Principles of Project Finance

exported equipment, or costs in one currency to be funded by loans in that

currency)

and having done so calculates:

• A drawdown schedule for both equity and debt;

Drawings on the debt give rise to interest payments (IDC), which also need to

be funded.

During the operating period the model takes into account:

• Priorities for allocation of net operating cash flow (cf. §13.5.1)

• Allocation of cash for debt repayment (cf. §13.2.4)

• Calculation of interest payments, allowing for hedging contracts (cf. §9.2)

§12.7 ACCOUNTING AND TAXATION ISSUES

Although the decision to invest in a project should be based primarily on cash

flow evaluation (cf. §12.8), the accounting results are important to the Sponsors,

who will not wish to show an accounting loss from investment in a Project Com-

pany affiliate. In fact, a Sponsor may choose to fund a project in a less than theo-

retically ideal way (e.g., through leasing— cf. §3.4) if this produces a better re-

ported profit.

Thus although a financial model for a project financing is concerned with cash

flows rather than accounting results, it is usually necessary to add accounting

sheets to the model (i.e., profit and loss accounts [income statements] and balance

sheets for each calculation period).

Apart from the need to check the effect on a Sponsor’s reported earnings, there

are a number of reasons why accounting results are needed in the financial model

for the Project Company:

• Tax payments are based on accounting results rather than cash flow (cf.

§12.7.1).

• The accounting results affect a company’s ability to pay dividends (cf.

§12.7.2) and could affect its ability to keep trading (cf. §12.7.3).

• Adding a balance sheet is a good way of checking for errors in the model: if

the balance sheet does not balance, there is a mistake somewhere.

§12.7.1 C

APITALIZATION AND

D

EPRECIATION

OF

P

ROJECT

C

OSTS

The most important difference between accounting and cash flow calculations

on a project relate to the capitalization and later depreciation of the project costs.

260 Chapter 12 Financial Modeling and Evaluation