- Determinetheperiodoverwhich thebenefitsfrom
the operating expense (such as SG&A) will flow. - Estimatethevalueoftheasset(similartotheresearch
asset)createdbytheseexpenses.Iftheexpensesare
SG&A expenses, this would be the SG&A asset. - Adjusttheoperatingincomefortheexpenseandthe
amortization of the created asset.
Adjustments for Financing Expenses
The second adjustment is for financing expenses that
accountantstreatasoperatingexpenses.Themostsignificant
example is operating lease expenses, which are treated as
operating expenses, incontrast to capitalleases,which are
presented as debt.
Converting Operating Leases into Debt
In Chapter 2, the basic approach for converting operating
leasesintodebtwaspresented.Wediscountfutureoperating
leasecommitmentsbackatthefirm’spretaxcostofdebt.The
present value of the operating lease commitments is then
addedtotheconventionaldebtofthefirmtoarriveatthetotal
debt outstanding.
Onceoperatingleasesarerecategorizedasdebt,theoperating
incomes canbe adjusted in two steps. First, theoperating
leaseexpenseisaddedbacktotheoperatingincome,sinceit
isafinancial expense.Next, thedepreciation ontheleased
asset is subtracted out to arrive at adjusted operating income.