Delta Airlines operates almost half of its aircraft fleet under operating leases, whilst

Singapore Airlines operates no aircraft under operating leases. Suppose an analyst

wants to make Delta?s financial figures more comparable with Singapore Airlines?

financial figures, what is an appropriate discount rate that he or she can use to

capitalize Delta?s operating leases? Explain.

The financial statements of Delta and Singapore Airlines are not directly comparable given the differences between the financial structures of the two companies? aircraft fleets. Suppose an analyst decide to make Delta?s financial figures more comparable with Singapore Airlines by capitalizing Delta?s operating leases. From the information provided in the case, demonstrate how to calculate Delta?s adjusted figures for the following items (for the years ended June 1992 and June 1993): (a) Capitalized lease assets/liabilities (b) Depreciation expense (Assume no residual value) (c) Interest expense incurred in the current accounting period due to the recognized capitalized liability

FIN365 Financial Statement Analysis Assignment 2 - Group-based Assignment January 2016 Presentation FIN365 Assignment 2 Group-based Assignment This assignment is worth 30% of the final mark for FIN365 Financial Statement Analysis. The cut-off date for this assignment is 10 March 2016, 2359hrs. This is a group-based assignment. You should form a group of 3 members from your seminar group. Each group is required to upload a single report to MyUniSIM via your respective seminar group. Please elect a group leader. The responsibility of the group leader is to upload the report on behalf of the group. It is important for each group member to contribute substantially to the final submitted work. All group members are equally responsible for the entire submitted assignment. If you feel that the work distribution is inequitable to either yourself or your group mates, please highlight this to your instructor as soon as possible. Your instructor will then investigate and decide on any action that needs to be taken. It is not necessary for all group members to be awarded the same mark. Please note that UniSIM takes a serious stance towards plagiarism. Please note that you are required to show your working clearly to facilitate marking. Solutions presented without working will be regarded as copied work. Please endeavour to phrase the answers on your own instead of lifting entire paragraphs from online sources. The final report must be neat and well-organized. A penalty applies for non-compliance with the above and poor report presentation. In this assignment, you are expected to: Develop analytical skills necessary for reading and understanding financial statements Demonstrate the essential knowledge and interpersonal skills to work effectively in a team Demonstrate proficiency in writing ___________________________________________________________________________ This assignment is based on the case studies: \"Depreciation at Delta Air Lines and Singapore Airlines (A)\" and \"Depreciation at Delta Air Lines and Singapore Airlines (B)\". Answer all the following questions based on the information given in the case. Question 1 Analyse the annual depreciation expense that Delta Airlines and Singapore Airlines would record for each $100 gross value of aircraft. (a) For Delta Airlines, what was its annual depreciation expense (per $100 of gross aircraft value) prior to July 1, 1986; from July 1, 1986 through March 31, 1993; and from April 1, 1993 on? (b) For Singapore Airlines, what was its annual depreciation expense (per $100 of gross aircraft value) prior to April 1, 1989; and from April 1, 1989 on? (10 marks) SIM UNIVERSITY Assignment 2 - Page 2 of 3 FIN365 Assignment 2 Question 2 From the information provided in the case, we see that Singapore Airlines employ more conservative depreciation assumptions than Delta. Discuss and analyse if the useful depreciable aircraft life of 10 years that Singapore Airlines uses is reasonable. (Please limit your answer to 5 paragraphs or less.) (20 marks) Question 3 Singapore Airlines employs depreciation assumptions that are very different from Delta. Discuss and analyse how Singapore Airlines may gain or lose by using such assumptions, and explain how this may relate to the company's overall strategy. (Please limit your answer to 5 