Airlines AMR (American Airlines) leases most of its commercial aircraft and is currently committed to pay almost $10 billion in future lease obligations. However, the company’s 2012 financial statement reported only $431 million of these commitments as long-term capital lease obligations in the liability section of its balance sheet. The remaining commitments are structured as operating leases. Obligations to pay future operating lease obligations are not reported in the balance sheet as liabilities. Instead, cash outlays for operating leases appear only in the income statement as expenses as the obligations come due.

American ’s recent balance sheet reports assets totaling $23,264 million. The company’s longterm debt, including its capital lease obligations, total approximately $8,471 million, and the stockholders’ equity section of its balance 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 sheet have changed?

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