.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.
Operating Leases Accounting Policy
FedEx leases certain aircraft, facilities, equipment and vehicles under capital and operating leases. The commencement date of all leases is the earlier of the date FedEx becomes legally obligated to make rent payments or the date FedEx may exercise control over the use of the property. In addition to minimum rental payments, certain leases provide for contingent rentals based on equipment usage, principally related to aircraft leases at FedEx Express and copier usage at FedEx Office. Rent expense associated with contingent rentals is recorded as incurred. Certain of FedEx's leases contain fluctuating or escalating payments and rent holiday periods. The related rent expense is recorded on a straight-line basis over the lease term. The cumulative excess of rent payments over rent expense is accounted for as a deferred lease asset and recorded in "Other assets" in the accompanying consolidated balance sheets. The cumulative excess of rent expense over rent payments is accounted for as a deferred lease obligation. Leasehold improvements associated with assets utilized under capital or operating leases are amortized over the shorter of the asset's useful life or the lease term.
Source: FedEx Corp., Annual Report
Present Value of Future Operating Lease Payments
FedEx Corp., future operating lease payments
| May 31, 2017 | May 31, 2016 | May 31, 2015 | May 31, 2014 | May 31, 2013 | May 31, 2012 | ||
|---|---|---|---|---|---|---|---|
| | Total undiscounted future operating lease payments1 (USD $ in millions) | ||||||
| | Discount rate2 | % | % | % | % | % | % |
| | Total present value of future operating lease payments (USD $ in millions) | ||||||
1 Source: FedEx Corp. Annual Reports
2 Weighted-average interest rate for FedEx Corp.'s debt
| Year | Future operating lease payments (as reported)1 | Year | Future operating lease payments (estimated) | Present value at % |
|---|---|---|---|---|
| 2018 | 2018 | |||
| 2019 | 2019 | |||
| 2020 | 2020 | |||
| 2021 | 2021 | |||
| 2022 | 2022 | |||
| 2023 and thereafter | 2023 | |||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| 2028 | ||||
| Total: |
1 Source: FedEx Corp. Annual Reports
| Year | Future operating lease payments (as reported)1 | Year | Future operating lease payments (estimated) | Present value at % |
|---|---|---|---|---|
| 2017 | 2017 | |||
| 2018 | 2018 | |||
| 2019 | 2019 | |||
| 2020 | 2020 | |||
| 2021 | 2021 | |||
| 2022 and thereafter | 2022 | |||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| Total: |
1 Source: FedEx Corp. Annual Reports
| Year | Future operating lease payments (as reported)1 | Year | Future operating lease payments (estimated) | Present value at % |
|---|---|---|---|---|
| 2016 | 2016 | |||
| 2017 | 2017 | |||
| 2018 | 2018 | |||
| 2019 | 2019 | |||
| 2020 | 2020 | |||
| 2021 and thereafter | 2021 | |||
| 2022 | ||||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| Total: |
1 Source: FedEx Corp. Annual Reports
| Year | Future operating lease payments (as reported)1 | Year | Future operating lease payments (estimated) | Present value at % |
|---|---|---|---|---|
| 2015 | 2015 | |||
| 2016 | 2016 | |||
| 2017 | 2017 | |||
| 2018 | 2018 | |||
| 2019 | 2019 | |||
| 2020 and thereafter | 2020 | |||
| 2021 | ||||
| 2022 | ||||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| Total: |
1 Source: FedEx Corp. Annual Reports
| Year | Future operating lease payments (as reported)1 | Year | Future operating lease payments (estimated) | Present value at % |
|---|---|---|---|---|
| 2014 | 2014 | |||
| 2015 | 2015 | |||
| 2016 | 2016 | |||
| 2017 | 2017 | |||
| 2018 | 2018 | |||
| 2019 and thereafter | 2019 | |||
| 2020 | ||||
| 2021 | ||||
| 2022 | ||||
| 2023 | ||||
| 2024 | ||||
| Total: |
1 Source: FedEx Corp. Annual Reports
| Year | Future operating lease payments (as reported)1 | Year | Future operating lease payments (estimated) | Present value at % |
|---|---|---|---|---|
| 2013 | 2013 | |||
| 2014 | 2014 | |||
| 2015 | 2015 | |||
| 2016 | 2016 | |||
| 2017 | 2017 | |||
| 2018 and thereafter | 2018 | |||
| 2019 | ||||
| 2020 | ||||
| 2021 | ||||
| 2022 | ||||
