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Analysis of Operating Leases

Difficulty: Advanced

An operating lease is treated like a rental contract. Neither the leased asset nor the associated liability is reported on the lessee statement of financial position, but the rights may be very similar to the rights of an owner. The lessee only records the lease payments as a rental expense in income statement.


Present Value of Future Operating Lease Payments

AT&T Inc., future operating lease payments

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Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
Total undiscounted future operating lease payments1 (USD $ in millions) 25,928  29,657  28,845  31,047  24,952 
Discount rate2 4.40% 4.20% 4.00% 4.20% 4.50%
Total present value of future operating lease payments (USD $ in millions) 21,576  24,373  23,869  25,120  19,904 

1 Source: AT&T Inc. Annual Reports

2 Weighted-average interest rate for AT&T Inc.'s debt

Year Future operating lease payments (as reported)1 Year Future operating lease payments (estimated) Present value at 4.40%
2018 3,945  2018 3,945  3,779 
2019 3,686  2019 3,686  3,382 
2020 3,414  2020 3,414  3,000 
2021 2,968  2021 2,968  2,498 
2022 2,659  2022 2,659  2,144 
2023 and thereafter 9,256  2023 2,659  2,054 
2024 2,659  1,967 
2025 2,659  1,884 
2026 1,279  868 
Total: 25,928  25,928  21,576 

1 Source: AT&T Inc. Annual Reports

Year Future operating lease payments (as reported)1 Year Future operating lease payments (estimated) Present value at 4.20%
2017 3,915  2017 3,915  3,757 
2018 3,706  2018 3,706  3,413 
2019 3,448  2019 3,448  3,048 
2020 3,208  2020 3,208  2,721 
2021 2,811  2021 2,811  2,288 
2022 and thereafter 12,569  2022 2,811  2,196 
2023 2,811  2,108 
2024 2,811  2,023 
2025 2,811  1,941 
2026 1,325  878 
Total: 29,657  29,657  24,373 

1 Source: AT&T Inc. Annual Reports

Year Future operating lease payments (as reported)1 Year Future operating lease payments (estimated) Present value at 4.00%
2016 3,775  2016 3,775  3,630 
2017 3,551  2017 3,551  3,283 
2018 3,257  2018 3,257  2,895 
2019 3,003  2019 3,003  2,567 
2020 2,771  2020 2,771  2,278 
2021 and thereafter 12,488  2021 2,771  2,190 
2022 2,771  2,106 
2023 2,771  2,025 
2024 2,771  1,947 
2025 1,404  948 
Total: 28,845  28,845  23,869 

1 Source: AT&T Inc. Annual Reports

Year Future operating lease payments (as reported)1 Year Future operating lease payments (estimated) Present value at 4.20%
2015 3,879  2015 3,879  3,723 
2016 3,641  2016 3,641  3,353 
2017 3,290  2017 3,290  2,908 
2018 2,981  2018 2,981  2,529 
2019 2,713  2019 2,713  2,209 
2020 and thereafter 14,543  2020 2,713  2,120 
2021 2,713  2,034 
2022 2,713  1,952 
2023 2,713  1,873 
2024 2,713  1,798 
2025 978  622 
Total: 31,047  31,047  25,120 

1 Source: AT&T Inc. Annual Reports

Year Future operating lease payments (as reported)1 Year Future operating lease payments (estimated) Present value at 4.50%
2014 3,003  2014 3,003  2,874 
2015 2,857  2015 2,857  2,616 
2016 2,694  2016 2,694  2,361 
2017 2,458  2017 2,458  2,061 
2018 2,233  2018 2,233  1,792 
2019 and thereafter 11,707  2019 2,233  1,715 
2020 2,233  1,641 
2021 2,233  1,570 
2022 2,233  1,503 
2023 2,233  1,438 
2024 542  334 
Total: 24,952  24,952  19,904 

