The Effect Of Lease Capitalization On Financial Ratios And Financial Statements Of American Companies

The reason we want to capitalise the lease commitments is that reporting under operating assets leads to substantial amounts of off-balance-sheet assets and liabilities. Hence, it is difficult to compare financial statements between two similar companies but use different accounting methods for essentially the same transaction.

The 20%/9% Bonds and Common Stock option does not generate as positive capital structure as 50%/50% option. Although EPS scores are the same for year nine, net income is reduced to 39,680 due to having to pay interest of 14,400 on bonds while the 50/50 option generates a net income of 49,049 and pays no interest on bonds and issues dividends. In year ten, both capital structures offer an EPS of .032 however the net income is 9,380 less than the 50/50 option. In years 11, 12, and 13, the 20%/9% Bonds and Common Stock option EPS and net income results decline while the EPS and net income results increase for the 50/50 option.

(d) The present value of the minimum lease payments is at 90% of the fair value of the leased asset to the lessor.

Dhaliwal, Dan, 2011. The Impact of Operating Leases on Firm Financial and Operating Risk.. Journal of Accounting, Auditing & Finance., [Online]. Volume 26 Issue 2, 151-197.. Available at: http://web.ebscohost.com.simsrad.net.ocs.mq.edu.au/ehost/detail?vid=3&sid=9317bb11-bcea-4e15-99f8-3930c890a726%40sessionmgr111&hid=103&bdata=JnNpdGU9ZWhvc3QtbGl

At the lease commencement, finance leases are capitalised at the fair value of the leased property, otherwise the present value of the minimum lease payments if lower (MHI, 2014). Other short term and long term payables include the relevant rental obligations and net of finance charges (MHI, 2014). Every lease payment is apportioned between the liability and finance charges (MHI, 2014). The finance cost is indicated in the comprehensive income statement for the lease period as well as to generate a constant periodic rate of interest on the remaining balance of the liability for each period (MHI, 2014). During the lease term, the depreciation is considered for the useful life of the asset such as the property, plant and equipment assigned under finance leases (MHI, 2014). The portion of the risks and rewards of ownership are persevered by the lessor are categorized as operating leases for leases (MHI, 2014). For the period of the lease, all payments made under operating leases less any incentives from lessor are indicated in the comprehensive income statement on a straight-line basis (MHI,

10-2 On the premise that the historical cost of acquiring an asset should include all costs necessarily incurred to bring it to the condition and location necessary for its intended use, in principle, the cost incurred in financing expenditures for an asset during a required construction or development period is itself a part of the asset 's historical acquisition cost. The cause-and-effect relationship between acquiring an asset and the incurrence of interest cost makes interest cost analogous to a direct cost that is readily and objectively assignable to the acquired asset. Failure to capitalize the interest cost associated with the acquisition of qualifying assets improperly reduces reported earnings during the period of acquisition and increases reported earnings in later periods.

While working on a consulting engagement, a supervisor in the team has given an assignment. The client is a regional trucking company. A new customer has approached the client with an opportunity that would require 120 trailers—20 more than the trucking company currently owns. The client is uncertain how long the relationship with the customer may last, but the deal has the potential for significant growth. The supervisor has asked a research to be conducted on leases and lease structure issues on the Financial Accounting Standards Board (FASB) website, in particular the current practice and thought related to direct financing, sales type, and operating leases. This paper is a memo addressed to the supervisor that summarizes

The investing activities showed a reduction in the cost of acquisition of equipment and favorable lease rights, but an increase in short-term investments. This reduction is the result of the leases providing a minimum annual rent that adjusts to set levels during the lease term. Approximately 52% of the leases provide additional rent based on percentage of sales to be paid when designated levels are achieved. The increase in short-term investments center around expansion and remodeling costs.

Although many variations of lease financing are available, potential lessees should be familiar with two general types of leases: the full payout lease and the fair market value (FMV) lease. The choice of lease is based upon the lessees’ long-term plans for the asset involved. A full payout lease is one in which the present value of the payment stream equals the acquisition cost of the asset. Options at the end of the lease typically include return, renewal, or purchase often for $1. The lessee is able to deploy and utilize the equipment, while the periodic payments of the full payout lease ease the financial burden of making a large IT acquisition. This option is a good choice when future ownership is desired, the dollar value of the equipment is substantial, the expected productive life of the assets is longer than five years, and the flexibility of spreading out payments would

Boeing’s financial risk ratios were also impacted by converting all operating leases into capital leases.  The Debt to Total Capital Ratio increased from 68.36 percent to 69.04 percent and the Debt to Equity Ratio increased from 16.38 to 16.90 (Exhibit 1).  It is imperative for the company’s corporate finance division to closely manage their long-term debt by minimizing the capital lease values on the balance sheet as Boeing’s debt covenants could be broken should these ratios increase above

This paper consists of several sections. The description of the project outlines the capital asset decision at hand, which in this case is the purchase of a new Boeing 787-9 Dreamliner by American Airlines. The second section of the paper highlights some of the information about the Dreamliner. Statistics about seat configuration are critical to the revenue projects used later in the net present value (NPV) calculation. The third section of the paper covers the lease or buy decision. American has both options and this section covers some of the financial aspects of each that are critical, such as depreciation. The fourth section is an explanation of the weighted-average cost of capital for American Airlines. The fifth section is an outline of the NPV calculation. The final section is the conclusion. The NPV compares directly the incremental cash flows associated with the lease option and those associated with the buy option. The final NPV figures are close to one another, but one option clearly adds more value to the company to the other. The "buy" option is therefore recommended.

Why did the FASB embark on a project to change the reporting standard for leases? Under the current financial reporting standards for leases, an entity has to determine the classification of leases to account for by applying bright-line rules. This creates a potential opportunity for management to structure leases in order to achieve a specific desired accounting results (FASB). In addition, the current accounting model does not require operating leases to be recognized on the balance sheet. As a result, investors may underestimate the assets and liabilities that arise from leases and, thus, cause an uninformed decision of investment. According to a 2014 study on public company filings, nearly a trillion U.S. dollars were reported in

Different operating and accounting practices misrepresent comparisons. Different firms employ operating leases to different extents, and this could distort comparisons of profitability ratios, asset turnovers, leverage levels, etc. Similarly, differing practices regarding inventory values, depreciation methods, and provisions for doubtful accounts receivable could also invalidate comparisons. For example, Garden State’s debt ratio in 1992 is almost 60 percent. However, if the firm has obtained significant amounts of equipment through the use of operating leases, or if it had factored all of its receivables, then its true debt ratio would have been substantially higher.

The following case analysis portraits the use of capital asset pricing model to compute the weighted average cost of capital for Marriott and each of its divisions. The flow of events below is following a string of different evaluations, each of which is assessed separately.

The course project involved developing a great depth of knowledge in analyzing capital structure, theories behind it, and its risks and issues. Before I began this assignment, I knew nothing but a few things about capital structure from previous unit weeks; however, it was not until this course’s final project that came along with opening