paragraphs or less.) (20 marks) Question 4 (a) Analyse the possible reasons to explain why Delta Airlines operates almost half of its aircraft fleet under operating leases. Also, discuss the disadvantages of using such operating leases. (10 marks) (b) Delta Airlines operates almost half of its aircraft fleet under operating leases, whilst Singapore Airlines operates no aircraft under operating leases. Suppose an analyst wants to make Delta's financial figures more comparable with Singapore Airlines' financial figures, what is an appropriate discount rate that he or she can use to capitalize Delta's operating leases given the case facts? Explain. (10 marks) Question 5 The financial statements of Delta and Singapore Airlines are not directly comparable given the differences between the financial structures of the two companies' aircraft fleets. Suppose an analyst decide to make Delta's financial figures more comparable with Singapore Airlines by capitalizing Delta's operating leases. From the information provided in the case, demonstrate how to calculate Delta's adjusted figures for the following items (for the years ended June 1992 and June 1993): (a) Capitalized lease assets/liabilities (b) Depreciation expense (Assume no residual value) (c) Interest expense incurred in the current accounting period due to the recognized capitalized liability (30 marks) ---- END OF ASSIGNMENT ---- SIM UNIVERSITY Assignment 2 - Page 3 of 3 Harvard Business School 9-198-002 Rev. February 27, 1998 Depreciation at Delta Air Lines and Singapore Airlines (B) Delta Air Lines and Singapore Airlines used different assumptions regarding the depreciable life and salvage life of their aircraft in 1993. Furthermore, the financial structures of their aircraft fleets were also different. As indicated in Exhibits 3 and 7 of the \"(A)\" case, close to half of Delta's planes operated under \"operating\" leases, whereas Singapore owned all of its aircraft; it did not operate any under \"operating\" leases. Delta Air Lines disclosed, in its 1992 and 1993 Annual Reports, information regarding its minimum rental commitments under capital leases and noncancelable operating leases. This information is shown in Exhibit 1. Singapore Airlines indicated that, at the end of fiscal year 1993, it had no liabilities for capital leases. Legally, it did have capital lease obligations amounting to $2.8 billion (Singapore dollars), but this was matched by $2.8 billion in cash that it had deposited with a financial institution \"under defeasance\"meaning that the deposited money was to be used solely for the purpose of satisfying the company's capital lease obligationsand therefore this amount was not considered debt for financial reporting purposes. Singapore's 1993 Annual Report did indicate that it leased a good deal of space for offices, air terminals, and maintenance and training facilitiespresumably under operating leasesbut it did not disclose information, comparable to Delta's, regarding its future rental commitments for these things. The \"(A)\" case indicated that the overall capital structures of Delta Air Lines and Singapore Airlines in 1993 were also very different. Delta had a fair amount of long-term debt (31.3% of total assets) whereas Singapore had none. Footnotes to Delta's financial statements for 1993 indicated that Delta had outstanding, in 1993, various issues of long-term debt. All of it was unsecured and (with a couple of exceptions) carried interest rates in the range of 7% to 10.5%, with an average around 8.5%. Questions 1. What possible reasons might there be to explain why Delta operates almost half of its aircraft fleet under operating leases, while Singapore operates no aircraft under operating leases? 2. Comparing the balance sheets and income statements of Delta and Singapore has serious shortcomings given the extreme difference between the financial structures of the two companies' aircraft fleets. From the information provided in the case, calculate adjusted figures for Delta's aircraft fleet so as to make Delta's total depreciation expense, total assets, and total long-term debt more comparable with Singapore's. Research Associate Jeremy Cott prepared this case under the supervision of Professor William J. Bruns, Jr. as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. Copyright 1997 by the President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any meanselectronic, mechanical, photocopying, recording, or otherwisewithout the permission of Harvard Business School. 