Off-Balance Sheet FinancingAirlines AMR (American Airlines) leases most of itscommercial a...

Off-Balance Sheet Financing

Airlines AMR (American Airlines) leases most of itscommercial aircraft and is currently committedtopayover $11 billion in future lease obligations. However, the company’s 2009 financialstatement reported only $689 million of these commitments as long-term capital lease obligationsinthe liability sectionof its balance sheet. The remaining commitments are structured asoperatingleases. Obligations to pay future operating lease obligations are not reported in the balance sheetas liabilities. Instead, cash outlays for operating leases appear only in the income statement asexpenses as the obligations corne due.American’s recent balance sheet reports assets totaling $25.5 billion. The company’s long-termdebt, including its capital lease obligations, total approximately $10.5 billion, and the stockholders’equity section of itsbalance sheet reveals a deficit (negative) balance in retained earnings.

Instructions

a. If American Airlines had structured its aircraft commitments as capital leases instead of operating leases, how would the appearance and potential interpretation of its balance sheethave changed?

b. Isit ethical for American Airlines to structure less than $1billion of its aircraft commitments as capital leases and theremaining as off-balance sheet financing? Defend your answer.

c. With regard to American Airlines’s lease obligations, why is it important for investors and creditors toread and understand the footnotes accompanying the airline's financial statements?