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Microsoft Excel LibreOffice Calc


Analysis of Operating Leases

Difficulty: Advanced


Operating Leases Accounting Policy

Costco leases land and/or buildings at warehouses and certain other office and distribution facilities, primarily under operating leases. Operating leases expire at various dates through 2064, with the exception of one lease in Costco's U.K. subsidiary, which expires in 2151. These leases generally contain one or more of the following options, which Costco can exercise at the end of the initial lease term: (a) renewal of the lease for a defined number of years at the then-fair market rental rate or rate stipulated in the lease agreement; (b) purchase of the property at the then-fair market value; or (c) right of first refusal in the event of a third-party purchase offer.

Costco accounts for its lease expense with free rent periods and step-rent provisions on a straight-line basis over the original term of the lease and any extension options that Costco more likely than not expects to exercise, from the date Costco has control of the property. Certain leases provide for periodic rental increases based on price indices, or the greater of minimum guaranteed amounts or sales volume.

Costco has capital leases for certain warehouse locations, expiring at various dates through 2054. Capital lease assets are included in land and buildings and improvements in the accompanying consolidated balance sheets. Amortization expense on capital lease assets is recorded as depreciation expense and is included in selling, general and administrative expenses. Capital lease liabilities are recorded at the lesser of the estimated fair market value of the leased property or the net present value of the aggregate future minimum lease payments and are included in other current liabilities and other liabilities in the accompanying consolidated balance sheets. Interest on these obligations is included in interest expense in the consolidated statements of income.

Costco records an asset and related financing obligation for the estimated construction costs under build-to-suit lease arrangements where it is considered the owner for accounting purposes, to the extent Costco is involved in the construction of the building or structural improvements or has construction risk prior to commencement of a lease. Upon occupancy, Costco assesses whether these arrangements qualify for sales recognition under the sale-leaseback accounting guidance. If Costco continues to be the deemed owner, it accounts for the arrangement as a financing lease.

Costco's asset retirement obligations (ARO) primarily relate to leasehold improvements that at the end of a lease must be removed. These obligations are recorded as a liability with an offsetting asset at the inception of the lease term based upon the estimated fair value of the costs to remove the leasehold improvements. These liabilities are accreted over time to the projected future value of the obligation using Costco's incremental borrowing rate. The ARO assets are depreciated using the same depreciation method as the leasehold improvement assets and are included with buildings and improvements. Estimated ARO liabilities associated with these leases were immaterial at the end of 2017 and 2016, respectively, and are included in other liabilities in the accompanying consolidated balance sheets.

Source: Costco Wholesale Corp., Annual Report


Present Value of Future Operating Lease Payments

Costco Wholesale Corp., future operating lease payments

Microsoft Excel LibreOffice Calc
Sep 3, 2017 Aug 28, 2016 Aug 30, 2015 Aug 31, 2014 Sep 1, 2013 Sep 2, 2012
Total undiscounted future operating lease payments1 (USD $ in millions) hidden hidden hidden hidden hidden hidden
Discount rate2 hidden% hidden% hidden% hidden% hidden% hidden%
Total present value of future operating lease payments (USD $ in millions) hidden hidden hidden hidden hidden hidden

1 Source: Costco Wholesale Corp. Annual Reports

2 Internal rate of return on capital leases

Year Future operating lease payments (as reported)1 Year Future operating lease payments (estimated) Present value at hidden%
2018 hidden 2018 hidden hidden
2019 hidden 2019 hidden hidden
2020 hidden 2020 hidden hidden
2021 hidden 2021 hidden hidden
2022 hidden 2022 hidden hidden
2023 and thereafter hidden 2023 hidden hidden
2024 hidden hidden
2025 hidden hidden
2026 hidden hidden
2027 hidden hidden
2028 hidden hidden
2029 hidden hidden
2030 hidden hidden
2031 hidden hidden
2032 hidden hidden
2033 hidden hidden
2034 hidden hidden
2035 hidden hidden
Total: hidden hidden hidden