1 This document is authorized for use only in Financial Statement Analysis - Jan 2016 by Dr. Ding Ding / Ms. Yong Wee En Audrey, SIM University from January 2016 to May 2016. 198-002 Depreciation at Delta Air Lines and Singapore Airlines (B) Exhibit 1 Delta Air Lines: Lease Obligations Excerpt from Delta Air Lines' \"Notes to Consolidated Financial Statements\" (for fiscal year 1992) The Company leases certain aircraft, airport terminal and maintenance facilities, ticket offices, and other property and equipment under agreements with terms of more than one year. . . . At June 30, 1992, the Company's minimum rental commitments under capital leases and noncancelable operating leases with initial or remaining terms of more than one year were as follows (in millions of dollars): Years Ending June 30 1993 1994 1995 1996 1997 After 1997 Capital Leases Operating Leases 20 21 18 18 17 73 907 897 881 895 901 12,852 Total minimum lease payments 167 17,333 Less: Amounts representing interest Present value of future minimum capital lease payments Less: Current obligations under capital leases Long-term capital lease obligations (47) 120 (10) 110 Excerpt from Delta Air Lines' \"Notes to Consolidated Financial Statements\" (for fiscal year 1993) At June 30, 1993, the Company's minimum rental commitments under capital leases and noncancelable operating leases with initial or remaining terms of more than one year were as follows (in millions of dollars): Years Ending June 30 1994 1995 1996 1997 1998 After 1998 Capital Leases Operating Leases 21 18 18 18 15 58 905 916 941 940 924 13,202 Total minimum lease payments 148 17,828 Less: Amounts representing interest Present value of future minimum capital lease payments Less: Current obligations under capital leases (38) 110 Long-term capital lease obligations 98 (12) Delta's Income Statements and Notes also indicated that the amounts charged to rental expense for operating leases (in millions of dollars) were (in 1993) $1,085, consisting of $729 for \"Aircraft rent\" and $356 for \"Facilities and other rent\"; and (in 1992) $997, consisting of $642 for \"Aircraft rent\" and $355 for \"Facilities and other rent.\" 2 This document is authorized for use only in Financial Statement Analysis - Jan 2016 by Dr. Ding Ding / Ms. Yong Wee En Audrey, SIM University from January 2016 to May 2016. 9-198-001 REV: SEPTEMBER 16, 2004 WILLIAM J. BRUNS, JR. Depreciation at Delta Air Lines and Singapore Airlines (A) Property, plant, and equipment (PP&E) is a significant asset category of most airline companies. PP&E usually constitutes more than 50% of the total assets of an airline, and depreciation of these assets is a major operating expense. However, unlike many expensesfor example, salaries, the cost of aircraft fuel, the cost of meals and beverages, all of which are significant operating expenses for airlinesdepreciation of PP&E is different in that the methods and estimates used to determine the amount of this expense can vary widely among companies. Moreover, the methods and estimates used can have a significant impact on companies' reported earnings. Thus, unless the user of financial statements sifts through the footnotes to sort out the details, comparability among companies within an industry can be problematic. Consider, for example, the depreciation practices of two major airlinesDelta Air Lines and Singapore Airlinesin 1993. Delta Air Lines Delta Air Lines was one of the major passenger airlines in the United States, with almost $12 billion in annual revenues. It served 161 cities in 44 states in the United States, and it also operated flights to 33 foreign countries. In terms of operating revenues and revenue passenger miles flown,1 it was, in 1993, the third-largest U.S. airline. (American Airlines and United Airlines were the largest.) Delta had been expanding its international operations. In fiscal year 1990 it entered a partnership with Singapore Airlines that was meant to coordinate some of their scheduling and marketing efforts. In November 1991, Delta purchased most of the transatlantic route authorities of Pan Am, which had gone bankrupt. Thus in fiscal year 1993, revenues from international flights represented 21% of total operating revenues. This represented a large increase from earlier years, but it was still a smaller 1 \"Revenue passenger miles\" is a widely used measurement of traffic volume in the airline industry. It represents the number of miles flown by all revenue-paying passengers. ________________________________________________________________________________________________________________ Research Associate Jeremy Cott prepared this case under the supervision of Professor William J. Bruns, Jr. