Forecasting Data Types

Entering Gross Fixed Assets

Three financial accounts together calculate gross fixed assets: Gross Fixed Assets (v2170.00), the Gross Book Value of Retired Assets (v2170.03) and Fixed Capital Investment (v2170.01). Fixed Capital Investment represents all capital expenditures for new and replacement equipment, discretionary and non-discretionary.

Entering Gross Fixed Assets in Historical Periods

In historical periods, you input historical values of Gross Fixed Assets (v2170.00) and Capital Expenditures (v2170.01). Gross Retirements (v2170.03) is calculated. In historical periods, the calculation for these accounts follows:

Operation	Gross Fixed Assets (beginning)	Input	$100
+	Capital Expenditures	Input	50
-	Gross Fixed Assets (ending)	Input	130
	Gross Retirements	Calc	$20

Forecasting Gross Fixed Assets

Gross Fixed Assets account

Forecasting the ending balance of Gross Fixed Assets results in Gross Retirements being calculated as:

Operation	Gross Fixed Assets (beginning)	Input	$100
+	Capital Expenditures	Input	50
-	Gross Fixed Assets (ending)	Input	130
	Gross Retirements	Calc	$20

Gross Retirements account

Forecasting Gross Retirements results in Gross Fixed Assets being calculated as:

Operation	Gross Fixed Assets (beginning)	Input	$100
+	Capital Expenditures	Input	50
-	Gross Retirements	Input	20
	Gross Fixed Assets (ending)	Calc	$130

This method assumes only fully depreciated assets are retired, enabling you to independently forecast actual amounts of retirements and the amount of Fixed Capital Investment in all future periods.

Accumulated Depreciation

Entering Accumulated Depreciation

Three financial accounts together calculate accumulated depreciation: Accumulated Depreciation (v2190.00), Accumulated Depreciation on Retirements (v2190.03) and Depreciation Expense (v2190.01). Depreciation Expense represents all depreciation expenses on all fixed assets.

Entering Accumulated Depreciation in Historical Periods

In historical periods, you input historical values of Accumulated Depreciation (v2190.00) and Depreciation Expense (v2190.01). Accumulated Depreciation on Retirements (v2190.03) is calculated. In historical periods, the calculation for these accounts is as follows:

Operation	Accumulated Depreciation (beginning)	Input	$70
+	Depreciation Expense	Input	30
-	Acc Depreciation on Retirements	Input	10
	Accumulated Depreciation (ending)	Calc	$90

Accumulated Depreciation in Forecasts

In forecast periods, you forecast accumulated depreciation using these options:

Forecasting Accumulated Depreciation

Forecasting the ending balance of the Accumulated Depreciation account results in Accumulated Depreciation on Retirements being calculated as:

Operation	Accumulated Depreciation (beginning)	Input	$70
+	Depreciation Expense	Input	30
-	Accumulated Depreciation (ending)	Input	90
	Acc Depreciation on Retirements	Calc	$10

Forecasting Accumulated Depreciation on Retirements

Forecasting Accumulated Depreciation on Retirements results in the Accumulated Depreciation account balance being calculated as:

Operation	Accumulated Depreciation (beginning)	Input	$70
+	Depreciation Expense	Input	30
-	Acc Depreciation on Retirements	Input	10
	Accumulated Depreciation (ending)	Calc	$90

This method assumes all Retirements are fully depreciated, enabling you to independently forecast actual amounts of depreciation associated with retirements and the amount of depreciation expense in all future periods.

Interest Accounts

Interest income and expense can be entered in detail manner or summary. For example, interest expense can be entered as a total summary amount or the detail can be displayed and forecasted for each debt instrument on the Balance Sheet.

Interest can be entered as a total amount in history, with detail forecasted based on a percentage of the current period, prior period, or average debt or investment balances. This is due to the fact that historical interest information is usually summarized, while interest in forecast periods can be detailed using rates applied to debt and investment balances.

Interest Summary Accounts

Interest Income (v1210.00) can be used to summarize total interest income in history and/or forecast. This account can also be used for other interest income.

Interest Expense (v1360.00) can be used to summarize total interest expense history and/or forecast. This account can also be used for other interest expense.

Specific Interest Accounts

Specific interest accounts are each related to a specified debt or investment account, so in forecast periods, you can forecast interest income and expense based on debt and investment balances. Any of the 10 predefined forecast methods or the Freeform Formula method can forecast interest. You can apply one of these methods:

Percent of Another Account
Percent of Prior Period Account
Percent of Average Account

where the Associated Account for each interest account is the related debt or investment account and percentages entered are interest rates. When debt or investment accounts are subaccounted, related interest accounts are subaccounted, enabling forecasting interest rates for different debt and investment accounts.