1 Source: Costco Wholesale Corp. Annual Reports

Year Future operating lease payments (as reported)1 Year Future operating lease payments (estimated) Present value at hidden%
2017 hidden 2017 hidden hidden
2018 hidden 2018 hidden hidden
2019 hidden 2019 hidden hidden
2020 hidden 2020 hidden hidden
2021 hidden 2021 hidden hidden
2022 and thereafter hidden 2022 hidden hidden
2023 hidden hidden
2024 hidden hidden
2025 hidden hidden
2026 hidden hidden
2027 hidden hidden
2028 hidden hidden
2029 hidden hidden
2030 hidden hidden
2031 hidden hidden
2032 hidden hidden
2033 hidden hidden
2034 hidden hidden
2035 hidden hidden
Total: hidden hidden hidden

1 Source: Costco Wholesale Corp. Annual Reports

Year Future operating lease payments (as reported)1 Year Future operating lease payments (estimated) Present value at hidden%
2016 hidden 2016 hidden hidden
2017 hidden 2017 hidden hidden
2018 hidden 2018 hidden hidden
2019 hidden 2019 hidden hidden
2020 hidden 2020 hidden hidden
2021 and thereafter hidden 2021 hidden hidden
2022 hidden hidden
2023 hidden hidden
2024 hidden hidden
2025 hidden hidden
2026 hidden hidden
2027 hidden hidden
2028 hidden hidden
2029 hidden hidden
2030 hidden hidden
2031 hidden hidden
2032 hidden hidden
2033 hidden hidden
2034 hidden hidden
Total: hidden hidden hidden

1 Source: Costco Wholesale Corp. Annual Reports

Year Future operating lease payments (as reported)1 Year Future operating lease payments (estimated) Present value at hidden%
2015 hidden 2015 hidden hidden
2016 hidden 2016 hidden hidden
2017 hidden 2017 hidden hidden
2018 hidden 2018 hidden hidden
2019 hidden 2019 hidden hidden
2020 and thereafter hidden 2020 hidden hidden
2021 hidden hidden
2022 hidden hidden
2023 hidden hidden
2024 hidden hidden
2025 hidden hidden
2026 hidden hidden
2027 hidden hidden
2028 hidden hidden
2029 hidden hidden
2030 hidden hidden
2031 hidden hidden
2032 hidden hidden
Total: hidden hidden hidden

1 Source: Costco Wholesale Corp. Annual Reports

Year Future operating lease payments (as reported)1 Year Future operating lease payments (estimated) Present value at hidden%
2014 hidden 2014 hidden hidden
2015 hidden 2015 hidden hidden
2016 hidden 2016 hidden hidden
2017 hidden 2017 hidden hidden
2018 hidden 2018 hidden hidden
2019 and thereafter hidden 2019 hidden hidden
2020 hidden hidden
2021 hidden hidden
2022 hidden hidden
2023 hidden hidden
2024 hidden hidden
2025 hidden hidden
2026 hidden hidden
2027 hidden hidden
2028 hidden hidden
2029 hidden hidden
2030 hidden hidden
Total: hidden hidden hidden

1 Source: Costco Wholesale Corp. Annual Reports

Year Future operating lease payments (as reported)1 Year Future operating lease payments (estimated) Present value at hidden%
2013 hidden 2013 hidden hidden
2014 hidden 2014 hidden hidden
2015 hidden 2015 hidden hidden
2016 hidden 2016 hidden hidden
2017 hidden 2017 hidden hidden
2018 and thereafter hidden 2018 hidden hidden
2019 hidden hidden
2020 hidden hidden
2021 hidden hidden
2022 hidden hidden
2023 hidden hidden
2024 hidden hidden
2025 hidden hidden
2026 hidden hidden
2027 hidden hidden
2028 hidden hidden
2029 hidden hidden
2030 hidden hidden
Total: hidden hidden hidden

