Analyzing, Interpreting and Capitalizing Operating Leases

Air Canada is the largest Canadian airline and is the world’s ninth largest passenger airline by number of destinations. The company is headquartered in Montreal, Quebec. Air Canada used Canadian GAAP to prepare its 20 12 financial statements. Its footnotes include the following:

Required

a. Combine the principal and interest payments for the company’s finance lease obligations reported in the “Maturity Ana lysis” footnote to determine the total annual finance lease payments. Confim1 that the implicit rate that Air Canada used to capita lize these leases was 9.4%.

b. The company explains its “adjusted net debt” in its footnotes. Why is this a metric that airline industry analysts might want to use?

c. Recomputed the “capitalized operating leases” of $2,352 million reported in the last footnote shown above using the method described in the note (I) below the table.

d. Use the reported Operating Lease Commitments footnote to determine an independent estimate of the amount that would be capitalized if the company’s operating leases were classified as finance leases under IFRS. Use a discount rate of 9.4%.

e. Compare the amounts we obtained in parts  and  above. Why might the two be different?

f Indicate the direction (increase or decrease) of the effect that capitalizing the operating leases would have on the following financial items and ratios for Air Canada: return on equity (ROE), net operating profit after tax (NOPAT), net operating assets (NOA), and measures of financial leverage.