> ## Documentation Index
> Fetch the complete documentation index at: https://valuation-101.com/docs/llms.txt
> Use this file to discover all available pages before exploring further.

# Adjustments

> R&D capitalization and operating lease conversion for the DCF model.

## R\&D capitalization: `lib/rd_converter.py`

Capitalizes R\&D expenses from operating expenses into a research asset, adjusting EBIT and invested capital. This is Damodaran's standard treatment for companies where R\&D is a true investment rather than a recurring cost.

### `capitalize_rd()`

**Parameters:**

* `rd_expenses` — list of R\&D expenses by year (most recent first, typically 3–10 years)
* `amortization_life` — useful life of R\&D in years (looked up by industry, typically 2–10 years)
* `tax_rate` — marginal tax rate

**Returns:**

* `research_asset` — capitalized value of unamortized R\&D
* `amortization` — current year's amortization expense
* `ebit_adjustment` — add back R\&D, subtract amortization (net effect on EBIT)
* `tax_benefit` — tax shield on the R\&D adjustment

**Data source:** `rd_amortization_by_industry.json` provides the amortization life by Damodaran industry classification.

***

## Operating lease conversion: `lib/lease_converter.py`

Converts operating lease commitments into a debt equivalent by computing the present value of future lease payments, then adjusts debt, EBIT, and invested capital accordingly.

### `convert_operating_leases()`

**Parameters:**

* `lease_commitments` — future lease payments by year (years 1–5 + beyond year 5)
* `lease_expense` — current year's operating lease expense
* `pretax_cost_of_debt` — discount rate for lease obligations

**Returns:**

* `debt_value` — present value of lease commitments (added to debt)
* `depreciation` — implied depreciation on the lease asset
* `ebit_adjustment` — add back lease expense, subtract depreciation (net effect on EBIT)
* `asset_value` — right-of-use asset to add to invested capital

<Info>
  The skill automatically checks whether leases are already capitalized under ASC 842 / IFRS 16. If so, no conversion is needed and the skill skips.
</Info>