Analyzing, Interpreting and Capitalizing Operating Leases
LM Ericsson one of Swedens lagest companies, is a provider of telecommunication and data communication systems. The company reports total assets of SEK 180, I 00 and total liabilities of SEK 102,075 for 20 12 (in millions). Its annual report has the following foot. Note related to leasing activities.
a. What is reported on Ericsson 's balance sheet as lease liabilities?
b. Confirm that the implicit rate that Ericsson uses to discount its capital leases is 5.03%. Use this discount rate and round the remaining years to 3 decimals to estimate the amount of assets and liabilities that Ericsson fails to report as a result of its off-balance-sheer lease financing.
c. What adjustments would we make to Ericsson's income statement corresponding to the balance sheer adjustments implied in part b?
d. What portion of total lease liabilities did Ericsson report on-ba lance-sheet and what portion is offbalance-sheet?
e. Indicate the direction (increase or decrease) of the effect that capitalizing the operating leases would have on the following financial items and ratios for Ericsson: 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.
f Based on your analysis, do you believe that Ericsson's balance sheet adequately reports its facilities assets and related obligations? Explain.
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