Aberrcrombie And Verizen Case Study
All of Abercrombie & Fitch’s leases are classified as operating. GAAP requires companies to provide a table of future lease payments for both operating and capital leases when they exist. Because no capital leases are included in the Abercrombie & Fitch footnote, we know that it only has operating leases. Because operating leases are not capitalized on the balance sheet, neither lease assets nor lease liabilities appear on the Abercrombie & Fitch balance sheets.
b. Total assets and total liabilities for Abercrombie are lower than if the operating leases had been capitalized. Over the life of the lease, total profit is unaffected by the operating-lease classification because in aggregate, total rent expense under operating leases is equal to the interest and depreciation expense that is recorded under capital leases. In any particular year during the life of the lease, however, income is not the same under the two methods. Even if depreciation is computed on a straight-line basis, interest is accrued based on the balance of the lease obligation, which is higher in the earlier years of the lease. As a result, depreciation plus interest will exceed rent expense during the early years of the lease life and will be less toward the end of the lease. However, these differences tend to be small for most leases. (Note: NOPAT excludes interest expense from capital …show more content…
Furthermore, we believe that our adjusted debt to EBITDAR ratio is important for understanding our financial position and provides meaningful additional information about our ability to service our long- term debt and other fixed obligations and to fund our future growth. …Our decision to own or lease real estate is based on an assessment of our financial liquidity, our capital structure, our desire to own or to lease the location, the owner's desire to own or to lease the location, and the alternative that results in the highest return to our