Lease Accounting at FedEx
Krishna an MBA (Finance) student at a premier B-school of India who aspires to be an investment banker, was doing his internship with a renowned financial services firm in Mumbai to complete a 2-month mandatory internship after the first year. His project included financial analysis of FedEx’s financial statement. Being a very enthusiastic student, he had almost completed his analysis on FedEx, most of its financial details, prepared a draft report on FedEx and its financial condition. Before finalizing the draft, he decided to meet his Team Lead Daniel and discuss his findings. Krishna was satisfied with the progress in his work and was expecting an early leave (a week before) from his internship as he had planned to submit the project in next 4 days. He had tentatively planned a Goa trip if he could save a week.
On November 21st 2013, Krishna goes to Daniel to discuss the draft report. While reading his financial report, Daniel observes that Krishna had not considered any off balance sheet information for the analysis. Krishna had overlooked a very important item i.e., the operating lease amount, which was kept off balance sheet. Daniel asks Krishna to go through the FASB’s newly proposed lease accounting changes and then redraft the required analysis as FedEx’s lease amounts might bring a significant difference in the analysis once included in the on balance sheet..................
Federal Express: An Overview
FedEx, instituted in January 1998 with the acquisition of Calibre System Inc., is the renowned American global courier delivery service company headquartered in Memphis, Tennessee.
FedEx Express is the industry’s global leader, providing rapid, reliable, time-definite delivery to more than 220 countries and territories. Most of the competition has built their business on the hub-and-spoke and track-and-trace models, which FedEx introduced first. Competitors in this industry include other package delivery concerns, principally United Parcel Service, Inc. (“UPS”), DHL, passenger airlines offering express package services, regional express delivery concerns, airfreight forwarders and the US Postal Service................
Financial Performance of Recent Fiscal Year
With a boost from e-commerce, FedEx posted a year with industry-leading margins. Revenue share increased for 54 consecutive quarters, an outstanding performance driven by superior service that is faster to more locations than any other ground service. At FedEx Express, acquisitions in Brazil, France, Poland, Mexico, and India are on course to deliver solid returns.............
Leasing in FedEx
In accordance with accounting principles generally accepted in the US, future contractual payments under the operating leases totalling $15 billion on an undiscounted basis) are not recorded in their balance sheet. Credit rating agencies routinely use information concerning minimum lease payments required for our operating leases to calculate the debt capacity...............
Leasing and Current Changes
Leasing is an important activity for many organizations. It is a means of gaining access to assets, obtaining financing, and reducing an organization’s exposure to the risks of asset ownership. Many organizations lease assets such as real estate, airplanes, trucks, ships, and construction and manufacturing equipment. The earlier accounting models for leases required lessees and lessors to classify their leases as either capital leases or operating leases and to account for those leases differently.............
Exhibits
Exhibit I: Consolidated Balance Sheets
Exhibit II: Consolidated Statements of Income
Exhibit III: Operating Lease Rentals (in $million)
Exhibit IV: Operating Lease Rentals (in $million)
Exhibit V: Operating Lease Schedule (as on May 2013 (in $ million)