Depreciation and amortization (D&A)

BDC calculates EBITDA by adding interest, taxes, depreciation and amortization back to net profit, so D&A are among the charges added back. BDC describes depreciation as an accounting method that spreads the cost of a tangible asset over its useful life, and amortization as a more general term that can be used for both tangible and intangible assets. BDC says the depreciation expense is recorded in the income statement. See which add-backs are legitimate when adjusting EBITDA for how they fit with other adjustments.

A non-cash charge, not a free one

BDC says depreciation is a non-cash expense: it does not require a cash outflow, since the expense has already been incurred, but it does reduce the asset’s value. Adding the charge back raises EBITDA, but it does not remove the need to repair or replace the asset, so ask what equipment or software the business will need to replace after closing. EBITDA shows the result of the add-back.

What to check

• Which figure the seller added back: the accounting charge in the financial statements, or a tax figure.
• The CRA’s income tax folio says capital cost allowance replaces accounting depreciation for income tax purposes, so the tax return can show a different amount (see undepreciated capital cost).
• BDC notes that depreciation and amortization do not have the same meaning in French and English, so confirm which term a French-language statement uses.