Skip to content

CFA Level I · CFA Level I Exam · Credit Analysis for Corporate Issuers

Two issuers have identical EBITDA. Issuer X leases most of its equipment under IFRS 16 leases recognized on the balance sheet, while Issuer Y owns its equipment and funds it with bank debt. An analyst comparing leverage most appropriately should:

The analyst should include Issuer X's lease liabilities in its debt. Under IFRS 16 they are financing obligations, so including them makes leverage comparable with Issuer Y, whose equipment is financed with bank debt that is already counted.

  1. Aignore lease liabilities for Issuer X because they are operating items
  2. Binclude lease liabilities in Issuer X's debt for a consistent comparisonCorrect
  3. Cexclude Issuer Y's bank debt because it is secured by equipment

Explanation

Under IFRS 16 lease liabilities are financing obligations, so including them in debt makes Issuer X comparable with Issuer Y, whose equipment financing is already debt. Ignoring them understates X's leverage. Excluding secured debt understates Y's leverage.

Did you get it right without looking?

One question tells you little. A timed set on Credit Analysis for Corporate Issuers shows your real accuracy, how long you take and where you lose marks.

Practise Credit Analysis for Corporate IssuersFree diagnostic mock

More Credit Analysis for Corporate Issuers questions