Microsoft Excel LibreOffice Calc

International Business Machines Corp. (IBM)

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

International Business Machines Corp., future operating lease payments

Microsoft Excel LibreOffice Calc
Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
Total undiscounted future operating lease payments (USD $ in millions) 6,568  6,883  6,434  6,152  5,991 
Discount rate1 2.51% 2.68% 2.58% 2.36% 2.55%
Total present value of future operating lease payments (USD $ in millions) 6,095  6,314  5,925  5,699  5,554 

Based on: 10-K (filing date: 2018-02-27), 10-K (filing date: 2017-02-28), 10-K (filing date: 2016-02-23), 10-K (filing date: 2015-02-24), 10-K (filing date: 2014-02-25).

1 Weighted-average interest rate for International Business Machines Corp.’s debt

Year Future operating lease payments (as reported) Year Future operating lease payments (estimated) Present value at 2.51%
2018 1,614  2018 1,614  1,574 
2019 1,453  2019 1,453  1,383 
2020 1,143  2020 1,143  1,061 
2021 829  2021 829  751 
2022 633  2022 633  559 
2023 and thereafter 896  2023 633  546 
2024 263  221 
Total: 6,568  6,568  6,095 

Based on: 10-K (filing date: 2018-02-27).

Year Future operating lease payments (as reported) Year Future operating lease payments (estimated) Present value at 2.68%
2017 1,414  2017 1,414  1,377 
2018 1,328  2018 1,328  1,260 
2019 1,218  2019 1,218  1,125 
2020 1,016  2020 1,016  914 
2021 796  2021 796  697 
2022 and thereafter 1,111  2022 796  679 
2023 315  262 
Total: 6,883  6,883  6,314 

Based on: 10-K (filing date: 2017-02-28).

Year Future operating lease payments (as reported) Year Future operating lease payments (estimated) Present value at 2.58%
2016 1,347  2016 1,347  1,313 
2017 1,231  2017 1,231  1,170 
2018 1,107  2018 1,107  1,026 
2019 985  2019 985  890 
2020 776  2020 776  683 
2021 and thereafter 988  2021 776  666 
2022 212  177 
Total: 6,434  6,434  5,925 

Based on: 10-K (filing date: 2016-02-23).

Year Future operating lease payments (as reported) Year Future operating lease payments (estimated) Present value at 2.36%
2015 1,350  2015 1,350  1,319 
2016 1,161  2016 1,161  1,108 
2017 988  2017 988  921 
2018 848  2018 848  772 
2019 754  2019 754  671 
2020 and thereafter 1,051  2020 754  656 
2021 297  252 
Total: 6,152  6,152  5,699 

Based on: 10-K (filing date: 2015-02-24).

Year Future operating lease payments (as reported) Year Future operating lease payments (estimated) Present value at 2.55%
2014 1,492  2014 1,492  1,455 
2015 1,286  2015 1,286  1,223 
2016 1,016  2016 1,016  942 
2017 799  2017 799  722 
2018 620  2018 620  547 
2019 and thereafter 778  2019 620  533 
2020 158  132 
Total: 5,991  5,991  5,554 

Based on: 10-K (filing date: 2014-02-25).

Analyst Adjustments for Operating Leases

International Business Machines Corp., adjustments to financial data

USD $ in millions

Microsoft Excel LibreOffice Calc
Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
Adjustment to Total Assets
Total assets (as reported) 125,356  117,470  110,495  117,532  126,223 
Add: Operating leased assets1 6,095  6,314  5,925  5,699  5,554 
Total assets (adjusted) 131,451  123,784  116,420  123,231  131,777 
Adjustment to Total Debt
Total debt (as reported) 46,824  42,168  39,889  40,804  39,718 
Add: Operating lease obligations2 6,095  6,314  5,925  5,699  5,554 
Total debt (adjusted) 52,919  48,482  45,814  46,503  45,272 
Adjustment to Earnings before Interest and Tax (EBIT)
EBIT3 (as reported) 12,032  12,976  16,421  20,476  19,933 
Add-back: Rental expense 1,821  1,508  1,474  1,592  1,759 
Less: Depreciation expense, operating leased assets4 1,627  1,304  1,288  1,424  1,577 
EBIT (adjusted) 12,226  13,180  16,607  20,644  20,115 
Adjustment to Interest Expense
Interest expense (as reported) 615  630  468  484  402 
Add: Interest expense, operating lease obligations5 194  204  186  168  182 
Interest expense (adjusted) 809  834  654  652  584 

Based on: 10-K (filing date: 2018-02-27), 10-K (filing date: 2017-02-28), 10-K (filing date: 2016-02-23), 10-K (filing date: 2015-02-24), 10-K (filing date: 2014-02-25).

