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Reference past information

Typically difficult to reconcile past PP & E data

Past “asset sales” may be a balancing item (plug)

Include past information that would be useful for estimating and analysis


Calculations

Referenced from

Income Statement

Referenced from

Balance Sheet

Need to be reconciled with a plug


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Depreciation Schedule – trend analysis

Projecting Depreciation from Existing PP & E

What is the expected trend of depreciation from existing PP & E


Time

Dep

recia

tio

n f

ro

m E

xis

tin

g P

P&

E


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Using past data to forecast depreciation

Be careful to eliminate land from the existing PP & E to arrive at the “depreciable PP & E”

Estimate remaining useful life, a) divide last year’s accumulated depreciation by last year’s depreciation expense (b) divide depreciable PP & E by last year’s depreciation expense

To forecast estimated depreciation from existing assets, use any of the accelerated depreciation methods to account for the varying useful lives of assets

Please note that the estimate is subject to change


Forecasts


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Depreciation on forecasted Capex

Reference forecasted Capex into the depreciation table

Assume a useful life for the assets based on existing policies

The straight line method with Capex assumed at mid-year is a common practice

Please note that the estimate is subject to change


References Drivers

Forecasts

Mid Year Capex convention


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Calculate Total Depreciation Expense for the forecasted period


Calculations


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Fill in the PP & E table and calculate ratios for the forecast period

Do not assume asset sales unless supported by management discussion


Calculations

Assumption References &

Calculations


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Make adjustments to smoothen the trend over the forecast period

Depreciation in the first forecast period should be less than the last historical year as assets finish depreciating

Simple assumption would be to straight line existing PP & E


Adjust to smooth

forecasted depreciation


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Make adjustments to smoothen the trend over the forecast period

Adjust useful life as required to “smooth” forecast depreciation transition

Depreciation as % of PP & E and as % of Capex can be useful ratios


Adjust to smoothen

forecasted depreciation


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Depreciation Schedule – Link to Income Statement

Link forecasted depreciation expense to Income Statement


Referenced from



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Depreciation Schedule – Link to Balance Sheet

Link forecasted PP & E to Balance Sheet


Referenced from



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Depreciation Schedule – Link to Cash Flow Statement

Link forecasted depreciation expense

Link forecasted Capex


Referenced from



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Illustrative Flow of Funds


Income

Statement

Cash Flow

Statement

Balance

Sheet

Working

Capital

Sales

COGS

Change in WC

Working Capital

Working Capital & Depreciation Schedules

PP & E,

Depreciation

Depreciation


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Amortization Schedule Overview

Amortization – creating the schedule

Create the lines items

Reference net sales as a driver

Fill in details of past additions to intangibles

Forecast estimated additions to intangibles

Reference past intangibles balances

Amortization expense:

• Forecast amortization from existing intangibles

• Forecast amortization from additions to intangibles

• Calculate total amortization expense

Complete the amortization table and calculate the required ratios

Link up the following:

• Amortization to Income Statement

• Amortization and additions to intangibles to Cash Flow Statement

• Intangibles to Balance Sheet



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Amortization Schedule - Sample

Setting up the Amortization Schedule

Create the amortization line items

Reference to Net Sales

Historical data on additions to intangibles

Check footnotes for details of intangibles


Input

Additions Calculations

Referenced from

Income Statement


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Forecast additions to intangibles

Check if the company is purchasing new intangibles


Simplified assumption

of constant amount


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Link up past information

Typically past data does not reconcile

Consider historical data on additions to intangible as a plug

Include past information that may be useful for forecasting/ analysis


Will need a plug to reconcile

Referenced from BS

Calculations

Referenced from Income Statement


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Forecasting amortization from existing intangibles

Consider sum-of-the years or any accelerated method

Estimate the remaining useful lives of existing intangibles

Consider straight line method to keep amortization account constant


Estimate

Forecasts


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Forecasting amortization from estimated additions to intangibles

Reference forecasted additions to intangibles into the table

Make reasonable assumptions on useful life (read through accounting policies and get a feel of industry norms)

Straight line method with additions assumed at mid year is popular


Reference Drivers

Convention of Mid Year Additions

Forecasts


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Arrive at total amortization expense for the forecast period


Calculations


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Complete the amortization table and calculate the ratios for the forecast period

Do not assume sale of intangibles unless backed by management discussion


Calculations

Assumption

References and

calculations


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Income Statement - Sample

Link up forecasted amortization expense to Income Statement


Referenced from

Amortization Schedule


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Balance Sheet – Sample


Link up forecasted net intangibles

Keep Constant

Referenced from



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Cash Flow Statement - Sample

Link up forecasted amortization expense

Link up forecasted additions to intangibles


Referenced from



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Income

Statement

Cash Flow

Statement

Balance

Sheet

Working

Capital

Sales

COGS

Change in WC

Working Capital

Working Capital, Depreciation & Amortization Schedules

PP & E,

Depreciation

Depreciation

Intangibles,

Amortization

Am

ort

ization

Intangibles

Am

ort

ization


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Other Long Term Items Overview

Use the schedule to include all remaining balance sheet items

Items with no specific drivers

Create the required line items

Reference historical balances

Forecast balances (keep constant if no specific drivers in order to have neutral impact on cash flows)

Calculate Cash Flows

Link up with Balance Sheet and Cash Flow Statement



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Other Long Term Items Schedule - Sample

Create the Other Long Term Items Schedule

Include all long-term items without specific drivers

Reference past balances from Balance Sheet

Calculate the past changes


Calculations

Calculations

Referenced from BS


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Forecast future balances

Keep the Long Term items constant for projected years in case of no visible drivers

First forecasted year should be referenced to past balances (mark in blue) in order to keep the amount constant


Reference to last year,

assuming constant value


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Changes from other long term assets and liabilities

Calculation should total to Zero if the items are held constant


Calculations


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Balance Sheet - Sample

Link the forecasted long term items to the Balance Sheet


Referenced from

Other LT items Schedule


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Cash Flow Statement - Sample

Link the forecasted change in long term items to Cash Flow Statement


Referenced from

Other LT items Schedule


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Working Capital, Depreciation, Amortization and Other LT Items Schedules

Income

Statement

Cash Flow

Statement

Balance

Sheet

Working

Capital

Sales

COGS

Change in WC

Working Capital

PP & E,

Depreciation

Depreciation

Intangibles,

Amortization

Am

ort

ization

Intangibles

Am

ort

ization

Other Long

Term Items


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FM eBook - Part 2-financial modelling

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