Intangible assets (BOP) + purchases – amortization = intangible assets (EOP) Line Item (see formula above)
That said, some industries (like REITs) require recurring asset sale forecasts. Most companies do not regularly offload assets as a matter of course, so barring specific guidance, assume no assets sales. Approach 2: Depreciation waterfall analysis (useful when companies provide sufficient detail).Approach 1: Forecast as a % of capital expenditures using historical depreciation as a guide.In the absence of guidance, assume purchases in line with historical trends as a % of sales. Use equity research or management guidance when available. PP&E (BOP) + capital expenditures ‑ depreciation‑ asset sales = PP&E (EOP) Line Item (see formula above) This creates a layer of complexity in the forecasting, as illustrated below: The PP&E roll-forward Unlike working capital, PP&E and intangible assets are depreciated or amortized (with a few notable exceptions like land and goodwill). In other words, the more revenue, the more capital spending and purchases of intangibles we expect to see. These line items are also driven largely by the company’s operations.
The largest component of most company’s long term assets are fixed assets (property plant and equipment), intangible assets, and increasingly, capitalized software development costs.
This is where the forecasting and calculations should take place. However, for forecasting purposes, they can be combined because they are forecast using the same drivers.Īll forecasting needs to be done in supporting schedules - either in the same worksheet or in dedicated separate worksheets. Conversely, GAAP requires that certain line items be broken out into current and long-term components (deferred taxes and deferred revenue are common examples). In these cases, the line items need to be separated and forecasting approaches should be tailored to the nature of the items.
For example, companies may lump line items with different drivers together. Data is organized in columns ascending from left to right.Ĭompanies present their balance sheet in ways that are not always optimized for analysis. It is recommended that at least two years of historical results are inputted into the model to help provide some context to forecasts.
Before we dive into individual line items, here are some balance sheet best practices (click here for a complete guide to financial modeling best practices): Typically, the main balance sheet section of a model will either have its own dedicated worksheet or it will be part of a larger worksheet containing other financial statements and schedules. Now it’s time to turn to the balance sheet. Based on analyst research and management guidance, we have completed the company’s income statement projections, including revenues, operating expenses, interest expense and taxes – all the way down to the company’s net income. Imagine that we are tasked with building a 3-statement statement model for Apple.