【正文】 ital charges and therefore improves EVA. Provisions Provisions are regarded as noninterest bearing and are therefore deducted from invested capital. Provisions for pensions and provisions for deferred taxes are treated differently and will not be deducted from invested capital. _ Adjustments Goodwill amortisation The full historical goodwill from the time of the acquisition is included in invested capital. Therefore accumulated goodwill amortisation is added back to invested capital. Rental and leasing contracts The present value of future rental and operating lease contracts is included in invested capital in order to reflect the risk associated with future payment obligations. Off balance sheet obligations In order to show the true risk associated with off balance sheet obligations, they are included in invested capital. In effect, the capital charges will be reduced by a corresponding item in NOPAT in order to derive an adequate risk premium for those items. Construction in progress Assets under construction are not included in invested capital because they do not earn operating ine. As a general rule, the calculation of capital within the XY Group will be based upon average capital during the year. As of 2020, this average calculation will be based on the quarterly financial statement. _ 4. Cost of capital Capital is not free, since lenders and shareholders expect a return on their investment. ? Lenders require a return on debt in the form of interest payment. ? Shareholders expect a return as well. XY will eventually need new equity from the capital market. Only if shareholders anticipate that XY will be able to meet their expectations will they be willing to invest new capital on favourable terms. This expected return on equity can be measured and is part of the cost of capital. In the Weighted Average Cost of Capital (WACC) the cost of debt and the cost of equity are bined, with weights based on the debt/equity ratio. WACC = %debt * Net Cost of Debt + %equity * Cost of Equity Using this approach countryspecific WACC?s are calculated. To illustrate the formula the WACC calculation for one country is shown. The cost of debt is 3,9% aftertax. The shareholders expect a return of 10,5%, a higher figure because the risk is higher than for a debt investment. The debttomarket value (leverage) ratio is 52%: Cost Weight Weighted Cost Debt after tax 3,9% 52% 2,0% Equity 10,5% 48% 5,1% Weighted Average Cost of Capital 7,1% (rounded 7%) You can find the specific WACC of different countries on the Intra under Group functions/Reporting, Controlling, Investor Relations (RCI)/WACC. _ 5. Focus on Delta EVA If you have calculated EVA for your business, you may have found out that it is not parable to other units. This is due to the fact that invested capital is stated at book value, which often does not reflect fair value. Does that mean that EVA does not work? No. As absolute values are sometimes not parable, we focus on Delta EVA, which reflects the change in EVA from one period to another. EVA is a management tool. It can help managers to evaluate opportunities, set goals, measure results, benchmark performance and deliver incentive pensation. Delta EVA is the measure because management action should always be directed towards the future when evaluating opportunities, an increase of EVA gives the right signal when setting goals, Delta EVA gives appropriate incentives when measuring results, Delta EVA shows a parable figure The following example pares the reporting of a unit that belongs to the Group for a long time to the reporting of a recently acquired unit. Both panies have a NOPAT of 120. Due to depreciation, the book value of assets of the pany that has been part of the Group for a long time is much lower than the book value of assets of the recently acquired pany. Both units invest in a new project that is equally profitable: H is toric p a rt of G roupEVAIn v e s te d c a pi ta lN O P A TC a pi ta l c ha rgeD e lta EVAE x i s ti n gb u s i n e s s100 1 .0 0 0 10040012 120 121201 0 1 0 0 1 04 0220280 2 282 22R e c e nt A c qu is iti onN e wIn v e s tm e n tE x i s ti n gb u s i n e s sN e wIn v e s tm e n tT o ta lT o ta l5 01325001 1 01321 .1 0 0 Because of different levels of invested capital, the EVA of the existing pany is much higher than the EVA of the new pany. The example shows that Delta EVA correctly indicates the performance of the units because it reflects the profitability of the new project. _ B. How to build up EVA on the Group and SBU level Valueoriented decisions are taken on all corporate levels. The EVA definition applied on the respective level reflects managers? responsibilities: G roup ? O per ati ng m anagem ent ? O per ati ng i n v es tm ent d ec i s i ons ? Res pons i bi l i t y f or i nv es ted c api ta l (i nc l . goo d wi l l ) ? Inv es tor Re l at i ons ? Cap i ta l s tr uc ture ? T ax es ? Maj or i nv es tm ents /ac qui s i t i ons ? G ood wi l l f r om the ac qui s i t i on of c om pan y A and c om pan y B SBU O pera t i ng U nit s As pared to the EVA definition on the operating unit level, the following items are treated differently on the Group and SBU level: Taxes Goodwill from the acquisition of A and B Currency Translation Adjustment (CTA) For details of the EVA calculation on the group and SBU level, see Appendix B. _ C. Use of EVA in the XY management system From 2020 onwards all operating units will report EVA on a quarterly basis. In the following, examples for EVA reporti