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In principle, if an operating lease is genuinely an operating expense, it must continue to be shown as an expense and treated accordingly. However, if it was structured to avoid taking on debt, it must be capitalized. Capitalized simply means that it must be treated as a capital asset.
In practice, you treat the operating lease in accordance with the rules prescribed by the SEC. We address the steps required to capitalize an operating lease on this page
Companies can either buy or lease assets it needs on a long-term basis. For example, a firm can buy a truck required for the business or lease the truck. A company usually leases a long-term asset if it either 1) does not have the money to buy it and 2) does not want to borrow the capital required to buy these assets. The business case should be the driver of this decision. Sometimes, companies may lease the asset because it does not have money to buy the asset or wants to avoid taking on more debt. The SEC has prescribed accounting rules that specify the conditions required to treat a lease as an operating expense or a capital item.
SEC regulations aside, we address how you should deal with operating leases when preparing cash flows for a DCF valuation on this page.
International firms will receive cash flows in a variety of currencies. Often you are called to value an overseas operation. In these circumstances, you have to decide on the currency you will use for estimating cash flows in your DCF model. On this page, we discuss if the choice of currency of cash flows matters when valuing an international firm?
Accounting rules for currency translation can be very complex. We only discuss the basics from a valuation perspective and provide a simple Microsoft Excel illustration showing how the cash flow of a Brazilian firm is converted to USD given the current exchange rates and interest rates in Brazil and the USA.
Many valuation models start with EBIT. EBIT includes all kinds of income earnings and expenses before only interest and tax expenses. However, not all revenues and expenses that show up in EBIT must be valued when evaluating a business. What line items found in EBIT must be removed when preparing cash flows for a DCF? This article discusses this question in detail and gives you examples of different types of line items that you must remove from EBIT in a DCF valuation. These include incomes, expenses, nonrecurring line item, temporary items, etc.