Question 6 Question 7 Comparing the balance sheets and income statements of Delta and Singapore has serious shortcomings given the extreme difference between the financial structures of the two companies’ aircraft fleets. From the information provided in the case, calculate adjusted figures for Delta’s aircraft fleet so as to make Delta’s total depreciation expense, total assets, and total long-term debt more comparable to Singapore’s. Comparability Delta Air Lines Singapore Airlines Solution Aircraft fleet composed of both Aircraft fleet comprises of only Use Case B’s Exhibit 1 on Delta’s OWNED and LEASED assets OWNED assets operating lease obligations to - Leased assets make up - SIA not operating any under estimate the value of the leases if substantial proportion of total operating leases they were to be capitalized and be fleet included in the Balance Sheet - Significant off-balance sheet financing effect Concept: Capitalization of Operating LEASES as Finance Lease Excerpt from Delta Air Lines “Notes to Consolidated Financial Statements” Year 1992 (SGD$ millions) 1993 (SGD$ millions) 1993 907 - 1994 897 905 1995 881 916 1996 895 941 1997 901 940 After 1997 / 1998 12,852 942 After 1998 - 13,202 Total 17,333 17,828 Assumptions 1. The interest rate to be kept at 8.5% - Highlighted in (B) case as the average interest rates of Delta’s various outstanding issues of long-term debt in 1993 2. n = 20, where n is the lease period. - Inferred from Exhibit 4 of the (A) case as the new depreciation policy effective April 1, 1993 depreciated flight equipment on a straight-line bases to RV over a 20-year period from the dates placed in service. 3. Tax rate for Delta is set at 25% Capitalising PV of Lease Commitments 1992 Year Cash Flow (SGD 1993 Year Cash Flow (SGD $ million) $ million) CF0 CF0 Year 1 CF1 907 Year 1 CF1 905 CF2 897 CF2 916 CF3 881 CF3 941 CF4 895 CF4 940 CF5 901 CF5 942 CF6 to CF 20 12,852/15 = CF6 to CF 20 13,202/15 = 856.8 880.13 PV = $8264.5077 million PV = $8502.408 million End of 1992 • PV of Lease commitments are to be capitalized Effects: 1. Increase in Non-Current Assets of Delta by $8264.50 million 2. Increase in Non-Current or Long-Term Debt of $8254.51 million (Liability is recorded) Note: Depreciation Expense is not affected in 1992 as amount is charged in 1993. Purchase of New Assets in FY 1993 Lease Payable (FY 1993) Rental Payment 1,085 BGN Balance 8264.51 Interest Expense 8264.51 * 8.5 = 702.48 Purchase of New Assets 620.42 (Balancing Figure) Ending Balance (From 8502.41 previous slide) Effect on 1993 Financial Statements Assets SGD $ millions Purchase of New Assets 620.42 (8264.51 / 20) + (310.21) / 20 = (428.74) Less: Accumulated Depreciation Assume assets bought evenly across 1992 – 1993 (Opening Balance + Closing Balance) / 2 620.42 / 2 = 310.21 191.26 Effect on 1993 Financial Statements P/L Adjustments SGD $ millions Additional Depreciation Expense (428.74) Interest Expense (From capitalization of lease) (702.48) Rental Payment (Add back from Operating Lease) 1085 Profits Before Tax (46.22) Tax Adjustment (at 25%) 0.25 * 46.22 = 11.55 Net P/L Effect (57.77) Effect on 1993 Financial Statements Equity SGD $ millions P/L Adjustment (57.77) Interest Expense (add back) 702.48 Rental Payment (1085) Tax Expense 11.55 Equity Effect (428.74) New P/L P/L Rent Expense 1,085 Depreciation Expense (428.74) Interest Expense (702.48) Tax Expense (11.55) Net Income (34.72 New Balance Sheet Balance Sheet Assets Liabilities Lease Assets 8,264 Lease Payables 8,264 New Assets 620 620 Depreciation (429) Reduction in Lease Payable (383) DTL (11.5) Equity (34.5) TOTAL 8,455 8,455 New Balance Sheet (Aircraft Fleet ~ 2/3) Balance Sheet Assets Liabilities Lease Assets 5,509 Lease Payables 5,509 New Assets 413 413 Depreciation 286 Reduction in Lease Payable (255) DTL (8) Equity (23) TOTAL 5,636 5,636