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Converting Operating Lease To Capital Lease Ahmed Younas FA16-BAF-012

McDonald's operates restaurants through both ground leases where it leases the land and owns the building, and improved leases where it leases both land and buildings. Lease terms are typically 20-25 years with options to renew and purchase. McDonald's is also obligated for property taxes, insurance, and maintenance on restaurant leases. Future minimum lease payments total over $9 billion through 2035 for restaurant and non-restaurant facilities. Converting these operating leases to capital leases would add over $6.6 billion in assets and liabilities to the balance sheet.

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81 views3 pages

Converting Operating Lease To Capital Lease Ahmed Younas FA16-BAF-012

McDonald's operates restaurants through both ground leases where it leases the land and owns the building, and improved leases where it leases both land and buildings. Lease terms are typically 20-25 years with options to renew and purchase. McDonald's is also obligated for property taxes, insurance, and maintenance on restaurant leases. Future minimum lease payments total over $9 billion through 2035 for restaurant and non-restaurant facilities. Converting these operating leases to capital leases would add over $6.6 billion in assets and liabilities to the balance sheet.

Uploaded by

wajhi naqvi
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Converting Operating Lease to Capital Lease

Ahmed Younas
FA16-BAF-012
In the Annual Report of McDonald’s, it is given that:

At December 31, 2000, the Company was lessee at 6,055 restaurant locations through ground leases (the Company
leases the land and the Company or franchisee owns the building) and at 6,984 restaurant locations through
improved leases (the Company leases land and buildings).

Lease terms for most restaurants are generally for 20 to 25 years and, in many cases, provide for rent escalations
and renewal options, with certain leases providing purchase options. For most locations, the Company is obligated
for the related occupancy costs including property taxes, insurance and maintenance.

In addition, the Company is lessee under noncancelable leases covering offices and vehicles. Future minimum
payments required under existing operating leases with initial terms of one year or more are:

Total
Restaurant Other

2001 748.3 63.3 811.6

2002 735.3 55.1 790.4

2003 705.8 46.4 752.2

2004 676.2 38.9 715.1


658.3
2005 623.5 34.8

Thereafter 6,018.7 221.0 6,239.7

Total minimum payments $9,507.8 $459.5 $9,967.3

Rent Expense was as:

2000 1999 1998

886.4 796.3 723

These amounts included percent rents in excess of minimum rents:

2000 1999 1998

133 117.1 116.7


6,240/658 = 10 years

The PV at 7% is:
Year Payment
2000 886.4
2001 811.6
2002 790.4
2003 752.2
2004 715.1
2005 658.3
2006 624
2007 624
2008 624
2009 624
2010 624
2011 624
2012 624
2013 624
2014 624
2015 624

6,625.2

Results:

6625.2 will be added to the Balance Sheet as Asset under Capitalized Lease and the like amount will be added to
Liabilities section.

Lease Expense will be reversed. 886.4 was paid in 2000.

Interest expense portion of the 2000 is as:

6,625.2x 7.00% = 463.8


Total payment was 886.4 and interest expense calculated is 463.8

Difference ( 886.4-463.8 = 422.6) will be added to Depreciation Expense.

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