Transcript

Question 6

Question 7
Comparing the balance sheets and income statements of Delta and
Singapore has serious shortcomings given the extreme difference
between the financial structures of the two companies’ aircraft fleets.
From the information provided in the case, calculate adjusted figures
for Delta’s aircraft fleet so as to make Delta’s total depreciation
expense, total assets, and total long-term debt more comparable to
Singapore’s.
Comparability

Delta Air Lines Singapore Airlines Solution

Aircraft fleet composed of both Aircraft fleet comprises of only Use Case B’s Exhibit 1 on Delta’s
OWNED and LEASED assets OWNED assets operating lease obligations to
- Leased assets make up - SIA not operating any under estimate the value of the leases if
substantial proportion of total operating leases they were to be capitalized and be
fleet included in the Balance Sheet
- Significant off-balance sheet
financing effect Concept: Capitalization of Operating
LEASES as Finance Lease
Excerpt from Delta Air Lines “Notes to Consolidated Financial
Statements”
Year 1992 (SGD$ millions) 1993 (SGD$ millions)

1993 907 -

1994 897 905

1995 881 916

1996 895 941

1997 901 940

After 1997 / 1998 12,852 942

After 1998 - 13,202

Total 17,333 17,828
Assumptions
1. The interest rate to be kept at 8.5%
- Highlighted in (B) case as the average interest rates of Delta’s various outstanding
issues of long-term debt in 1993

2. n = 20, where n is the lease period.
- Inferred from Exhibit 4 of the (A) case as the new depreciation policy effective April
1, 1993 depreciated flight equipment on a straight-line bases to RV over a 20-year
period from the dates placed in service.

3. Tax rate for Delta is set at 25%
Capitalising PV of Lease
Commitments
1992 Year Cash Flow (SGD 1993 Year Cash Flow (SGD
$ million) $ million)
CF0 CF0

Year 1 CF1 907 Year 1 CF1 905

CF2 897 CF2 916

CF3 881 CF3 941

CF4 895 CF4 940

CF5 901 CF5 942

CF6 to CF 20 12,852/15 = CF6 to CF 20 13,202/15 =
856.8 880.13

PV = $8264.5077 million PV = $8502.408 million
End of 1992
• PV of Lease commitments are to be capitalized

Effects:
1. Increase in Non-Current Assets of Delta by $8264.50 million
2. Increase in Non-Current or Long-Term Debt of $8254.51 million
(Liability is recorded)

Note: Depreciation Expense is not affected in 1992 as amount is
charged in 1993.
Purchase of New Assets in FY 1993

Lease Payable (FY 1993)

Rental Payment 1,085 BGN Balance 8264.51

Interest Expense 8264.51 * 8.5 = 702.48

Purchase of New Assets 620.42 (Balancing Figure)

Ending Balance (From 8502.41
previous slide)
Effect on 1993 Financial Statements
Assets SGD $ millions

Purchase of New Assets 620.42

(8264.51 / 20) + (310.21) / 20 = (428.74)

Less: Accumulated Depreciation Assume assets bought evenly across 1992 – 1993
(Opening Balance + Closing Balance) / 2
620.42 / 2 = 310.21

191.26
Effect on 1993 Financial Statements
P/L Adjustments SGD $ millions

Additional Depreciation Expense (428.74)

Interest Expense (From capitalization of lease) (702.48)

Rental Payment (Add back from Operating Lease) 1085

Profits Before Tax (46.22)

Tax Adjustment (at 25%) 0.25 * 46.22 = 11.55

Net P/L Effect (57.77)
Effect on 1993 Financial Statements
Equity SGD $ millions

P/L Adjustment (57.77)

Interest Expense (add back) 702.48

Rental Payment (1085)

Tax Expense 11.55

Equity Effect (428.74)
New P/L
P/L

Rent Expense 1,085

Depreciation Expense (428.74)

Interest Expense (702.48)

Tax Expense (11.55)

Net Income (34.72
New Balance Sheet
Balance Sheet Assets Liabilities

Lease Assets 8,264

Lease Payables 8,264

New Assets 620 620

Depreciation (429)

Reduction in Lease Payable (383)

DTL (11.5)

Equity (34.5)

TOTAL 8,455 8,455
New Balance Sheet (Aircraft Fleet ~
2/3)
Balance Sheet Assets Liabilities

Lease Assets 5,509

Lease Payables 5,509

New Assets 413 413

Depreciation 286

Reduction in Lease Payable (255)

DTL (8)

Equity (23)

TOTAL 5,636 5,636