Specific interest accounts and related debt/investment accounts are:

Account	Name	Assoc. Acct.
2010.05	Interest on Marketable Securities	2010.00
2015.05	Interest on Excess Mkt. Securities	2015.00
2460.05	Interest on L-T Funding Asset	2460.00
2510.05	Interest on Curr. Portion of LTD	2510.00
2520.05	Interest on Notes Payable	2520.00
2660.51	Interest on L-T Debt: Scheduled	2660.00
2690.05	Interest on Long-Term Debt: Excess	2690.00

Non-Cash Interest

Non-Cash Interest Expense (v2660.03) calculates non-cash portions of interest expense on scheduled debt accounts. Non-cash interest typically takes the form of zero coupon (deep discount) debt or PIKs (Payments in Kind). In history, enter Non-Cash Interest as a dollar amount. In forecast, enter this item as a rate (using the Percent of Prior Period Account forecast method) or as a default currency amount, depending on the forecast method you choose.

Amounts entered into this account reflect as part of total interest expense and accrue to the related scheduled debt account, Long-Term Debt: Scheduled (v2660.00) in the forecast periods.

Note:

If the forecast methods Percent of Another Account or Percent of Average Account forecast Non-Cash Interest Expense, a circular reference occurs when calculating because the current period-ending balance of L-T Debt: Scheduled is calculated based on Non-Cash Interest Expense.

Tax Rates

Trial Provision for Income Taxes (v1610.00)

This account measures the amount of taxes paid to taxing authorities. In historical periods, enter a currency amount. In forecast periods, enter the percentage of taxable income paid in taxes. Strategic Modeling multiplies this rate by Taxable Income (v3140.00) to arrive at the taxes to be paid.

Deferred Provision for Income Taxes (v1660.00)

This account measures the amount of taxes paid on temporary differences when they reverse. In periods where book income exceeds taxable income, the deferred provision is positive. In periods where taxable income exceeds book income, the deferred provision is negative. In historical periods, enter a currency amount. In forecast periods, enter the tax rate in effect when the temporary differences are scheduled to reverse. Generally, this is the same rate as in v1610 unless a new rate is enacted but is not yet effective.

Temporary Differences (v3120.00)

This account measures the differences between book and taxable income that reverses in future periods. In historical periods, enter a rate. Strategic Modeling divides Deferred Provision for Income Taxes (v1660.00) in a given historical period by this rate to determine the amount of temporary differences that gave rise to the deferred provision. Generally, is the statutory tax rate in effect in that period. It is important to know temporary differences in historical periods since it is a key component of Taxable Income (v3140.00). In forecast periods, this is calculated.

Interest Tax Shield (v3220.00)

This account measures the tax benefit of having debt. In historical periods, enter a currency amount. In forecast periods, enter the marginal tax rate, which is the tax rate to be paid on the last dollar of income. This is the rate used in v1610.00. Strategic Modeling multiplies this rate by Total Interest Expense (v1420.00) to determine the interest tax shield.

Tax on Non-Operating Profit (v3230.00)

This account measures the tax liability on non-operating income. In historical periods, enter a currency amount. In forecast periods, enter the tax rate on non-operating profit. If all income is subject to the same tax rate, this is the same rate as in v1610. Strategic Modeling multiplies this rate by Non-Operating Profit (v3225.00) to determine the tax on non-operating profit.

Residual Value Tax Rate (v4.00.560 and v5.00.800)

This account measures the tax rate on Perpetuity Operating Profit (v5100.00) used in both the Discounted Cash Flow and Economic Profit approaches to valuation. For discounted cash flow, enter the rate by selecting Design, Tax/Valuation Options, SVA. For economic profit, enter the rate by selecting Design, Tax/Valuation Options, EP.

Taxable Income

The starting point in analyzing taxable income is Earnings Before Taxes (EBT) (v1600.00). This account aggregates all the items of income and expense and measures book (GAAP) income. There are two general categories of differences between GAAP and tax law. GAAP uses the terms permanent differences and temporary differences to distinguish between them.

A permanent difference is one which is included in taxable income but never EBT or included in EBT but never taxable income. An example of a permanent difference is municipal bond interest income. Municipal bond interest is included in EBT but is never taxable.

A temporary difference occurs when the difference between the financial and tax treatment of an item eventually reverses. Over the life of the item, there is no difference. In a given year, there can be differences. The classic example is depreciation of fixed assets. If assets are depreciated using the straight line method for financial purposes and an accelerated method for tax purposes, a difference between GAAP and taxable income is created. Over the life of the asset, the total depreciation under each method must be equal.

Strategic Modeling uses EBT (v1600.00) and subtracts Permanent Differences (v3130.00) and Temporary Differences (v3120.00) to arrive at Taxable Income (v3140.00).