1 Source: Costco Wholesale Corp. Annual Reports


Analyst Adjustments for Operating Leases

Costco Wholesale Corp., adjustments to financial data

USD $ in millions

Microsoft Excel LibreOffice Calc
Sep 3, 2017 Aug 28, 2016 Aug 30, 2015 Aug 31, 2014 Sep 1, 2013 Sep 2, 2012
Adjustment to Total Assets
Total assets (as reported) hidden hidden hidden hidden hidden hidden
Add: Operating leased assets1 hidden hidden hidden hidden hidden hidden
Total assets (adjusted) hidden hidden hidden hidden hidden hidden
Adjustment to Total Debt
Total debt (as reported) hidden hidden hidden hidden hidden hidden
Add: Operating lease obligations2 hidden hidden hidden hidden hidden hidden
Total debt (adjusted) hidden hidden hidden hidden hidden hidden
Adjustment to Earnings before Interest and Tax (EBIT)
EBIT3 (as reported) hidden hidden hidden hidden hidden hidden
Add-back: Aggregate rental expense4 hidden hidden hidden hidden hidden hidden
Less: Depreciation expense, operating leased assets5 hidden hidden hidden hidden hidden hidden
EBIT (adjusted) hidden hidden hidden hidden hidden hidden
Adjustment to Interest Expense
Interest expense (as reported) hidden hidden hidden hidden hidden hidden
Add: Interest expense, operating lease obligations6 hidden hidden hidden hidden hidden hidden
Interest expense (adjusted) hidden hidden hidden hidden hidden hidden

1, 2 Equal to total present value of future operating lease payments. See Details »

3 See Details »

4 Source: Costco Wholesale Corp. Annual Reports

5 See Details »

6 See Details »


Adjusted Ratios for Operating Leases (Summary)

Costco Wholesale Corp., adjusted ratios

Microsoft Excel LibreOffice Calc
Sep 3, 2017 Aug 28, 2016 Aug 30, 2015 Aug 31, 2014 Sep 1, 2013 Sep 2, 2012
Total Asset Turnover1
Reported total asset turnover hidden hidden hidden hidden hidden hidden
Adjusted total asset turnover hidden hidden hidden hidden hidden hidden
Debt to Equity2
Reported debt to equity hidden hidden hidden hidden hidden hidden
Adjusted debt to equity hidden hidden hidden hidden hidden hidden
Return on Assets3 (ROA)
Reported ROA hidden% hidden% hidden% hidden% hidden% hidden%
Adjusted ROA hidden% hidden% hidden% hidden% hidden% hidden%
Interest Coverage4
Reported interest coverage hidden hidden hidden hidden hidden hidden
Adjusted interest coverage hidden hidden hidden hidden hidden hidden
Ratio Description The company
Adjusted total asset turnover An activity ratio calculated as total revenue divided by adjusted total assets. Costco Wholesale Corp.'s adjusted total asset turnover improved from 2015 to 2016 but then slightly deteriorated from 2016 to 2017.
Adjusted debt-to-equity A solvency ratio calculated as adjusted total debt divided by total shareholders' equity. Costco Wholesale Corp.'s adjusted debt-to-equity improved from 2015 to 2016 but then deteriorated significantly from 2016 to 2017.
Adjusted ROA A profitability ratio calculated as net income divided by adjusted total assets. Costco Wholesale Corp.'s adjusted ROA deteriorated from 2015 to 2016 but then improved from 2016 to 2017 exceeding 2015 level.
Adjusted interest coverage A solvency ratio calculated as adjusted EBIT divided by adjusted interest payments. Costco Wholesale Corp.'s adjusted interest coverage deteriorated from 2015 to 2016 but then improved from 2016 to 2017 exceeding 2015 level.