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright 1997 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any meanselectronic, mechanical, photocopying, recording, or otherwisewithout the permission of Harvard Business School. This document is authorized for use only in Financial Statement Analysis - Jan 2016 by Dr. Ding Ding / Ms. Yong Wee En Audrey, SIM University from January 2016 to May 2016. 198-001 Depreciation at Delta Air Lines and Singapore Airlines (A) proportion of total revenues than what was the case for some other major carriers. (For example, in 1993, 38% of United's revenues, and 26% of American's, came from international flights.) Although Delta was the third-largest U.S. airline in terms of operating revenues and revenue passenger miles flown, it was the largest in terms of the number of airline departures and the number of passengers carried. Exhibit 1 shows key financial and operational data for Delta for the years 1989 through 1993. Delta was in the throes of difficulties affecting most American airlines. Deregulation of the industry in 1978 had led to increasing price competition; in the 1980s and early 1990s, airline fares didn't even remotely keep pace with inflation. Major carriers like Deltawith high cost structures left over from an earlier, regulated environmentwere hit hard by competition from low-cost, nofrills airlines like Southwest and People's Express. In the late 1980s and early 1990s, the difficulties mounted: Iraq's invasion of Kuwait discouraged passenger travel and caused fuel prices to skyrocket; the American economy went into a recession; and fare wars intensified. In four years, 1990-1993, the American airline industry as a whole lost $12.8 billion. Delta went about reassessing its marketing programs and cutting back on staff in an effort to control costs. \"The work we are doing to cut costs and raise revenues,\" the 1993 Annual Report stated, \"fits within a comprehensive effort to transform our Company into a high performing organization.\" Delta's property and equipment totaled $7.1 billion on its 1993 balance sheet. The largest part of this ($5.5 billion) consisted of aircraft and other flight equipment. (See Exhibits 2 and 3, which show the dollar values of Delta's fixed assets and the composition of its aircraft fleet.) The average age of Delta's aircraft was 8.8 years, which was relatively young by industry standards. Among other major airlines, the average age of aircraft varied a good deal. At American and United, the two largest passenger airlines in the United States, the average age of aircraft was 8.9 and 10.8 years, respectively. At Continental, the fifth-largest airline, it was 15.3. At TWA, the seventh largest, it was 18.7. (There was no necessary connection, however, between the average age of an airline's fleet and the assumption it made regarding the fleet's depreciable life.) In April 1993 Delta announced a change in its depreciation assumptions regarding flight equipment. The last time Delta had made such a change had been in July 1986. (See the excerpts from the footnotes to Delta's financial statements, regarding this, in Exhibit 4.)2 Singapore Airlines Singapore Airlines was the largest private-sector employer in Singapore's booming economy. At the end of fiscal year 1993, its route network covered 70 cities in 40 countries. Singapore was a transit point for a good deal of travel in Asia, but the airline also handled a lot of traffic to other continents: for example, it flew regularly to the United States across both the Atlantic and Pacific Oceans, and flew nonstop to and from London nine times a week. Of its total operating revenues, about 44% came from flights to Asia, 23% from flights to Europe, 22% from flights to North and South America, and 11% from flights to the Southwest Pacific. In fiscal year 1993 its total operating revenues ($5.1 2 During fiscal year 1993 Delta also changed one of its assumptions regarding pension accounting. \"Effective April 1, 1993, Delta increased from 9% to 10% its assumption regarding the expected return on plan assets associated with defined benefit pension plans. This change in accounting estimate resulted in a decrease in pension expense of $12.7 million in fiscal 1993, and is expected to reduce pension expense by an estimated $56 million in fiscal 1994.