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Google's operating lease commitments

In concert with the IASB, the FASB is rethinking accounting for leases. Because obligations to make operating lease payments contribute to a company's riskiness, some accountants speculate that new lease standards might require leases now considered to be operating leases to be capitalized the way we now record capital leases.

Refer to the financial statements and related disclosure notes of Google for 2007, which may be found online at investor.google.com/pdf/2007_google_annual_report.pdf Find the section entitled, "Contractual Obligations as of December 31, 2007," within the MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Note the discussion of Google's various noncancelable operating lease agreements for certain of its offices, land, and data centers throughout the world.

1. What is the total of Google's operating lease commitments?
2. Why might these leases be considered capital leases under IFRS, when they are considered operating leases under U.S. GAAP?
3. If the operating leases were capitalized, approximately how much would that increase Google's debt? [Assume a 6% interest rate and state clearly any other assumptions you make in your calculations.]
4. Referring also to Google's balance sheet, determine the effect that capitalizing the leases would have on the company's debt-equity ratio. (Calculate the debt-equity ratio before and after capitalization of the leases and comment on the difference.)

Solution Preview

NOTE: I strongly believe that the figures I used are CORRECT. They were sourced from Google's 10-K filing with SEC for its fiscal year ended December 31, 2007. You may see the figures at http://www.sec.gov/Archives/edgar/data/1288776/000119312508032690/d10k.htm (page 59).

ANSWERS

Question 1
The total operating lease obligations of Google is $2,203.7 million. This amount is comprised of the following according to when payments are due:
1. Less than 1 year - $151.6 million
2. 1-3 years - $328.7 million
3. 3-5 years - $288.7 ...

Solution Summary

This solution goes through Google's operating lease commitments.

$2.19