1 Source: AT&T Inc. Annual Reports


Analyst Adjustments for Operating Leases

AT&T Inc., adjustments to financial data

USD $ in millions

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Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
Adjustment to Total Assets
Total assets (as reported) 444,097  403,821  402,672  292,829  277,787 
Add: Operating leased assets1 21,576  24,373  23,869  25,120  19,904 
Total assets (adjusted) 465,673  428,194  426,541  317,949  297,691 
Adjustment to Total Debt
Total debt (as reported) 164,346  123,513  126,151  82,067  74,788 
Add: Operating lease obligations2 21,576  24,373  23,869  25,120  19,904 
Total debt (adjusted) 185,922  147,886  150,020  107,187  94,692 
Adjustment to Earnings before Interest and Tax (EBIT)
EBIT3 (as reported) 21,439  24,722  24,812  13,573  31,717 
Add-back: Rental expense under operating leases4 4,953  4,482  5,025  4,345  3,683 
Less: Depreciation expense, operating leased assets5 3,835  3,319  3,914  3,157  2,667 
EBIT (adjusted) 22,557  25,885  25,923  14,761  32,733 
Adjustment to Interest Expense
Interest expense (as reported) 6,300  4,910  4,120  3,613  3,940 
Add: Interest expense, operating lease obligations6 1,118  1,163  1,111  1,188  1,016 
Interest expense (adjusted) 7,418  6,073  5,231  4,801  4,956 

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

3 See Details »

4 Source: AT&T Inc. Annual Reports

5 See Details »

6 See Details »


Adjusted Ratios for Operating Leases (Summary)

AT&T Inc., adjusted ratios

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Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
Total Asset Turnover1
Reported total asset turnover 0.36 0.41 0.36 0.45 0.46
Adjusted total asset turnover 0.34 0.38 0.34 0.42 0.43
Debt to Equity2
Reported debt to equity 1.17 1.00 1.03 0.95 0.82
Adjusted debt to equity 1.32 1.20 1.22 1.24 1.04
Return on Assets3 (ROA)
Reported ROA 6.63% 3.21% 3.31% 2.13% 6.57%
Adjusted ROA 6.32% 3.03% 3.13% 1.96% 6.13%
Interest Coverage4
Reported interest coverage 3.40 5.04 6.02 3.76 8.05
Adjusted interest coverage 3.04 4.26 4.96 3.07 6.61
Ratio Description The company
Adjusted total asset turnover An activity ratio calculated as total revenue divided by adjusted total assets. AT&T Inc.'s adjusted total asset turnover improved from 2015 to 2016 but then slightly deteriorated from 2016 to 2017 not reaching 2015 level.
Adjusted debt-to-equity A solvency ratio calculated as adjusted total debt divided by total shareholders' equity. AT&T Inc.'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. AT&T Inc.'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. AT&T Inc.'s adjusted interest coverage deteriorated from 2015 to 2016 and from 2016 to 2017.

Adjusted Total Asset Turnover

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Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
As Reported
Operating revenues (USD $ in millions) 160,546  163,786  146,801  132,447  128,752 
Total assets (USD $ in millions) 444,097  403,821  402,672  292,829  277,787 
Total asset turnover1 0.36 0.41 0.36 0.45 0.46
Adjusted for Operating Leases
Operating revenues (USD $ in millions) 160,546  163,786  146,801  132,447  128,752 
Adjusted total assets (USD $ in millions) 465,673  428,194  426,541  317,949  297,691 
Adjusted total asset turnover2 0.34 0.38 0.34 0.42 0.43

2017 Calculations

1 Total asset turnover = Operating revenues ÷ Total assets
= 160,546 ÷ 444,097 = 0.36

2 Adjusted total asset turnover = Operating revenues ÷ Adjusted total assets
= 160,546 ÷ 465,673 = 0.34

Ratio Description The company
Adjusted total asset turnover An activity ratio calculated as total revenue divided by adjusted total assets. AT&T Inc.'s adjusted total asset turnover improved from 2015 to 2016 but then slightly deteriorated from 2016 to 2017 not reaching 2015 level.

Adjusted Debt to Equity

Microsoft Excel LibreOffice Calc
Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
As Reported
Total debt (USD $ in millions) 164,346  123,513  126,151  82,067  74,788 
Stockholders' equity attributable to AT&T (USD $ in millions) 140,861  123,135  122,671  86,370  90,988 
Debt to equity1 1.17 1.00 1.03 0.95 0.82
Adjusted for Operating Leases
Adjusted total debt (USD $ in millions) 185,922  147,886  150,020  107,187  94,692 
Stockholders' equity attributable to AT&T (USD $ in millions) 140,861  123,135  122,671  86,370  90,988 
Adjusted debt to equity2 1.32 1.20 1.22 1.24 1.04

