Module 10

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Module 10

• Reporting and Analyzing Off-Balance Sheet
  Financing

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Off-Balance Sheet Financing

• Off-balance sheet financing means that either
  assets or liabilities, or both, are kept off of
  the face of the balance sheet.

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Leasing

• A lease is a contract between the owner of an
  asset (the lessor) and the party desiring to use
  that asset (the lessee).
• Generally, leases provide for the following
  terms
• The lessor allows the lessee the unrestricted
  right to use the asset during the lease term.
• The lessee agrees to make periodic payments to
  the lessor and to maintain the asset.
• Title to the asset remains with the lessor, who
  usually retakes possession of the asset at the
  conclusion of the lease.

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Capital vs. Operating Leases

• GAAP identifies for two different approaches in
  the reporting of leases by the lessee
• Capital lease method - both the lease asset and
  the lease liability are reported on the balance
  sheet.
• Operating lease method - neither the lease asset
  nor the lease liability is on the balance sheet.

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Capital vs. Operating Leases
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Operating Leases

• Benefits for the lessee
• Leased asset is not reported on the balance
  sheet.
• Lease liability is not reported on the balance
  sheet.
• For the early years of the lease term, rent
  expense reported for an operating lease is less
  than the depreciation and interest expense
  reported for a capital lease.
• Without analytical adjustments, the portion of
  ROE derived from operating activities (RNOA)
  appears higher, and the companys ROE is
  perceived of higher quality.

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Footnote Disclosures of Lessees
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Capitalizing Operating Leases for Analysis
Purposes

• Determine the discount rate.
• Compute the present value of future operating
  lease payments.
• Adjust the financials to include the present
  value of the lease asset and lease liability.

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Pensions

• Generally two types of plans
• Defined contribution plan. This plan has the
  company make periodic contributions to an
  employees account, and many plans require an
  employee matching contribution.
• Defined benefit plan. This plan has the company
  make periodic payments to an employee after
  retirement.

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Accounting for Defined Contribution Plans

• From an accounting standpoint, defined
  contribution plans offer no particular problems.
• The contribution is recorded as an expense in the
  income statement when paid or accrued.

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Two Accounting Issues Related to Defined Benefit
Plans

• The appropriate balance sheet presentation of the
  pension investments and obligation.
• The pension standard allows companies to report
  the net pension liability on their balance sheet.
  
• Underfunded plans are reported on the balance
  sheet as a long-term liability.
• Overfunded plans are reported as a long-term
  asset.
• The treatment of fluctuations in pension
  investments and obligations in the income
  statement.
• The FASB allows companies to report pension
  income based on expected long-term returns on
  pension investments (rather than actual
  investment returns), and to defer the recognition
  of unrealized gains and losses on both pension
  investments and pension obligations

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Plan Assets and PBO Computations
             
             
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Balance Sheet Presentation
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American Airlines Funded Status