Financial Statement Analysis Workshop Tutorial Assignment
Adjusting for operating leases
Airline companies typically do not own their aircrafts. Rather, they lease aircrafts from commercial lessors (e.g. General Electric's finance subsidiary). According to US GAAP, companies are required to disclose their lease information in the footnotes of their financial statements.
Recall from ACCT2011 that leases can be classified into finance leases (or capital leases in American English) and operating leases (US GAAP and IFRS apply virtually the same rules to leases). Airlines may structure their lease contracts to skilfully avoid the capitalization requirement for capital leases. The footnote on leases of the 2016 annual report of Delta Air Lines, a major US airline, is attached.
Additional information & assumptions
- Recapitalized operating lease asset is 80% of the existing operating lease liability if the operating leases were capitalized. The difference between the lease asset and lease liability reflects accumulated depreciation and impairments from previous years.
- New leases initiated in 2016 are assumed to take effect from the end of 2016.
- Recapitalized lease assets are depreciated over a useful life of 10 years.
- Lease obligations due after 5 years from the reporting date ("thereafter") are evenly distributed to the next 8 years.
- Ignore any tax effect.
Required -
Prepare the adjusting journal entries required to capitalize Delta's operating leases, and verbally describe the impact of the recapitalization of operating leases on the 2016 financial statement of Delta Air Line.
Attachment:- Assignment File.rar