medium · Principles of Finance financial-statements-markets-wc
Under ASC 842, a firm enters into a 5-year operating lease with annual payments of 1M. The present value of the lease payments at the firm's incremental borrowing rate is4M.
How does this operating lease impact the firm's EBITDA compared to the treatment before ASC 842?
- EBITDA decreases because the firm must now record depreciation on the Right-of-Use asset.
- There is no change to EBITDA because the lease expense is still recognized as a single operating expense.
- EBITDA rises because the single lease payment is now split into an interest piece and an amortization piece.
- EBITDA increases across the board because ASC 842 now capitalizes every lease as debt on the balance sheet.
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