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

3 See Details »

4 See Details »

5 See Details »

International Business Machines Corp., Financial Data: Reported vs. Adjusted

Adjusted Ratios for Operating Leases (Summary)

International Business Machines Corp., 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 0.63 0.68 0.74 0.79 0.79
Adjusted total asset turnover 0.60 0.65 0.70 0.75 0.76
Debt to Equity2
Reported debt to equity 2.66 2.31 2.80 3.44 1.74
Adjusted debt to equity 3.01 2.66 3.21 3.92 1.99
Return on Assets3 (ROA)
Reported ROA 4.59% 10.11% 11.94% 10.23% 13.06%
Adjusted ROA 4.38% 9.59% 11.33% 9.76% 12.51%
Interest Coverage4
Reported interest coverage 19.56 20.60 35.09 42.31 49.58
Adjusted interest coverage 15.12 15.80 25.39 31.66 34.45

Based on: 10-K (filing date: 2018-02-27), 10-K (filing date: 2017-02-28), 10-K (filing date: 2016-02-23), 10-K (filing date: 2015-02-24), 10-K (filing date: 2014-02-25).

1 See Details »

2 See Details »

3 See Details »

4 See Details »

Ratio Description The company
Adjusted total asset turnover An activity ratio calculated as total revenue divided by adjusted total assets. International Business Machines Corp.’s adjusted total asset turnover deteriorated from 2015 to 2016 and from 2016 to 2017.
Adjusted debt-to-equity A solvency ratio calculated as adjusted total debt divided by total shareholders’ equity. International Business Machines Corp.’s adjusted debt-to-equity improved from 2015 to 2016 but then slightly deteriorated from 2016 to 2017 not reaching 2015 level.
Adjusted ROA A profitability ratio calculated as net income divided by adjusted total assets. International Business Machines Corp.’s adjusted ROA deteriorated from 2015 to 2016 and from 2016 to 2017.
Adjusted interest coverage A solvency ratio calculated as adjusted EBIT divided by adjusted interest payments. International Business Machines Corp.’s adjusted interest coverage deteriorated from 2015 to 2016 and from 2016 to 2017.

International Business Machines Corp., Ratios: Reported vs. Adjusted

Adjusted Total Asset Turnover

Microsoft Excel LibreOffice Calc
Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
As Reported
Selected Financial Data (USD $ in millions)
Revenue 79,139  79,919  81,741  92,793  99,751 
Total assets 125,356  117,470  110,495  117,532  126,223 
Ratio
Total asset turnover1 0.63 0.68 0.74 0.79 0.79
Adjusted for Operating Leases
Selected Financial Data (USD $ in millions)
Revenue 79,139  79,919  81,741  92,793  99,751 
Adjusted total assets 131,451  123,784  116,420  123,231  131,777 
Ratio
Adjusted total asset turnover2 0.60 0.65 0.70 0.75 0.76

Based on: 10-K (filing date: 2018-02-27), 10-K (filing date: 2017-02-28), 10-K (filing date: 2016-02-23), 10-K (filing date: 2015-02-24), 10-K (filing date: 2014-02-25).

2017 Calculations

1 Total asset turnover = Revenue ÷ Total assets
= 79,139 ÷ 125,356 = 0.63

2 Adjusted total asset turnover = Revenue ÷ Adjusted total assets
= 79,139 ÷ 131,451 = 0.60

Ratio Description The company
Adjusted total asset turnover An activity ratio calculated as total revenue divided by adjusted total assets. International Business Machines Corp.’s adjusted total asset turnover deteriorated from 2015 to 2016 and from 2016 to 2017.

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
Selected Financial Data (USD $ in millions)
Total debt 46,824  42,168  39,889  40,804  39,718 
Total IBM stockholders’ equity 17,594  18,246  14,262  11,868  22,792 
Ratio
Debt to equity1 2.66 2.31 2.80 3.44 1.74
Adjusted for Operating Leases
Selected Financial Data (USD $ in millions)
Adjusted total debt 52,919  48,482  45,814  46,503  45,272 
Total IBM stockholders’ equity 17,594  18,246  14,262  11,868  22,792 
Ratio
Adjusted debt to equity2 3.01 2.66 3.21 3.92 1.99

Based on: 10-K (filing date: 2018-02-27), 10-K (filing date: 2017-02-28), 10-K (filing date: 2016-02-23), 10-K (filing date: 2015-02-24), 10-K (filing date: 2014-02-25).

2017 Calculations

1 Debt to equity = Total debt ÷ Total IBM stockholders’ equity
= 46,824 ÷ 17,594 = 2.66

2 Adjusted debt to equity = Adjusted total debt ÷ Total IBM stockholders’ equity
= 52,919 ÷ 17,594 = 3.01

Ratio Description The company
Adjusted debt-to-equity A solvency ratio calculated as adjusted total debt divided by total shareholders’ equity. International Business Machines Corp.’s adjusted debt-to-equity improved from 2015 to 2016 but then slightly deteriorated from 2016 to 2017 not reaching 2015 level.

