Depreciation
This article explains how depreciation works in Model Reef.
You will learn:
How depreciation is generated from asset variables.
How it affects P&L, Balance Sheet and Cashflow.
How depreciation links to capex and valuation.
Depreciation is the accounting mechanism that spreads asset cost over its useful life.
How depreciation is generated
Depreciation comes from Asset variables.
For each Asset variable, you configure:
The asset or capex amount.
The start date when the asset is placed into service.
The depreciation method (for example straight line).
The useful life or rate.
Model Reef then calculates a depreciation schedule for the asset over its life.
Depreciation in the P&L
In the P&L:
Depreciation is shown below EBITDA and above EBIT.
It reduces EBIT but does not affect EBITDA.
It is a non cash expense, meaning it does not directly change cash in the period it is recognised.
Multiple assets and asset categories contribute to the total depreciation expense line.
Depreciation in the Balance Sheet
In the Balance Sheet:
Assets are recorded at cost when purchased or as opening balances.
Depreciation reduces the carrying amount of the asset over time.
Model Reef tracks the net asset value after depreciation.
There is no separate accumulated depreciation line displayed by default, but the engine keeps track internally to be able to show carrying values correctly.
Depreciation in the Cashflow Statement and Cash Waterfall
In the Cashflow Statement:
Depreciation itself does not appear as a cashflow, because it is non cash.
Capex appears as an investing cash outflow when the asset is purchased.
In the Cash Waterfall:
Depreciation is not shown as a separate line because it is non cash.
Capex is shown explicitly as a cash outflow in the investing or financing section.
This reflects the economic reality that cash is spent when assets are acquired, even though the expense is recognised over time in the P&L.
Depreciation and valuation
Depreciation affects valuation in several ways:
It shapes EBIT and therefore EBT and tax expense.
It influences free cashflow indirectly via tax and capex.
Free cashflow calculations add back non cash depreciation and subtract actual capex to estimate cash available to debt and equity.
Model Reef's valuation engine uses cashflow rather than depreciation as the core input, but depreciation is still important for realistic earnings and tax.
Related articles
Last updated