Microsoft Excel LibreOffice Calc

Microsoft Corp. (MSFT)


Analysis of Operating Leases

Advanced level


Accounting Policy on Operating Leases

Microsoft determines if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets, other current liabilities, and operating lease liabilities in Microsoft’s consolidated balance sheets. Finance leases are included in property and equipment, other current liabilities, and other long-term liabilities in Microsoft’s consolidated balance sheets.

ROU assets represent Microsoft’s right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of the leases do not provide an implicit rate, Microsoft generally uses the incremental borrowing rate based on the estimated rate of interest for collateralized borrowing over a similar term of the lease payments at commencement date. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. The lease terms may include options to extend or terminate the lease when it is reasonably certain that Microsoft will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term.

Microsoft has lease agreements with lease and non-lease components, which are generally accounted for separately. For certain equipment leases, such as vehicles, Microsoft accounts for the lease and non-lease components as a single lease component. Additionally, for certain equipment leases, Microsoft applies a portfolio approach to effectively account for the operating lease ROU assets and liabilities.

Source: 10-K (filing date: 2019-08-01).


Present Value of Future Operating Lease Payments (before Adoption of FASB Topic 842)

Microsoft Corp., future operating lease payments (before adoption of FASB Topic 842)

US$ in millions

Microsoft Excel LibreOffice Calc
Jun 30, 2019 Jun 30, 2018 Jun 30, 2017 Jun 30, 2016 Jun 30, 2015 Jun 30, 2014
Total undiscounted future operating lease payments 7,872  6,464  5,153  4,414 
Discount rate1 2.95% 2.56% 2.71% 2.84%
 
Total present value of future operating lease payments 6,980  5,816  4,627  3,990 

Based on: 10-K (filing date: 2019-08-01), 10-K (filing date: 2018-08-03), 10-K (filing date: 2017-08-02), 10-K (filing date: 2016-07-28), 10-K (filing date: 2015-07-31), 10-K (filing date: 2014-07-31).

1 Weighted-average interest rate for Microsoft Corp.’s debt

Year Future operating lease payments (as reported) Year Future operating lease payments (estimated) Present value at 2.95%
2018 1,292  2018 1,292  1,255 
2019 1,220  2019 1,220  1,151 
2020 1,115  2020 1,115  1,022 
2021 908  2021 908  808 
2022 749  2022 749  648 
2023 and thereafter 2,588  2023 749  629 
2024 749  611 
2025 749  594 
2026 341  262 
Total: 7,872  7,872  6,980 

Based on: 10-K (filing date: 2017-08-02).

Year Future operating lease payments (as reported) Year Future operating lease payments (estimated) Present value at 2.56%
2017 961  2017 961  937 
2018 996  2018 996  947 
2019 922  2019 922  855 
2020 833  2020 833  753 
2021 634  2021 634  559 
2022 and thereafter 2,118  2022 634  545 
2023 634  531 
2024 634  518 
2025 216  172 
Total: 6,464  6,464  5,816 

Based on: 10-K (filing date: 2016-07-28).

Year Future operating lease payments (as reported) Year Future operating lease payments (estimated) Present value at 2.71%
2016 863  2016 863  840 
2017 803  2017 803  761 
2018 735  2018 735  678 
2019 611  2019 611  549 
2020 524  2020 524  458 
2021 and thereafter 1,617  2021 524  446 
2022 524  435 
2023 524  423 
2024 45  35 
Total: 5,153  5,153  4,627 

Based on: 10-K (filing date: 2015-07-31).

Year Future operating lease payments (as reported) Year Future operating lease payments (estimated) Present value at 2.84%
2015 878  2015 878  854 
2016 748  2016 748  707 
2017 671  2017 671  617 
2018 598  2018 598  535 
2019 456  2019 456  396 
2020 and thereafter 1,063  2020 456  385 
2021 456  375 
2022 151  121 
Total: 4,414  4,414  3,990 

Based on: 10-K (filing date: 2014-07-31).