Temporary Differences

Strategic Modeling uses two accounts to represent temporary differences:

(v3110.00) Other Temporary Differences
(v3120.00) Temporary Differences

Other Temporary Differences (v3110.00) is an input in all periods.

In historical periods, Temporary Differences (v3120.00) is entered as a tax rate. The rate should be such that Deferred Provision for Income Taxes (v1160.00) divided by it equals the temporary differences in that period.

In forecast periods it is calculated as:

v3100.00 - v2190.01 + v3110.00

where:

v3100.00 Tax Depreciation

v2190.01 Depreciation Expense (Funds)

v3110.00 Other Temporary Differences.

If multiple temporary differences exist, you can subaccount Other Temporary Differences (v3110.00), so subaccounts represent a unique temporary difference. You can model each subaccount using a forecast method that best predicts what happens during the forecast periods.

Permanent Differences

Permanent differences are entered in Permanent Differences (v3130.00). This account uses the default Freeform formula as follows:

- (v2410.03) Amortization of Intangibles

Permanent Differences (v3130.00) are subtracted from EBT (v1600.00) to arrive at Taxable Income (v3140.00).

If additional permanent differences exist, and you want to model each separately, create subaccounts and model each permanent difference individually. The first subaccount inherits the default Freeform formula. As with Freeform Formulas, you can modify or delete it. Permanent Differences (v3130.00) is the total of all the subaccounts.

Deferred Taxes

Use these accounts to model taxes on the Balance Sheet:

(v2080.00) Current Deferred Tax Asset
(v2080.01) Incr. in Curr. Def Tax Asset
(v2380.00) Deferred Tax Asset
(v2380.01) Incr. in Def. Tax Asset
(v2580.00) Current Deferred Tax Liab.
(v2580.01) Incr. in Curr. Def. Tax Liab.
(v2770.00) Deferred Income Taxes
(v2770.01) Incr. in Deferred Inc. Taxes

Changes in the deferred tax accounts generally are due to changes in temporary differences. The proper relationship between these accounts and Temporary Differences (v3120.00) assures proper presentation of the deferred tax position.

Strategic Modeling uses Current Deferred Tax Asset (v2080.00), Deferred Tax Asset (v2380.00), Current Deferred Tax Liab (v2580.00), and Deferred Income Taxes (v2770.00) as input accounts. Incr. in Curr. Def Tax Asset (v2080.01), Incr. in Def. Tax Asset (v2380.01), Incr. in Curr. Def. Tax Liab. (v2580.01) and Incr. in Deferred Inc. Taxes (v2770.01) take the current period value in the associated account and subtract the previous period value. If the input accounts are zero, the calculated accounts are zero.

In forecast periods, Strategic Modeling calculates the deferred tax provision as a function of temporary differences in that period. Strategic Modeling does not default a relationship between the deferred tax accounts on the balance sheet and deferred tax provision on the income statement. To keep the cash flow reports internally consistent, this relationship must be enforced. The best way to enforce it is to make sure this equality holds in all periods:

v1660.00 = v2770.01 + v2580.01 - v2080.01 - v2380.01

Deferred Tax Reconciliation (v4180.00) is calculated using the above equation. On the Direct and Indirect Cash Flow Statements, this account can be accessed by analyzing Non-Operating Income (v4200.00). On the FAS 95 Cash Flow Statement, this account can be accessed by analyzing Non-Operating Sources (FAS 95) (v4520.00).

Historical Averages

You can forecast an account based on its historical average. Strategic Modeling calculates the historical average of that account and apply it to all forecast periods.

For example, for three historical periods in a file, the respective sales were 100, 110, and 121. If the forecast periods, you want to forecast sales as a historical growth rate. Strategic Modeling calculates historical growth rates to apply to forecast periods. Without data input, Strategic Modeling grows sales at 10% in all periods.

This is a dynamic forecast method. If you changed one of the historical years, recalculating the file would change the sales forecast by applying the new historical average. If you changed the amount of historical years, recalculating the file would change data dependent on the historical average.

The number of years for the historical average is determined through the Time dialog, where you set the amount of years for the historical average. In the case of growth rates, you must select three years of history to get two growth rates. The other place to determine the amount of time to use for the historical average is the Account Status & Groupings Dialog. The Historical Average tab enables you to determine, for each account, how many periods to use in calculating the historical average.

The historical average calculation is a weighted calculation. Say, for example, you forecast Cost of Goods Sold as a historical average percentage of Sales. You have two years of historical data as follows:

Sales	100	200
COGS	70	110

The historical average calculation sum all the sales values and COGS values and calculate the percentage. In this case, 180 (70 + 110) divided by 300 (100 + 200) would yield a historical average percentage of 60. The alternative is to calculate the percentage in each period and take the historical average of the percentages. Doing that here would return a historical average percentage of 62.5. Weighting is a superior method of calculation.