\" (1993 Annual Report) 2 This document is authorized for use only in Financial Statement Analysis - Jan 2016 by Dr. Ding Ding / Ms. Yong Wee En Audrey, SIM University from January 2016 to May 2016. Depreciation at Delta Air Lines and Singapore Airlines (A) 198-001 billion in Singapore dollars, $3.1 billion in U.S. dollars) would have made it the seventh-largest airline in the United Stateslarger, for example, than Trans World Airlines and Southwest.3 Exhibit 5 shows key financial and operational data for Singapore for the years 1989 through 1993. The airline was renowned for its high level of customer service, geared largely to business travelers. Year after year, it won awards from various trade associations and travel magazines for the quality of its service. The average age of its aircraft was 5.1 years, which was the youngest of any major airline in the world. (See Exhibits 6 and 7, which show the dollar values of Singapore's fixed assets and the composition of its aircraft fleet.) According to an industry publication, Singapore's exclusive MEGATOP 747-400, which it bought from Boeing, was \"the largest, fastest long-haul aircraft in the world, offering state-of-the-art technology and comfort.\"4 Much of the Asian airline market was regulated. Moreover, slightly more than half of Singapore Airlines' common stock was owned by the Singapore government. However, the company received no government subsidy and operated under most of the usual pressures from international competition and the investment community. Its stock was followed by more than 20 investment analysts. Asian airlines at this time were generally more profitable than American airlines, but they definitely did not feel immune to the problems in the industry. In 1993, Singapore Airlines' net profit dropped (in Singapore dollars) from $922 million to $741 millionor (in American dollars) from $555 million to $452 million. In its Annual Report for the year, the company said that the year had been \"a difficult one for most airlines. The industry continued to be saddled with huge financial losses.... Singapore Airlines was not spared.\" As a result, the company's briefing for reporters was held at a much more modest hotel than usual, and staff bonuses were reduced from the 3.4 months of the previous year to a half-month. The company said that it was continuing with its expansion plans, expecting an eventual recovery in the business cycle. Its capital expenditures, however, were running about $2 billion a year (Singapore dollars), and, as a result, the company's Annual Report said, \"it is possible that, in a few years' time, we shall have to incur debt.\"5 During fiscal year 1993, the company's assumptions regarding its depreciation of flight equipment remained unchanged. The last time Singapore had changed its depreciation policy regarding flight equipment had been in April 1989. (See the excerpts from the footnotes to Singapore's financial statements, regarding this, in Exhibit 8.) 3 Singapore Airlines was actually a wholly owned subsidiary of a holding company named SIA, 90% of whose revenues came from the airline operation. All of the financial and operating data cited in this case regarding Singapore Airlines, however, pertains solely to Singapore Airlines, not the holding company. (The holding company's other investments were in engineering and airport terminal services, a regional airline, and various hotel properties.) 4 Business Wire, November 29, 1996. 5 Business Times in Singapore reported on May 20, 1993, that \"even with the lower earnings\" in fiscal year 1993, Singapore Airlines \"retained its position as the world's most profitable airline.\" The company's director of corporate affairs reported a conversation he had with an industry analyst in which \"the analyst said that if an American airline had reported such figures, the market would have rejoiced at the news.