Adjustments to Financial Statements for Operating Leases

Microsoft Corp., adjustments to financial statements

US$ in millions

Microsoft Excel LibreOffice Calc
Jun 30, 2019 Jun 30, 2018 Jun 30, 2017 Jun 30, 2016 Jun 30, 2015 Jun 30, 2014
Adjustment to Total Assets
Total assets (as reported) 286,556  258,848  241,086  193,694  176,223  172,384 
Add: Operating lease right-of-use asset (before adoption of FASB Topic 842)1 —  —  6,980  5,816  4,627  3,990 
Total assets (adjusted) 286,556  258,848  248,066  199,510  180,850  176,374 
Adjustment to Total Debt
Total debt (as reported) 72,178  76,240  86,194  53,687  35,292  22,645 
Add: Operating lease liability (before adoption of FASB Topic 842)2 —  —  6,980  5,816  4,627  3,990 
Add: Operating lease liabilities (included in Other current liabilities) 1,515  1,399  —  —  —  — 
Add: Long-term operating lease liabilities 6,188  5,568  —  —  —  — 
Total debt (adjusted) 79,881  83,207  93,174  59,503  39,919  26,635 

Based on: 10-K (filing date: 2019-08-01), 10-K (filing date: 2018-08-03), 10-K (filing date: 2017-08-02), 10-K (filing date: 2016-07-28), 10-K (filing date: 2015-07-31), 10-K (filing date: 2014-07-31).

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


Microsoft Corp., Financial Data: Reported vs. Adjusted


Adjusted Financial Ratios for Operating Leases (Summary)

Microsoft Corp., adjusted financial ratios

Microsoft Excel LibreOffice Calc
Jun 30, 2019 Jun 30, 2018 Jun 30, 2017 Jun 30, 2016 Jun 30, 2015 Jun 30, 2014
Total Asset Turnover1
Reported total asset turnover 0.44 0.43 0.37 0.44 0.53 0.50
Adjusted total asset turnover 0.44 0.43 0.36 0.43 0.52 0.49
Debt to Equity2
Reported debt to equity 0.71 0.92 1.19 0.75 0.44 0.25
Adjusted debt to equity 0.78 1.01 1.29 0.83 0.50 0.30
Return on Assets3 (ROA)
Reported ROA 13.69% 6.40% 8.80% 8.67% 6.92% 12.81%
Adjusted ROA 13.69% 6.40% 8.55% 8.42% 6.74% 12.52%

Based on: 10-K (filing date: 2019-08-01), 10-K (filing date: 2018-08-03), 10-K (filing date: 2017-08-02), 10-K (filing date: 2016-07-28), 10-K (filing date: 2015-07-31), 10-K (filing date: 2014-07-31).

Financial ratio Description The company
Adjusted total asset turnover An activity ratio calculated as total revenue divided by adjusted total assets. Microsoft Corp.’s adjusted total asset turnover ratio improved from 2017 to 2018 and from 2018 to 2019.
Adjusted debt to equity A solvency ratio calculated as adjusted total debt divided by total shareholders’ equity. Microsoft Corp.’s adjusted debt to equity ratio improved from 2017 to 2018 and from 2018 to 2019.
Adjusted ROA A profitability ratio calculated as net income divided by adjusted total assets. Microsoft Corp.’s adjusted ROA deteriorated from 2017 to 2018 but then improved from 2018 to 2019 exceeding 2017 level.

Microsoft Corp., Financial Ratios: Reported vs. Adjusted


Adjusted Total Asset Turnover

Microsoft Excel LibreOffice Calc
Jun 30, 2019 Jun 30, 2018 Jun 30, 2017 Jun 30, 2016 Jun 30, 2015 Jun 30, 2014
As Reported
Selected Financial Data (US$ in millions)
Revenue 125,843  110,360  89,950  85,320  93,580  86,833 
Total assets 286,556  258,848  241,086  193,694  176,223  172,384 
Activity Ratio
Total asset turnover1 0.44 0.43 0.37 0.44 0.53 0.50
Adjusted for Operating Leases
Selected Financial Data (US$ in millions)
Revenue 125,843  110,360  89,950  85,320  93,580  86,833 
Adjusted total assets 286,556  258,848  248,066  199,510  180,850  176,374 
Activity Ratio
Adjusted total asset turnover2 0.44 0.43 0.36 0.43 0.52 0.49

Based on: 10-K (filing date: 2019-08-01), 10-K (filing date: 2018-08-03), 10-K (filing date: 2017-08-02), 10-K (filing date: 2016-07-28), 10-K (filing date: 2015-07-31), 10-K (filing date: 2014-07-31).

