EBITDA (Earnings before interests, taxes, depreciation and amortization) is equivalent to Gross Operating Income (in Spanish, Resultado Bruto de Explotación) because it reflects the excess of operating income over expenses related to those revenues in a period of time and, it is commonly used as a multiple to valuing companies. It is a measure that normally is not defined in the framework of the financial information presented by entities so they need to build it by themselves for using it to analyze the performance in a specified period.
EBITDA is useful for analysts and users in general, because:
- It works to compare the performance of a business with others within the same sector and with the same business in other periods due to the fact that it shows the resources obtained from the operations and excludes any extraordinary or non-recurrent item,
- It measures the performance of the business by isolating the influence of financing decisions or the fiscal framework in which the entity operates, that could affect its economic results but have no direct connection with the business itself.
Being a non-standardized measure, sometimes the EBITDA brings misunderstandings and misinterpretations.
For example, many analysts use EBITDA as an expression of the cash flow generated by an entity in a period. For this to be the case, changes in the current working capital of the entitty in the analyzed period (current operating assets less current operating liabilities) would have to be taken into account, in addition to the adjustments for impairment of current assets and the change in the operating provisions, whether short-term or long-term. Another example that EBITDA could lead to a misinterpretation of an entity’s situation at any given time, could be when in calculating it non-recurring revenues or expenses have been considered, bringing distortions and making the entity incomparable with others within the same sector, or with the same entity in different periods.
These reasons have led the AECA (Spanish Association of Accounting and Business Administration), in December 2016, to express its Opinion No.4 Concept and use of EBITDA as a measure of Gross Operating Income, with the purpose of offering recommendations regarding the presentation and use of the EBITDA.
The Opinion of the AECA Accounting Principles and Standards Committee has two parts:
- In the first, recommendations are made to ensure that the EBITDA figures are calculated and presented in a consistent manner from period to period, explaining their composition from the items in the Profit and Loss Account for the year.
- In the second part, EBITDA is formulated to help entities that want to use it on a regular basis, calculating and presenting measures based on recurring resources generated by the entity.
Presentation of EBITDA
In order to be useful to analysts of financial statements and other financial reports, the entity that includes the EBITDA as an information measure of its performance, must first of all select only the recurring revenues and expenses related to the operating activities excluding the consumption of fixed capital.
Any financial or fiscal result such as interests on debts or financial income, as well as income tax, should be excluded when calculating EBITDA, since they are not part of the results of the business operation in itself.
Sufficient information should be included to present a reconciliation table, where should be clear that EBITDA is obtained from other items usually included in the financial statements and defined in the conceptual framework that applies to it.
The usual way to make the reconciliation with the items that appear in the financial statements has a profile, in general, such as the following:
RESULTS OF THE YEAR (continued operations)
+/- Income tax
– Financial income
+ Financial expenses
= RESULTS FROM OPERATIONS
+ Depreciation and amortization (net)
– Non-recurring operating income
+ Non-recurrent operating expenses
= GROSS OPERATING INCOME (EBITDA)
It is recommended that the calculation procedure used, as well as the resulting figure, when presented, be made in line with the Opinion document, expressly stating that the calculation of the EBITDA has been made following the recommendations of the Commission of Principles And AECA Rules -OE 4 / 2016-.
If the procedure differs in a period, that is to say that different variables are used or the procedure of calculation has changed, the entity should treat it like a change in the accounting criteria, which means that:
- Will explain, both the nature and the cause that caused the change made,
- Will explain the reasons the change made produce more reliable and relevant information about the entity’s performance and,
- Will apply the change retroactively for all comparative figures presented together with those for the current period or period, as well as for all derived measures (percentages, coefficients, ratios or differences) based on EBITDA.
Calculation of EBITDA
To calculate EBITDA, the entity must select the recurring revenues and expenses from operations, which implies identifying or delimiting the business activity. Recurring activities include all those that are repeated or may be repeated period after period, as a result of the usual management efforts and actions of those responsible for the operations of the entity, excluding any financial or fiscal results.
The procedure chosen is the indirect method, adjusting the result of the year by items that do not related to the business in itself or are not recurrent. The adjustments are as follows (earnings or profits are subtracted, while expenses or losses are added up):
(I) Results of the year for discontinued operations, net of taxes.
(Ii) Income tax.
(Iii) Financial result.
(Iv) Impairment and result from disposal of property, plant and equipment.
(V) Non-financial fixed assets and other subsidies.
(Vi) Depreciation of property, plant and equipment.
(Vii) Amortization / Impairment of goodwill or consolidation.
(Viii) Negative difference of business combinations.
(Ix) Work performed by the company for its assets (amortizations).
(X) Other non-recurring results.
The purpose of Opinion No. 4 is not to establish a specific procedure for calculating EBITDA, but it does include a summary model so that interested companies can calculate it based on the data used by Spanish companies, acording to the codes of the Individual Profit and Loss Account of the General Chart of Accounts, contained in the models of deposit of Annual Accounts in the Commercial Registries.
In addition to the purpose of clarifying and standardizing the EBITDA calculation by entities, especially those that begin to publish and spread EBITDA, these guidelines facilitate a common framework of interpretation for analysts and other users of financial statements, both to analyze the measures that include the entities, as to build their own using general acceptance procedures.
To download Opinion No, 4 and attachment, click here.