Analyzing, Interpreting and Capitalizing Operating Leases Goldman Sachs\' 10-K r
ID: 2517839 • Letter: A
Question
Analyzing, Interpreting and Capitalizing Operating Leases
Goldman Sachs' 10-K report contains the following lease footnote. This is the only information it discloses relating to its leasing activity.
The firm has contractual obligations under long-term noncancelable lease agreements for office space expiring on various dates through 2069. Rent charged to operating expense was $249 million for 2015. The table below presents future minimum rental payments, net of minimum sublease rentals.
(a) What lease assets and lease liabilities does Goldman Sachs report on its balance sheet? How do we know?
Goldman Sachs reports that it leases its retail locations. Because the leases represent contractual obligations, they are reported as liabilities on Goldman Sachs's balance sheet.
Under GAAP, Goldman Sachs must recognize the present value of the lease obligations as both an asset and a liability. The asset is subsequently depreciated and the liability is amortized like a mortgage obligation.
Because no capital leases are included in the Goldman Sachs footnote, we know that it only has operating leases. Because operating leases are not capitalized on the balance sheet, neither lease assets nor lease liabilities appear on the Goldman Sachs balance sheets.
Goldman Sachs reports that it leases its retail locations. Because the leases represent contractual obligations, they are reported as liabilities on Goldman Sachs's balance sheet. Goldman Sachs also reports assets relating to the real property it leases.
Mark 1.00 out of 1.00
(b) What effect does the lease classification have on Goldman Sachs's balance sheet? Over the life of the lease, what effect does this classification have on the company's net income?
Total assets and total liabilities for Goldman Sachs are lower than if the operating leases had been capitalized. Total profit is lower as a result of this classification.
Total assets and total liabilities for Goldman Sachs are higher than if the operating leases had been capitalized. Total profit is higher as a result of this classification.
Total assets and total liabilities for Goldman Sachs are lower than if the operating leases had been capitalized. Total profit is higher as a result of this classification.
Total assets and total liabilities for Goldman Sachs are lower than if the operating leases had been capitalized. Total profit is unaffected by this classification.
Mark 1.00 out of 1.00
(c) Using a 6% discount rate and rounding the remaining lease life to the nearest whole year, estimate the assets and liabilities that Goldman Sachs fails to report as a result of its off-balance-sheet lease financing. (Use a financial calculator or Excel to compute. Do not round until your final answers. Round each answer to the nearest whole number.)
*Use subsequent rounded answers to compute total.
$ in millions As of December 2015 2016 $317 2017 313 2018 301 2019 258 2020 226 2021-thereafter 1,160 Total $2,575Explanation / Answer
S.no. Year Lease rental Discount factor @ 6% Present value 1 Year 1 $317 0.943396226 $299.06 2 Year 2 $313 0.88999644 $278.57 3 Year 3 $301 0.839619283 $252.73 4 Year 4 $258 0.792093663 $204.36 5 Year 5 $226 0.747258173 $168.88 6 after 5 Year $1,160 0.70496054 $817.75 Total $2,021.00