\" In response, the company's director of corporate affairs said to the analyst, \"You must forgive the local press because it is influenced by the performance of other Singapore companies.\" 3 This document is authorized for use only in Financial Statement Analysis - Jan 2016 by Dr. Ding Ding / Ms. Yong Wee En Audrey, SIM University from January 2016 to May 2016. 198-001 Depreciation at Delta Air Lines and Singapore Airlines (A) Questions 1. Calculate the annual depreciation expense that Delta and Singapore would record for each $100 gross value of aircraft. (a) For Delta, what was its annual depreciation expense (per $100 of gross aircraft value) prior to July 1, 1986; from July 1, 1986 through March 31, 1993; and from April 1, 1993 on? (b) For Singapore, what was its annual depreciation expense (per $100 of gross aircraft value) prior to April 1, 1989; and from April 1, 1989 on? 2. Are the differences in the ways that the two airlines account for depreciation expense significant? Why would companies depreciate aircraft using different depreciable lives and salvage values? What reasons could be given to support these differences? Is different treatment proper? 3. Assuming the average value of flight equipment that Delta had in 1993, how much of a difference do the depreciation assumptions it adopted on April 1, 1993 make? How much more or less will its annual depreciation expense be compared to what it would be were it using Singapore's depreciation assumptions? 4. Singapore Airlines maintains depreciation assumptions that are very different from Delta's. What does it gain or lose by doing so? How does this relate to the company's overall strategy? 5. Does the difference in the average age of Delta's and Singapore's aircraft fleets have any impact on the amount of depreciation expense that they record? If so, how much? 4 This document is authorized for use only in Financial Statement Analysis - Jan 2016 by Dr. Ding Ding / Ms. Yong Wee En Audrey, SIM University from January 2016 to May 2016. Depreciation at Delta Air Lines and Singapore Airlines (A) Exhibit 1 198-001 Delta Air Lines: Key Financial and Operational Data ($ millions) Exhibit 1 Delta Air Lines: Key Financial and Operational Data ($ millions) 1993 For the fiscal years ending June 30 1992 1991 1990 1989 Total assets 11,871 10,162 8,411 7,227 6,484 Fixed assets 7,141 7,093 5,641 5,399 4,478 Fixed assets/Total assets 60.2% 69.8% 67.1% 74.7% 69.1% Long-term debt (including capital leases) 3,717 2,833 2,058 1,315 703 Total debt/Total assets 31.3% 27.9% 24.5% 18.2% 10.8% Total operating revenues 11,997 10,837 9,170 8,582 8,089 Total operating expenses 12,572 11,512 9,621 8,163 7,411 Depreciation expense for fixed assets 679 585 512 453 378 Depreciation expense/ Total operating expense 5.4% 5.1% 5.3% 5.5% 5.1% Operating profit (575) (674) (450) 420 678 Operating profit/Revenues -4.8% -6.2% -4.9% 4.9% 8.4% Gain on sale of flight equipment (pretax) 65 35 17 18 17 Net profit (excluding cumulative effect of accounting change) (415) (506) (324) 303 461 Net profit/Revenues -3.5% -4.7% -3.5% 3.5% 5.7% Revenue passenger miles (millions) Number of revenue passengers carried (millions) Average passenger trip length (miles) Available passenger miles (millions) Capacity utilization 82,406 85 72,693 77 62,086 69 58,987 67 55,904 64 969 944 900 880 874 132,282 123,102 104,328 96,463 90,742 62.3% 59.1% 59.5% 61.1% 61.6% Source: Company Annual Reports and 10-Ks; ratios calculated by casewriter. 5 This document is authorized for use only in Financial Statement Analysis - Jan 2016 by Dr. Ding Ding / Ms. Yong Wee En Audrey, SIM University from January 2016 to May 2016. 198-001 Depreciation at Delta Air Lines and Singapore Airlines (A) Exhibit 2 Delta Air Lines: Property and Equipment ($ millions) June 30 1993 Flight equipment owned Less: Accumulated depreciation 1992 9,043 (3,559) 5,484 173 (128) 45 Ground property and equipment Less: Accumulated depreciation Advance payments for equipment 173 (112) 61 2,373 (1,143) 1,230 Flight equipment under capital leases Less: Accumulated depreciation 8,354 (3,213) 5,141 2,211 (983) 1,228 383 7,142 Total 663 7,093 Source: Company Annual Reports. Exhibit 3 Delta Air Lines: Aircraft Fleet as of June 30, 1993 Type of Aircraft Average Seats per Aircraft 177 178 148 107 127 182 204 254 218 302 300 266 223 253 142 150 Total Leased Total 3 106 1 3 43 15 2 7 32 1 6 17 1 59 - 4 15 43 57 13 41 23 7 8 57 - 7 15 149 58 16 84 15 25 14 32 1 6 17 9 116 0 296 A310-200 A310-300 B727-200 B737-200 B737-300 B757-200 B767-200 B767-300 B767-300ER L1011-1 L1011-200 L-1011-250 L1011-500 MD-11 MD-88 MD-90 Owned 268 564 Source: Company Annual Reports. Note: All of the aircraft shown above as \"leased\" were being operated under \"operating\" leases. 