2019 Calculations

1 Total asset turnover = Revenue ÷ Total assets
= 125,843 ÷ 286,556 = 0.44

2 Adjusted total asset turnover = Revenue ÷ Adjusted total assets
= 125,843 ÷ 286,556 = 0.44

Activity ratio Description The company
Adjusted total asset turnover An activity ratio calculated as total revenue divided by adjusted total assets. Microsoft Corp.’s adjusted total asset turnover ratio improved from 2017 to 2018 and from 2018 to 2019.

Adjusted Debt to Equity

Microsoft Excel LibreOffice Calc
Jun 30, 2019 Jun 30, 2018 Jun 30, 2017 Jun 30, 2016 Jun 30, 2015 Jun 30, 2014
As Reported
Selected Financial Data (US$ in millions)
Total debt 72,178  76,240  86,194  53,687  35,292  22,645 
Stockholders’ equity 102,330  82,718  72,394  71,997  80,083  89,784 
Solvency Ratio
Debt to equity1 0.71 0.92 1.19 0.75 0.44 0.25
Adjusted for Operating Leases
Selected Financial Data (US$ in millions)
Adjusted total debt 79,881  83,207  93,174  59,503  39,919  26,635 
Stockholders’ equity 102,330  82,718  72,394  71,997  80,083  89,784 
Solvency Ratio
Adjusted debt to equity2 0.78 1.01 1.29 0.83 0.50 0.30

Based on: 10-K (filing date: 2019-08-01), 10-K (filing date: 2018-08-03), 10-K (filing date: 2017-08-02), 10-K (filing date: 2016-07-28), 10-K (filing date: 2015-07-31), 10-K (filing date: 2014-07-31).

2019 Calculations

1 Debt to equity = Total debt ÷ Stockholders’ equity
= 72,178 ÷ 102,330 = 0.71

2 Adjusted debt to equity = Adjusted total debt ÷ Stockholders’ equity
= 79,881 ÷ 102,330 = 0.78

Solvency ratio Description The company
Adjusted debt-to-equity A solvency ratio calculated as adjusted total debt divided by total shareholders’ equity. Microsoft Corp.’s adjusted debt-to-equity ratio improved from 2017 to 2018 and from 2018 to 2019.

Adjusted Return on Assets (ROA)

Microsoft Excel LibreOffice Calc
Jun 30, 2019 Jun 30, 2018 Jun 30, 2017 Jun 30, 2016 Jun 30, 2015 Jun 30, 2014
As Reported
Selected Financial Data (US$ in millions)
Net income 39,240  16,571  21,204  16,798  12,193  22,074 
Total assets 286,556  258,848  241,086  193,694  176,223  172,384 
Profitability Ratio
ROA1 13.69% 6.40% 8.80% 8.67% 6.92% 12.81%
Adjusted for Operating Leases
Selected Financial Data (US$ in millions)
Net income 39,240  16,571  21,204  16,798  12,193  22,074 
Adjusted total assets 286,556  258,848  248,066  199,510  180,850  176,374 
Profitability Ratio
Adjusted ROA2 13.69% 6.40% 8.55% 8.42% 6.74% 12.52%

Based on: 10-K (filing date: 2019-08-01), 10-K (filing date: 2018-08-03), 10-K (filing date: 2017-08-02), 10-K (filing date: 2016-07-28), 10-K (filing date: 2015-07-31), 10-K (filing date: 2014-07-31).

2019 Calculations

1 ROA = 100 × Net income ÷ Total assets
= 100 × 39,240 ÷ 286,556 = 13.69%

2 Adjusted ROA = 100 × Net income ÷ Adjusted total assets
= 100 × 39,240 ÷ 286,556 = 13.69%

Profitability ratio Description The company
Adjusted ROA A profitability ratio calculated as net income divided by adjusted total assets. Microsoft Corp.’s adjusted ROA deteriorated from 2017 to 2018 but then improved from 2018 to 2019 exceeding 2017 level.