| Total: |
1 Source: FedEx Corp. Annual Reports
Analyst Adjustments for Operating Leases
FedEx Corp., adjustments to financial data
USD $ in millions
| May 31, 2017 | May 31, 2016 | May 31, 2015 | May 31, 2014 | May 31, 2013 | May 31, 2012 | ||
|---|---|---|---|---|---|---|---|
| Adjustment to Total Assets | |||||||
| | Total assets (as reported) | ||||||
| | Add: Operating leased assets1 | ||||||
| | Total assets (adjusted) | ||||||
| Adjustment to Total Debt | |||||||
| | Total debt (as reported) | ||||||
| | Add: Operating lease obligations2 | ||||||
| | Total debt (adjusted) | ||||||
| Adjustment to Earnings before Interest and Tax (EBIT) | |||||||
| | EBIT3 (as reported) | ||||||
| | Add-back: Rent expense under operating leases4 | ||||||
| | Less: Depreciation expense, operating leased assets5 | ||||||
| | EBIT (adjusted) | ||||||
| Adjustment to Interest Expense | |||||||
| | Interest expense (as reported) | ||||||
| | Add: Interest expense, operating lease obligations6 | ||||||
| | Interest expense (adjusted) | ||||||
1, 2 Equal to total present value of future operating lease payments. See Details »
4 Source: FedEx Corp. Annual Reports
Adjusted Ratios for Operating Leases (Summary)
FedEx Corp., adjusted ratios
| May 31, 2017 | May 31, 2016 | May 31, 2015 | May 31, 2014 | May 31, 2013 | May 31, 2012 | ||
|---|---|---|---|---|---|---|---|
| Total Asset Turnover1 | |||||||
| | Reported total asset turnover | ||||||
| | Adjusted total asset turnover | ||||||
| Debt to Equity2 | |||||||
| | Reported debt to equity | ||||||
| | Adjusted debt to equity | ||||||
| Return on Assets3 (ROA) | |||||||
| | Reported ROA | % | % | % | % | % | % |
| | Adjusted ROA | % | % | % | % | % | % |
| Interest Coverage4 | |||||||
| | Reported interest coverage | ||||||
| | Adjusted interest coverage | ||||||
| Ratio | Description | The company |
|---|---|---|
| Adjusted total asset turnover | An activity ratio calculated as total revenue divided by adjusted total assets. | FedEx Corp.'s adjusted total asset turnover deteriorated from 2015 to 2016 but then improved from 2016 to 2017 exceeding 2015 level. |
| Adjusted debt-to-equity | A solvency ratio calculated as adjusted total debt divided by total shareholders' equity. | FedEx Corp.'s adjusted debt-to-equity deteriorated from 2015 to 2016 but then slightly improved from 2016 to 2017. |
| Adjusted ROA | A profitability ratio calculated as net income divided by adjusted total assets. | FedEx Corp.'s adjusted ROA improved from 2015 to 2016 and from 2016 to 2017. |
| Adjusted interest coverage | A solvency ratio calculated as adjusted EBIT divided by adjusted interest payments. | FedEx Corp.'s adjusted interest coverage improved from 2015 to 2016 and from 2016 to 2017. |
Adjusted Total Asset Turnover
| May 31, 2017 | May 31, 2016 | May 31, 2015 | May 31, 2014 | May 31, 2013 | May 31, 2012 | ||
|---|---|---|---|---|---|---|---|
| As Reported | |||||||
| | Revenues (USD $ in millions) | ||||||
| | Total assets (USD $ in millions) | ||||||
| | Total asset turnover1 | ||||||
| Adjusted for Operating Leases | |||||||
| | Revenues (USD $ in millions) | ||||||
| | Adjusted total assets (USD $ in millions) | ||||||
| | Adjusted total asset turnover2 | ||||||
2017 Calculations
1 Total asset turnover = Revenues ÷ Total assets
= ÷ =
2 Adjusted total asset turnover = Revenues ÷ Adjusted total assets
= ÷ =
| Ratio | Description | The company |
|---|---|---|
| Adjusted total asset turnover | An activity ratio calculated as total revenue divided by adjusted total assets. | FedEx Corp.'s adjusted total asset turnover deteriorated from 2015 to 2016 but then improved from 2016 to 2017 exceeding 2015 level. |
Adjusted Debt to Equity
| May 31, 2017 | May 31, 2016 | May 31, 2015 | May 31, 2014 | May 31, 2013 | May 31, 2012 | ||
|---|---|---|---|---|---|---|---|
| As Reported | |||||||
| | Total debt (USD $ in millions) | ||||||
| | Common stockholders' investment (USD $ in millions) | ||||||
| | Debt to equity1 | ||||||
| Adjusted for Operating Leases | |||||||
| | Adjusted total debt (USD $ in millions) | ||||||
| | Common stockholders' investment (USD $ in millions) | ||||||
| | Adjusted debt to equity2 | ||||||
2017 Calculations