Adjusted Total Asset Turnover

Microsoft Excel LibreOffice Calc
Sep 3, 2017 Aug 28, 2016 Aug 30, 2015 Aug 31, 2014 Sep 1, 2013 Sep 2, 2012
As Reported
Net sales (USD $ in millions) hidden hidden hidden hidden hidden hidden
Total assets (USD $ in millions) hidden hidden hidden hidden hidden hidden
Total asset turnover1 hidden hidden hidden hidden hidden hidden
Adjusted for Operating Leases
Net sales (USD $ in millions) hidden hidden hidden hidden hidden hidden
Adjusted total assets (USD $ in millions) hidden hidden hidden hidden hidden hidden
Adjusted total asset turnover2 hidden hidden hidden hidden hidden hidden

2017 Calculations

1 Total asset turnover = Net sales ÷ Total assets
= hidden ÷ hidden = hidden

2 Adjusted total asset turnover = Net sales ÷ Adjusted total assets
= hidden ÷ hidden = hidden

Ratio Description The company
Adjusted total asset turnover An activity ratio calculated as total revenue divided by adjusted total assets. Costco Wholesale Corp.'s adjusted total asset turnover improved from 2015 to 2016 but then slightly deteriorated from 2016 to 2017.

Adjusted Debt to Equity

Microsoft Excel LibreOffice Calc
Sep 3, 2017 Aug 28, 2016 Aug 30, 2015 Aug 31, 2014 Sep 1, 2013 Sep 2, 2012
As Reported
Total debt (USD $ in millions) hidden hidden hidden hidden hidden hidden
Total Costco stockholders' equity (USD $ in millions) hidden hidden hidden hidden hidden hidden
Debt to equity1 hidden hidden hidden hidden hidden hidden
Adjusted for Operating Leases
Adjusted total debt (USD $ in millions) hidden hidden hidden hidden hidden hidden
Total Costco stockholders' equity (USD $ in millions) hidden hidden hidden hidden hidden hidden
Adjusted debt to equity2 hidden hidden hidden hidden hidden hidden

2017 Calculations

1 Debt to equity = Total debt ÷ Total Costco stockholders' equity
= hidden ÷ hidden = hidden

2 Adjusted debt to equity = Adjusted total debt ÷ Total Costco stockholders' equity
= hidden ÷ hidden = hidden

Ratio Description The company
Adjusted debt-to-equity A solvency ratio calculated as adjusted total debt divided by total shareholders' equity. Costco Wholesale Corp.'s adjusted debt-to-equity improved from 2015 to 2016 but then deteriorated significantly from 2016 to 2017.

Adjusted Return on Assets (ROA)

Microsoft Excel LibreOffice Calc
Sep 3, 2017 Aug 28, 2016 Aug 30, 2015 Aug 31, 2014 Sep 1, 2013 Sep 2, 2012
As Reported
Net income attributable to Costco (USD $ in millions) hidden hidden hidden hidden hidden hidden
Total assets (USD $ in millions) hidden hidden hidden hidden hidden hidden
ROA1 hidden% hidden% hidden% hidden% hidden% hidden%
Adjusted for Operating Leases
Net income attributable to Costco (USD $ in millions) hidden hidden hidden hidden hidden hidden
Adjusted total assets (USD $ in millions) hidden hidden hidden hidden hidden hidden
Adjusted ROA2 hidden% hidden% hidden% hidden% hidden% hidden%

2017 Calculations

1 ROA = 100 × Net income attributable to Costco ÷ Total assets
= 100 × hidden ÷ hidden = hidden%

2 Adjusted ROA = 100 × Net income attributable to Costco ÷ Adjusted total assets
= 100 × hidden ÷ hidden = hidden%

Ratio Description The company
Adjusted ROA A profitability ratio calculated as net income divided by adjusted total assets. Costco Wholesale Corp.'s adjusted ROA deteriorated from 2015 to 2016 but then improved from 2016 to 2017 exceeding 2015 level.

