General Electric‘s cash problem will look better in 2019 after an accounting change takes effect, an accounting professor says.
For reporting periods beginning after December 15, 2018, all public US companies should apply a new accounting standard that requires them to recognize financing-lease assets and operating-lease assets on their balance sheets. The previous accounting term only required companies to recognized capital lease-assets.
With the financing-lease assets and operating-lease assets now being counted as capital expenditures (CAPEX), companies’ free cash flow (operating cash flow minus capital expenditure) will look different than they used to, Charles Mulford, professor of accounting at Georgia Institute of Technology, told Markets Insider. Companies that are not growing their fixed assets quickly, or are reducing them, such as General Electric, will see a positive adjustment in their free cash flow, and vice versa, he added.