Interpreting Lease Disclosures
Triangle Air Lines is one of the largest airlines in the world. It provides scheduled passenger service, airfreight, mail, and other related aviation services. Selected balance sheet information from Triangle’s 1999 annual report is given here, along with Note 4 to the financial statements, describing Triangle’s lease obligations.
Like most airlines, Triangle leases the major portion of its assets. Most of these leases are structured to meet the FASB’s criteria for operating leases. Accounting standards require that the minimum annual rental commitments under both capital and operating leases be disclosed for the ensuing five years and in the aggregate for later years.
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Triangle Air Lines, Inc. Selected Financial Information, 1999 Annual Report (Dollars in Thousands) |
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Balance sheet |
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Current assets |
$ 1,698,444 |
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Property and equipment |
7,093,312 |
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Other assets |
1,369,818 |
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Total |
$10,161,574 |
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Current liabilities |
$ 3,542,814 |
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Noncurrent liabilities and other credits |
4,724,692 |
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Total liabilities |
8,267,506 |
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Common stockholders’ equity |
1,894,068 |
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Total |
$10,161,574 |
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Net loss |
$ 506,318 |
Triangle Air Lines, Inc.
Footnote Disclosures of Lease Obligations
1999 Annual Report
Note 4. Lease Obligations:
The company leases certain aircraft, airport terminal and maintenance facilities, ticket offices, and other property and equipment under agreements with terms of more than one year. Rent expense is generally recorded on a straight line basis over the lease term. Amounts charged to rental expense for operating leases were $997,326,000 in fiscal 1999; $668,848,000 in 1998; and $545,542,000 in fiscal 1997.
On June 30, 1999, the Company’s minimum rental commitments under capital leases and non cancelable operating leases with initial or remaining terms of more than one year were as follows on the next page.
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Capital Leases |
Operating Leases |
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Years Ending June 30 |
(Dollars in Thousands) |
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1999 |
$ 19,708 |
$ 906,698 |
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2000 |
20,565 |
896,793 |
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2001 |
18,323 |
880,980 |
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2002 |
18,274 |
894,651 |
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2003 |
17,530 |
901,514 |
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After 2004 |
72,842 |
12,851,687 |
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Total minimum lease payments |
167,242 |
$17,332,323 |
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Less: Amounts representing interest |
47,423 |
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Present value of future minimum |
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capital lease payments |
119,819 |
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Less: Current obligations under |
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capital leases |
10,321 |
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Long term capital lease obligations |
$109,498 |
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Special facility revenue bonds have been issued by certain municipalities and airport authorities to build or improve airport terminal and maintenance facilities that are leased under operating leases by Triangle. Under these lease agreements, the Company is required to make rental payments sufficient to pay principal and interest on the bonds as they become due. On June 30,1999, Triangle guaranteed $679,505,000 principal amount of such bonds.
Note 4 on lease obligations shows that Triangle’s existing operating leases require total minimum lease payments exceeding $17 billion dollars in future years. These operating lease obligations are more than 100 times the company’s capital lease obligations of $167.2 million.
Required
a. Assume that for purposes of financial analysis, you wish to treat Triangle’s operating leases as if they were capital leases. Develop an approximation of the capitalized value of Triangle’s leases, based on the information provided in Note 4.
b. Show how this approximation of the capitalized values of Triangle’s operating leases would affect measurements of total assets, total liabilities, property and equipment, ratio of liabilities to assets, ratio of property, plant, and equipment to assets, and net income.