Adjusted Interest Coverage

Microsoft Excel LibreOffice Calc
Sep 3, 2017 Aug 28, 2016 Aug 30, 2015 Aug 31, 2014 Sep 1, 2013 Sep 2, 2012
As Reported
Earnings before interest and tax1 (EBIT) (USD $ in millions) hidden hidden hidden hidden hidden hidden
Interest expense (USD $ in millions) hidden hidden hidden hidden hidden hidden
Interest coverage2 hidden hidden hidden hidden hidden hidden
Adjusted for Operating Leases
Adjusted EBIT (USD $ in millions) hidden hidden hidden hidden hidden hidden
Adjusted interest expense (USD $ in millions) hidden hidden hidden hidden hidden hidden
Adjusted interest coverage3 hidden hidden hidden hidden hidden hidden

1 See Details »

2017 Calculations

2 Interest coverage = EBIT ÷ Interest expense
= hidden ÷ hidden = hidden

3 Adjusted interest coverage = Adjusted EBIT ÷ Adjusted interest expense
= hidden ÷ hidden = hidden

Ratio Description The company
Adjusted interest coverage ratio A solvency ratio calculated as adjusted EBIT divided by adjusted interest payments. Costco Wholesale Corp.'s adjusted interest coverage ratio deteriorated from 2015 to 2016 but then improved from 2016 to 2017 exceeding 2015 level.

Estimation of Depreciation Expense, Operating Leased Assets

USD $ in millions

Microsoft Excel LibreOffice Calc
Sep 3, 2017 Aug 28, 2016 Aug 30, 2015 Aug 31, 2014 Sep 1, 2013 Sep 2, 2012
Aggregate rental expense1 hidden hidden hidden hidden hidden hidden
Less: Estimated interest expense, operating lease obligations2 hidden hidden hidden hidden hidden hidden
Estimated depreciation expense, operating leased assets hidden hidden hidden hidden hidden hidden

1 Source: Costco Wholesale Corp., Annual Reports

2 See Details »


Estimation of Interest Expense, Operating Lease Obligations

Microsoft Excel LibreOffice Calc
Sep 3, 2017 Aug 28, 2016 Aug 30, 2015 Aug 31, 2014 Sep 1, 2013 Sep 2, 2012
Operating leased assets, at beginning of year1 (USD $ in millions) hidden hidden hidden hidden hidden hidden
Discount rate2 hidden% hidden% hidden% hidden% hidden% hidden%
Estimated interest expense, operating lease obligations3 (USD $ in millions) hidden hidden hidden hidden hidden hidden

1 See Details »

2 Internal rate of return on capital leases

2017 Calculations

3 Estimated interest expense, operating lease obligations = Operating leased assets, at beginning of year × Discount rate
= hidden × hidden = hidden


Present Value of Operating Lease Payments, at Beginning of Year

Microsoft Excel LibreOffice Calc
Sep 3, 2017 Aug 28, 2016 Aug 30, 2015 Aug 31, 2014 Sep 1, 2013 Sep 2, 2012
Total present value of future operating lease payments1 (USD $ in millions) hidden hidden hidden hidden hidden hidden
Aggregate rental expense2 (USD $ in millions) hidden hidden hidden hidden hidden hidden
Discount rate3 hidden% hidden% hidden% hidden% hidden% hidden%
Total present value of operating lease payments, at beginning of year4 (USD $ in millions) hidden hidden hidden hidden hidden hidden

1 Equal to total present value of future operating lease payments. See Details »

2 Source: Costco Wholesale Corp., Annual Reports

3 Internal rate of return on capital leases

2017 Calculations

4 Total present value of operating lease payments, at beginning of year = (Total present value of future operating lease payments + Aggregate rental expense) ÷ (1 + Discount rate)
= (hidden + hidden) ÷ (1 + hidden%) = hidden