CFM96430 - Interest restriction: group-EBITDA: depreciation and amortisation adjustment

TIOPA10/416(3)

In the calculation of group-EBITDA, an adjustment is made to remove the effects of depreciation and amortisation on relevant assets from the financial statements. This is referred to as the depreciation and amortisation adjustment and is the aggregate of three adjusting figures relating to:

  • Capital (expenditure) adjustment, which removes depreciation, amortisation and other amounts that result from capital expenditure in respect of a relevant asset.
  • Capital (fair value movement) adjustment, which removes fair value movements on the revaluation of a relevant asset.
  • Capital (disposals) adjustment, which relates to amounts of profits or losses on disposal of a relevant asset, computed on the assumption the asset was not depreciated, amortised or revalued. This adjustment reduces the reduction to accounting profits in respect of gains on relevant assets, with the effect that any overall gain on disposal with respect to historic cost is included in group-EBITDA. There is no corresponding adjustment in respect of losses computed by reference to historic cost.

The principles underlying this approach are that:

  • amounts which are commercially similar to depreciation or amortisation, such as other components of an overall loss on a relevant asset (historic cost less disposal proceeds) is brought into account; but
  • an overall gain on an asset (disposal proceeds less historic cost) is not akin to depreciation and therefore should not be subtracted in computing group-EBITDA. This is why the capital (disposals) adjustment is needed.

Further guidance