Question

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. $ in millions As of December 2015 2016 $317 2017 313 2018 301 2019 2020 2021-thereafter Total 258 226 1,160 $2,575 (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.

Answer 1

Part A

Answer is option C

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

There is no disclosure provided regarding capital lease

Part B

Answer is option D

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.

Capitalization of operating leases lowers the amount of total assets and liabilities

Part D

Answer is option B

We would make the following adjustments to Goldman Sachs's income statement: remove rent expense, add depreciation expense, and add interest expense.

Total rent expense under operating leases = interest and depreciation expense under capital leases

Part E

ROE	Increase (net income increases and no change equity)
NOPAT	Increase (rent expense was higher than depreciation would be if the leases were capitalized)
NOA	Increase ( lease assets are considered operating)
NOPM	Increase (in NOPAT/sales, NOPAT increases and no change in sales)
NOAT	Decrease (sales / NOA, NOA increases and no change in sales)
Financial leverage	Increase (lease obligations would increase)