Airlines AMR (American Airlines) leases most of its commercial aircraft and is currently com-mitted to pay over $11 billion in future lease obligations. However, the company’s 2009 financial statement reported only $689 million of these commitments as long-term capital lease obligationsin the liability section of its balance sheet. The remaining commitments are structured as operatingleases. Obligations to pay future operating lease obligations are not reported in the balance sheetas liabilities. Instead, cash outlays for operating leases appear only in the income statement asexpenses as the obligations come due.American’s recent balance sheet reports assets totaling $25.5 billion. The company’s long-term debt, including its capital lease obligations, total approximately $10.5 billion, and the stockhold-ers’ equity section of its balance sheet reveals a deficit (negative) balance in retained earnings. Instructionsa. If American Airlines had structured its aircraft commitments as capital leases instead ofoperating leases, how would the appearance and potential interpretation of its balance sheethave changed?b. Is it ethical for American Airlines to structure less than $1 billion of its aircraft commitmentsas capital leases and the remaining as off-balance sheet financing? Defend your answer.c. With regard to American Airlines’s lease obligations, why is it important for investors andcreditors to read and understand the footnotes accompanying the airline’s financial statements?
Airlines AMR (American Airlines) leases most of its commercial aircraft and is currently com-
mitted to pay over $11 billion in future lease obligations. However, the company’s 2009 financial
statement reported only $689 million of these commitments as long-term capital lease obligations
in the liability section of its
leases. Obligations to pay future operating lease obligations are not reported in the balance sheet
as liabilities. Instead, cash outlays for operating leases appear only in the income statement as
expenses as the obligations come due.
American’s recent balance sheet reports assets totaling $25.5 billion. The company’s long-term
debt, including its capital lease obligations, total approximately $10.5 billion, and the stockhold-
ers’ equity section of its balance sheet reveals a deficit (negative) balance in
Instructions
a. If American Airlines had structured its aircraft commitments as capital leases instead of
operating leases, how would the appearance and potential interpretation of its balance sheet
have changed?
b. Is it ethical for American Airlines to structure less than $1 billion of its aircraft commitments
as capital leases and the remaining as off-balance sheet financing? Defend your answer.
c. With regard to American Airlines’s lease obligations, why is it important for investors and
creditors to read and understand the footnotes accompanying the airline’s financial statements?
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