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Adjusting Account Information

This module outlines necessary adjustments to Apple Inc.'s balance sheet and income statement regarding operating leases and share-based compensation. Key steps include estimating the implied interest rate for capitalizing operating leases, calculating the present value of future lease payments with a defined interest rate, and adjusting the net enterprise asset by $3,499. Additionally, it details how capitalizing operating leases impacts EPAT by altering depreciation and reclassifying rent expenses. The effective tax rate used for calculations is 26.2%, resulting in a $180 net increase to EPAT.

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Adjusting Account Information

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  1. Adjusting Account Information April 6, 2014 Kristen Bachteler Module 11

  2. Agenda Adjustments to the Balance Sheet & Income Statement Operating Leases Share Based Compensation

  3. Operating Leases Step 1 • Apple doesn't’t provide information on capital leases to estimate the implied interest rate in capitalizing the operating leases • Therefore, use long-term weighted average interest rate (cost of debt) from Module 6: 0.0697%

  4. Operating Leases Step 2 • Compute the present value of future operating lease payments using the 0.0697% rate from Step 1 • Assume future years after 2018 will have payments equal to the 5th year until the amount labeled “Thereafter” is satisfied

  5. Operating Leases Step 3 • Adjust NEA up by $3,499 to include this additional enterprise asset (it is part of the property, plant & equipment) • Financing liabilities increased by $3,499 as a result of the implied borrowing • $366.11 current & $3,132.97 noncurrent portion

  6. Operating Leases Step 4 • Capitalize operating leases affects EPAT via the addition of depreciation related to the lease equipment as well as the removal of the operating leases which had been reported as rent expense • Rent expense was $645 million, $488 million and $338 million in 2013, 2012, & 2011 • We remove the rent payment from SG&A and reclassify it as $243 interest expense and $401 rent expense • Effective tax rate of 26.2% • $180 net increase to EPAT

  7. Effects of Adjustments

  8. Share Based CompensationStep 1

  9. Share Based CompensationStep 2

  10. Share Based CompensationStep 3

  11. Share Based CompensationStep 4

  12. Share Based CompensationStep 5

  13. Share Based CompensationStep 6

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