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
Selected Financial Data (USD $ in millions)
Net income attributable to IBM 5,753  11,872  13,190  12,022  16,483 
Total assets 125,356  117,470  110,495  117,532  126,223 
Ratio
ROA1 4.59% 10.11% 11.94% 10.23% 13.06%
Adjusted for Operating Leases
Selected Financial Data (USD $ in millions)
Net income attributable to IBM 5,753  11,872  13,190  12,022  16,483 
Adjusted total assets 131,451  123,784  116,420  123,231  131,777 
Ratio
Adjusted ROA2 4.38% 9.59% 11.33% 9.76% 12.51%

Based on: 10-K (filing date: 2018-02-27), 10-K (filing date: 2017-02-28), 10-K (filing date: 2016-02-23), 10-K (filing date: 2015-02-24), 10-K (filing date: 2014-02-25).

2017 Calculations

1 ROA = 100 × Net income attributable to IBM ÷ Total assets
= 100 × 5,753 ÷ 125,356 = 4.59%

2 Adjusted ROA = 100 × Net income attributable to IBM ÷ Adjusted total assets
= 100 × 5,753 ÷ 131,451 = 4.38%

Ratio Description The company
Adjusted ROA A profitability ratio calculated as net income divided by adjusted total assets. International Business Machines Corp.’s adjusted ROA deteriorated from 2015 to 2016 and from 2016 to 2017.

Adjusted Interest Coverage

Microsoft Excel LibreOffice Calc
Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
As Reported
Selected Financial Data (USD $ in millions)
Earnings before interest and tax1 (EBIT) 12,032  12,976  16,421  20,476  19,933 
Interest expense 615  630  468  484  402 
Ratio
Interest coverage2 19.56 20.60 35.09 42.31 49.58
Adjusted for Operating Leases
Selected Financial Data (USD $ in millions)
Adjusted EBIT 12,226  13,180  16,607  20,644  20,115 
Adjusted interest expense 809  834  654  652  584 
Ratio
Adjusted interest coverage3 15.12 15.80 25.39 31.66 34.45

Based on: 10-K (filing date: 2018-02-27), 10-K (filing date: 2017-02-28), 10-K (filing date: 2016-02-23), 10-K (filing date: 2015-02-24), 10-K (filing date: 2014-02-25).

1 See Details »

2017 Calculations

2 Interest coverage = EBIT ÷ Interest expense
= 12,032 ÷ 615 = 19.56

3 Adjusted interest coverage = Adjusted EBIT ÷ Adjusted interest expense
= 12,226 ÷ 809 = 15.12

Ratio Description The company
Adjusted interest coverage ratio A solvency ratio calculated as adjusted EBIT divided by adjusted interest payments. International Business Machines Corp.’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 1,821  1,508  1,474  1,592  1,759 
Less: Estimated interest expense, operating lease obligations1 194  204  186  168  182 
Estimated depreciation expense, operating leased assets 1,627  1,304  1,288  1,424  1,577 

Based on: 10-K (filing date: 2018-02-27), 10-K (filing date: 2017-02-28), 10-K (filing date: 2016-02-23), 10-K (filing date: 2015-02-24), 10-K (filing date: 2014-02-25).

1 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) 7,722  7,618  7,213  7,123  7,132 
Discount rate2 2.51% 2.68% 2.58% 2.36% 2.55%
Estimated interest expense, operating lease obligations3 (USD $ in millions) 194  204  186  168  182 

Based on: 10-K (filing date: 2018-02-27), 10-K (filing date: 2017-02-28), 10-K (filing date: 2016-02-23), 10-K (filing date: 2015-02-24), 10-K (filing date: 2014-02-25).

1 See Details »

2 Weighted-average interest rate for International Business Machines Corp.’s debt

2017 Calculations

3 Estimated interest expense, operating lease obligations = Operating leased assets, at beginning of year × Discount rate
= 7,722 × 2.51% = 194

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) 6,095  6,314  5,925  5,699  5,554 
Rental expense (USD $ in millions) 1,821  1,508  1,474  1,592  1,759 
Discount rate2 2.51% 2.68% 2.58% 2.36% 2.55%
Total present value of operating lease payments, at beginning of year3 (USD $ in millions) 7,722  7,618  7,213  7,123  7,132 

Based on: 10-K (filing date: 2018-02-27), 10-K (filing date: 2017-02-28), 10-K (filing date: 2016-02-23), 10-K (filing date: 2015-02-24), 10-K (filing date: 2014-02-25).

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

2 Weighted-average interest rate for International Business Machines Corp.’s debt

2017 Calculations

3 Total present value of operating lease payments, at beginning of year = (Total present value of future operating lease payments + Rental expense) ÷ (1 + Discount rate)
= (6,095 + 1,821) ÷ (1 + 2.51%) = 7,722