Analyzing, Interpreting and Capitalizing Operating Leases
The Abercrombie & Fitch 10-K report contains the following footnote relating to leasing activities. This is the only information it discloses relating to its leasing activity.
Abercrombie & Fitch (ANF)
At January 29, 2011, the Company was committed to noncancelable leases with remaining terms of one to 17 years. A summary of operating lease commitments under noncancelable leases follows (thousands):
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Fiscal 2011 ...........................................................
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$ 331,151
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Fiscal 2012............................................................
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319,982
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Fiscal 2013............................................................
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303,531
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Fiscal 2014............................................................
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285,337
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Fiscal 2015............................................................
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262,586
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Thereafter..............................................................
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1,110,598
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Required
a. What lease assets and lease liabilities does Abercrombie report on its balance sheet? How do we know?
b. What effect does the lease classification have on A&F's balance sheet? Over the life of the lease, what effect does this classification have on the company's net income?
c. Using a 6% discount rate and rounding the remaining lease life to the nearest whole year, estimate the assets and liabilities that A&F fails to report as a result of its off-balance-sheet lease financing.
d. What adjustments would we consider to A&F's income statement corresponding to the adjustments we would make to its balance sheet in part c?
e. Indicate the direction (increase or decrease) of the effect that capitalizing these leases would have on the following financial items and ratios for A&F: return on equity (ROE), net operating profit after tax (NOPAT), net operating assets (NOA), net operating profit margin (NOPM), net operating asset turnover (NOAT), and measures of financial leverage.