CHAPTER 15 Leases 885 impact this would have on the company’s debt to equity ratio and its return on assets ratio using selected financial statement information taken from Walmart’s annual report for the fiscal year ending January 31, 2014, shown next: ($ in millions) Total assets $204,751 Total liabilities 123,412 Total shareholders’ equity 81,339 Net income 16,695 The debt to equity and return on assets ratios are calculated in Illustration 15–20 without considering the capitalization of operating leases and then again after adding $9,456 million to both total assets and total liabilities. In the calculation of return on assets, we use only the year-end total assets rather than the average total assets for the year. Also, we assume no impact on net income. 5 1.52 $132,868 5 1.63 5 8.2% The debt to equity ratio rises from 1.52 to 1.63, and the return on assets ratio declines from 8.2% to 7.8%. Statement of Cash Flow Impact OPERATING LEASES. Remember, lease payments for operating leases represent rent—expense to the lessee, revenue for the lessor. These amounts are included in net income, so both the lessee and lessor report cash payments for operating leases in a statement of cash flows as cash flows from operating activities. CAPITAL LEASES AND DIRECT FINANCING LEASES. You’ve learned in this chapter that capital leases are agreements that we identify as being formulated outwardly as leases, but which are in reality installment purchases, so we account for them as such. Each rental payment (except the first if paid at inception) includes both an amount that represents interest and an amount that represents a reduction of principal. In a statement of Real World Financials Operating leases are not reported in a statement of cash flows at the lease’s inception. The interest portion of a capital lease payment is a cash flow from operating activities and the principal portion is a cash flow from financing activities. ($ in millions) Without Capitalization With Capitalization Debt to equity ratio $123,412 _________ $81,339 _________ $81,339 Return on assets $16,695 _________ $204,751 $16,695 _________ $214,207 5 7.8% Illustration 15–20 Ratios with and without Capitalization of Operating Leases; Walmart Capitalized Value or Debt Equivalent of Walmart’s Operating Leases ($ in millions) Fiscal Years Operating Leases PV Factor 10% Present Value 2015 $ 1,734 .909 $1,576 2016 1,632 .826 1,348 2017 1,462 .751 1,098 2018 1,314 .683 897 2019 1,192 .621 740 Thereafter 9,836 .386 * 3,797 Total minimum rentals $17,170 $9,456 *This is the PV factor for i 5 10%, n 5 10, which treats payments after 2019 as occurring in 2024, an assumption due to not knowing precise dates of specific payments after 2019. Illustration 15–19 Estimating the Debt Equivalent of Operating Lease Commitments; Walmart Real World Financials
Spiceland_Inter_Accounting8e_Ch15
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