2017 Calculations

1 Debt to equity = Total debt ÷ Stockholders' equity attributable to AT&T
= 164,346 ÷ 140,861 = 1.17

2 Adjusted debt to equity = Adjusted total debt ÷ Stockholders' equity attributable to AT&T
= 185,922 ÷ 140,861 = 1.32

Ratio Description The company
Adjusted debt-to-equity A solvency ratio calculated as adjusted total debt divided by total shareholders' equity. AT&T Inc.'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
Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
As Reported
Net income attributable to AT&T (USD $ in millions) 29,450  12,976  13,345  6,224  18,249 
Total assets (USD $ in millions) 444,097  403,821  402,672  292,829  277,787 
ROA1 6.63% 3.21% 3.31% 2.13% 6.57%
Adjusted for Operating Leases
Net income attributable to AT&T (USD $ in millions) 29,450  12,976  13,345  6,224  18,249 
Adjusted total assets (USD $ in millions) 465,673  428,194  426,541  317,949  297,691 
Adjusted ROA2 6.32% 3.03% 3.13% 1.96% 6.13%

2017 Calculations

1 ROA = 100 × Net income attributable to AT&T ÷ Total assets
= 100 × 29,450 ÷ 444,097 = 6.63%

2 Adjusted ROA = 100 × Net income attributable to AT&T ÷ Adjusted total assets
= 100 × 29,450 ÷ 465,673 = 6.32%

Ratio Description The company
Adjusted ROA A profitability ratio calculated as net income divided by adjusted total assets. AT&T Inc.'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
Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
As Reported
Earnings before interest and tax1 (EBIT) (USD $ in millions) 21,439  24,722  24,812  13,573  31,717 
Interest expense (USD $ in millions) 6,300  4,910  4,120  3,613  3,940 
Interest coverage2 3.40 5.04 6.02 3.76 8.05
Adjusted for Operating Leases
Adjusted EBIT (USD $ in millions) 22,557  25,885  25,923  14,761  32,733 
Adjusted interest expense (USD $ in millions) 7,418  6,073  5,231  4,801  4,956 
Adjusted interest coverage3 3.04 4.26 4.96 3.07 6.61

1 See Details »

2017 Calculations

2 Interest coverage = EBIT ÷ Interest expense
= 21,439 ÷ 6,300 = 3.40

3 Adjusted interest coverage = Adjusted EBIT ÷ Adjusted interest expense
= 22,557 ÷ 7,418 = 3.04

Ratio Description The company
Adjusted interest coverage ratio A solvency ratio calculated as adjusted EBIT divided by adjusted interest payments. AT&T Inc.'s adjusted interest coverage ratio deteriorated from 2015 to 2016 and from 2016 to 2017.

Estimation of Depreciation Expense, Operating Leased Assets

USD $ in millions

Microsoft Excel LibreOffice Calc
Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
Rental expense under operating leases1 4,953  4,482  5,025  4,345  3,683 
Less: Estimated interest expense, operating lease obligations2 1,118  1,163  1,111  1,188  1,016 
Estimated depreciation expense, operating leased assets 3,835  3,319  3,914  3,157  2,667 

1 Source: AT&T Inc., Annual Reports

2 See Details »


Estimation of Interest Expense, Operating Lease Obligations

Microsoft Excel LibreOffice Calc
Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
Operating leased assets, at beginning of year1 (USD $ in millions) 25,411  27,692  27,782  28,278  22,571 
Discount rate2 4.40% 4.20% 4.00% 4.20% 4.50%
Estimated interest expense, operating lease obligations3 (USD $ in millions) 1,118  1,163  1,111  1,188  1,016 

1 See Details »

2 Weighted-average interest rate for AT&T Inc.'s debt

2017 Calculations

3 Estimated interest expense, operating lease obligations = Operating leased assets, at beginning of year × Discount rate
= 25,411 × 4.40% = 1,118


Present Value of Operating Lease Payments, at Beginning of Year

Microsoft Excel LibreOffice Calc
Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
Total present value of future operating lease payments1 (USD $ in millions) 21,576  24,373  23,869  25,120  19,904 
Rental expense under operating leases2 (USD $ in millions) 4,953  4,482  5,025  4,345  3,683 
Discount rate3 4.40% 4.20% 4.00% 4.20% 4.50%
Total present value of operating lease payments, at beginning of year4 (USD $ in millions) 25,411  27,692  27,782  28,278  22,571 

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

2 Source: AT&T Inc., Annual Reports

3 Weighted-average interest rate for AT&T Inc.'s debt

2017 Calculations

4 Total present value of operating lease payments, at beginning of year = (Total present value of future operating lease payments + Rental expense under operating leases) ÷ (1 + Discount rate)
= (21,576 + 4,953) ÷ (1 + 4.40%) = 25,411