Depreciation and Amortization Schedules

Financial Modeling E-Book Part 2 of 4
Financial Modeling E-book

Part 2 of 4
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Depreciation Schedule Overview Financial Modeling E-Book Part 2 of 4

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 Financial Modeling E-Book Part 2 of 4
Calculations
Input Past Capex
Reference from Income Statement
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
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Depreciation Schedule - Sample

Forecast
Input, based on research, management guidance
Common driver if projected Capex is not available
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
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Need to be reconciled with a plug Referenced from Balance Sheet
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
Referenced from Income Statement
Calculations
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Depreciation Schedule trend analysis Financial Modeling E-Book Part 2 of 4

Projecting Depreciation from Existing PP & E
What is the expected trend of depreciation from existing PP & E
Depreciation from Existing PP&E
Time
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Forecasts
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 years accumulated depreciation by last years depreciation expense (b) divide depreciable PP & E by last years 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
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Mid Year Capex convention
Forecasts
References
Drivers
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
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Calculations
Calculate Total Depreciation Expense for the forecasted period
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Assumption
References & Calculations
Calculations
Fill in the PP & E table and calculate ratios for the forecast period
Do not assume asset sales unless supported by management discussion
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Adjust to smooth forecasted depreciation
Make adjustments to smoothen the trend over the forecast period
Depreciation in the first forecast period should be l ess than the last historical year as assets finish depreciating
Simple assumption would be to straight line existing PP & E
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Adjust to smoothen forecasted depreciation
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

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Depreciation Schedule Link to Income Statement Financial Modeling E-Book Part 2 of 4
Referenced from Depreciation Schedule
Link forecasted depreciation expense to Income Statement
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Depreciation Schedule Link to Balance Sheet Financial Modeling E-Book Part 2 of 4
Link forecasted PP & E to Balance Sheet
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Depreciation Schedule Link to Cash Flow Statement Financial Modeling E-Book Part 2 of 4
Link forecasted depreciation expense Link forecasted Capex
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Illustrative Flow of Funds Financial Modeling E-Book Part 2 of 4

Working Capital & Depreciation Schedules
Depreciation Sales
COGS
Income Statement
Working Capital
Change in WC Working Capital
Cash Flow Statement
PP & E, Depreciation Balance Sheet
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Amortization Schedule Overview Financial Modeling E-Book Part 2 of 4

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 Financial Modeling E-Book Part 2 of 4
Input Additions
Calculations
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
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Simplified assumption of constant amount
Forecast additions to intangibles

Check if the company is purchasing new intangibles
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Will need a plug to reconcile
Referenced from BS
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
Calculations
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Forecasts
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
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Convention of Mid Year Additions
Forecasts Reference Drivers
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
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Calculations
Arrive at total amortization expense for the forecast period
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References and calculations
Assumption
Calculations
Complete the amortization table and calculate the ratios for the forecast period Do not assume sale of intangibles unless backed by management discussion
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Income Statement - Sample Financial Modeling E-Book Part 2 of 4
Referenced from Amortization Schedule
Link up forecasted amortization expense to Income Statement
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Balance Sheet Sample Financial Modeling E-Book Part 2 of 4
Keep Constant
Link up forecasted net intangibles
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Cash Flow Statement - Sample Financial Modeling E-Book Part 2 of 4
Link up forecasted amortization expense Link up forecasted additions to intangibles
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Working Capital, Depreciation & Amortization Schedules
Depreciation Sales
COGS
Income Statement
Working Capital
Amortization
Change in WC Working Capital
Cash Flow Statement
Amortization
PP & E, Depreciation
Balance Sheet
Intangibles, Amortization
Intangibles
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Other Long Term Items Overview Financial Modeling E-Book Part 2 of 4

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 Financial Modeling E-Book Part 2 of 4
Calculations
Referenced from BS
Calculations
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
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Reference to last year, assuming constant value
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
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Calculations
Changes from other long term assets and liabilities

Calculation should total to Zero if the items are held constant
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Balance Sheet - Sample Financial Modeling E-Book Part 2 of 4
Referenced from Other LT items Schedule
Link the forecasted long term items to the Balance Sheet
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Cash Flow Statement - Sample Financial Modeling E-Book Part 2 of 4
Referenced from Other LT items Schedule
Link the forecasted change in long term items to Cash Flow Statement
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Working Capital, Depreciation, Amortization and Other LT Items Schedules
Depreciation Sales
COGS
Income Statement
Working Capital
Amortization
Change in WC
Working Capital
Cash Flow Statement PP & E, Depreciation
Amortization
Balance Sheet
Other Long Term Items
Intangibles, Amortization
Intangibles
TM
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Depreciation and Amortization Schedules

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Depreciation and Amortization Schedules

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Financial Modeling E-Book Part 2 of 4

Financial Modeling E-book

All Rights Reserved. Corporate Bridge

Depreciation Schedule Overview Financial Modeling E-Book Part 2 of 4

Create the required line items

All Rights Reserved. Corporate Bridge

Private and Confidential Not for Circulation

Depreciation Schedule - Sample Financial Modeling E-Book Part 2 of 4

Input Past Capex

Reference from Income Statement

Set up the Depreciation Schedule

All Rights Reserved. Corporate Bridge

Private and Confidential Not for Circulation

Depreciation Schedule - Sample

Financial Modeling E-Book Part 2 of 4

Input, based on research, management guidance

Common driver if projected Capex is not available

Forecasted Capital Expenditures

All Rights Reserved. Corporate Bridge

Private and Confidential Not for Circulation

Depreciation Schedule - Sample Financial Modeling E-Book Part 2 of 4

Need to be reconciled with a plug Referenced from Balance Sheet

Reference past information

Referenced from Income Statement

All Rights Reserved. Corporate Bridge

Private and Confidential Not for Circulation

Depreciation Schedule trend analysis Financial Modeling E-Book Part 2 of 4

Depreciation from Existing PP&E

All Rights Reserved. Corporate Bridge

Private and Confidential Not for Circulation

Depreciation Schedule - Sample Financial Modeling E-Book Part 2 of 4

Using past data to forecast depreciation

All Rights Reserved. Corporate Bridge

Private and Confidential Not for Circulation

Depreciation Schedule - Sample Financial Modeling E-Book Part 2 of 4

Mid Year Capex convention

Depreciation on forecasted Capex

All Rights Reserved. Corporate Bridge

Depreciation Schedule - Sample Financial Modeling E-Book Part 2 of 4

Calculate Total Depreciation Expense for the forecasted period

All Rights Reserved. Corporate Bridge

Private and Confidential Not for Circulation

Depreciation Schedule - Sample Financial Modeling E-Book Part 2 of 4

References & Calculations

All Rights Reserved. Corporate Bridge

Private and Confidential Not for Circulation

Depreciation Schedule - Sample Financial Modeling E-Book Part 2 of 4

Adjust to smooth forecasted depreciation

Make adjustments to smoothen the trend over the forecast period

All Rights Reserved. Corporate Bridge

Private and Confidential Not for Circulation

Depreciation Schedule - Sample Financial Modeling E-Book Part 2 of 4

Adjust to smoothen forecasted depreciation

Make adjustments to smoothen the trend over the forecast period

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

All Rights Reserved. Corporate Bridge

Private and Confidential Not for Circulation

Depreciation Schedule Link to Income Statement Financial Modeling E-Book Part 2 of 4

Referenced from Depreciation Schedule

Link forecasted depreciation expense to Income Statement

All Rights Reserved. Corporate Bridge

Private and Confidential Not for Circulation

Depreciation Schedule Link to Balance Sheet Financial Modeling E-Book Part 2 of 4