1 Debt to equity = Total debt ÷ Common stockholders' investment
= ÷ =
2 Adjusted debt to equity = Adjusted total debt ÷ Common stockholders' investment
= ÷ =
| Ratio | Description | The company |
|---|---|---|
| Adjusted debt-to-equity | A solvency ratio calculated as adjusted total debt divided by total shareholders' equity. | FedEx Corp.'s adjusted debt-to-equity deteriorated from 2015 to 2016 but then slightly improved from 2016 to 2017. |
Adjusted Return on Assets (ROA)
| May 31, 2017 | May 31, 2016 | May 31, 2015 | May 31, 2014 | May 31, 2013 | May 31, 2012 | ||
|---|---|---|---|---|---|---|---|
| As Reported | |||||||
| | Net income (USD $ in millions) | ||||||
| | Total assets (USD $ in millions) | ||||||
| | ROA1 | % | % | % | % | % | % |
| Adjusted for Operating Leases | |||||||
| | Net income (USD $ in millions) | ||||||
| | Adjusted total assets (USD $ in millions) | ||||||
| | Adjusted ROA2 | % | % | % | % | % | % |
2017 Calculations
1 ROA = 100 × Net income ÷ Total assets
= 100 × ÷ = %
2 Adjusted ROA = 100 × Net income ÷ Adjusted total assets
= 100 × ÷ = %
| Ratio | Description | The company |
|---|---|---|
| Adjusted ROA | A profitability ratio calculated as net income divided by adjusted total assets. | FedEx Corp.'s adjusted ROA improved from 2015 to 2016 and from 2016 to 2017. |
Adjusted Interest Coverage
| May 31, 2017 | May 31, 2016 | May 31, 2015 | May 31, 2014 | May 31, 2013 | May 31, 2012 | ||
|---|---|---|---|---|---|---|---|
| As Reported | |||||||
| | Earnings before interest and tax1 (EBIT) (USD $ in millions) | ||||||
| | Interest expense (USD $ in millions) | ||||||
| | Interest coverage2 | ||||||
| Adjusted for Operating Leases | |||||||
| | Adjusted EBIT (USD $ in millions) | ||||||
| | Adjusted interest expense (USD $ in millions) | ||||||
| | Adjusted interest coverage3 | ||||||
2017 Calculations
2 Interest coverage = EBIT ÷ Interest expense
= ÷ =
3 Adjusted interest coverage = Adjusted EBIT ÷ Adjusted interest expense
= ÷ =
| Ratio | Description | The company |
|---|---|---|
| Adjusted interest coverage ratio | A solvency ratio calculated as adjusted EBIT divided by adjusted interest payments. | FedEx Corp.'s adjusted interest coverage ratio improved from 2015 to 2016 and from 2016 to 2017. |
Estimation of Depreciation Expense, Operating Leased Assets
USD $ in millions
| May 31, 2017 | May 31, 2016 | May 31, 2015 | May 31, 2014 | May 31, 2013 | May 31, 2012 | ||
|---|---|---|---|---|---|---|---|
| | Rent expense under operating leases1 | ||||||
| | Less: Estimated interest expense, operating lease obligations2 | ||||||
| | Estimated depreciation expense, operating leased assets |
1 Source: FedEx Corp., Annual Reports
Estimation of Interest Expense, Operating Lease Obligations
| May 31, 2017 | May 31, 2016 | May 31, 2015 | May 31, 2014 | May 31, 2013 | May 31, 2012 | ||
|---|---|---|---|---|---|---|---|
| | Operating leased assets, at beginning of year1 (USD $ in millions) | ||||||
| | Discount rate2 | % | % | % | % | % | % |
| | Estimated interest expense, operating lease obligations3 (USD $ in millions) | ||||||
2 Weighted-average interest rate for FedEx Corp.'s debt
2017 Calculations
3 Estimated interest expense, operating lease obligations = Operating leased assets, at beginning of year × Discount rate
= × =
Present Value of Operating Lease Payments, at Beginning of Year
| May 31, 2017 | May 31, 2016 | May 31, 2015 | May 31, 2014 | May 31, 2013 | May 31, 2012 | ||
|---|---|---|---|---|---|---|---|
| | Total present value of future operating lease payments1 (USD $ in millions) | ||||||
| | Rent expense under operating leases2 (USD $ in millions) | ||||||
| | Discount rate3 | % | % | % | % | % | % |
| | Total present value of operating lease payments, at beginning of year4 (USD $ in millions) | ||||||
1 Equal to total present value of future operating lease payments. See Details »
2 Source: FedEx Corp., Annual Reports
3 Weighted-average interest rate for FedEx Corp.'s debt
2017 Calculations
4 Total present value of operating lease payments, at beginning of year = (Total present value of future operating lease payments + Rent expense under operating leases) ÷ (1 + Discount rate)
= ( + ) ÷ (1 + %) =