6 This document is authorized for use only in Financial Statement Analysis - Jan 2016 by Dr. Ding Ding / Ms. Yong Wee En Audrey, SIM University from January 2016 to May 2016. Depreciation at Delta Air Lines and Singapore Airlines (A) Exhibit 4 198-001 Delta Air Lines' Depreciation Policy Excerpt from Delta Air Lines' \"Notes to Consolidated Financial Statements\" (for fiscal year 1993) Depreciation and AmortizationPrior to April 1, 1993, substantially all of the Company's flight equipment was being depreciated on a straight-line basis to residual values (10% of cost) over a 15year period from the dates placed in service. As a result of a review of its fleet plan, effective April 1, 1993, the Company increased the estimated useful lives of substantially all of its flight equipment. Flight equipment that was not already fully depreciated is being depreciated on a straight-line basis to residual values (5% of cost) over a 20-year period from the dates placed in service. Excerpt from Delta Air Lines' \"Notes to Consolidated Financial Statements\" (for fiscal year 1987) Depreciation and AmortizationPrior to July 1, 1986, substantially all of the Company's flight equipment was being depreciated on a straight-line basis to residual values (10% of cost) over a 10year period from dates placed in service. As a result of a comprehensive review of its fleet plan, effective July 1, 1986, the Company increased the estimated useful lives of substantially all of its flight equipment. Flight equipment that was not already fully depreciated is now being depreciated on a straight-line basis to residual values (10% of cost) over a 15-year period from dates placed in service. The effect of this change was a $130 million decrease in depreciation . . . for the year ended June 30, 1987. Note: Delta's assumptions regarding the depreciable life and salvage value of fixed assets other than flight equipment were quite different and were, in any case, unchanged in 1993. 7 This document is authorized for use only in Financial Statement Analysis - Jan 2016 by Dr. Ding Ding / Ms. Yong Wee En Audrey, SIM University from January 2016 to May 2016. 198-001 Exhibit 5 Depreciation at Delta Air Lines and Singapore Airlines (A) Singapore Airlines: Key Financial and Operational Data ($ millions, Singapore dollars) For the fiscal years ending March 31 1993 1992 1991 1990 1989 Total assets 9,417 9,366 8,516 7,708 6,365 Fixed assets 6,729 5,876 4,960 4,515 3,926 Fixed assets/Total assets 71.5% 62.7% 58.2% 58.6% 61.7% 421 450 518 624 4.5% 5.3% 6.7% 9.8% Long-term debt (including capital leases) Total debt/Total assets 0 0.0% Total operating revenues 5,135 5,013 4,602 4,730 4,272 Total operating expenses 4,480 4,149 3,760 3,601 3,407 708 614 513 439 550 15.8% 14.8% 13.6% 12.2% 16.1% 655 863 842 1,129 865 12.8% 17.2% 18.3% 23.9% 20.2% 42 129 208 195 96 741 922 887 1,177 928 14.4% 18.4% 19.3% 24.9% 21.7% Depreciation expense for fixed assets Depreciation expense/ Total operating expense Operating profit Operating profit/Revenues Gain on sale of flight equipment (pretax) Net profit (excluding cumulative effect of accounting change) Net profit/Revenues Revenue passenger miles (millions) Number of revenue passengers carried (millions) Average passenger trip length (miles) Available passenger miles (millions) 23,663 21,808 19,582 19,210 17,991 8.7 8.1 7.1 6.8 6.2 2,720 2,692 2,758 2,825 2,902 33,174 29,659 26,063 24,523 22,789 Capacity utilization 71.3% 73.5% 75.1% 78.3% 78.9% Note: March 31 exchange rate for conversion of Singapore dollars to U.S. dollars $1.64 $1.66 $1.80 $1.89 $1.96 Source: Company Annual Reports and 10-Ks; ratios calculated by casewriter. 8 This document is authorized for use only in Financial Statement Analysis - Jan 2016 by Dr. Ding Ding / Ms. Yong Wee En Audrey, SIM University from January 2016 to May 2016. Depreciation at Delta Air Lines and Singapore Airlines (A) Exhibit 6 Singapore Airlines: Singapore dollars) 198-001 Fixed Assets ($ millions, March 31 1993 1992 Flight equipment Less: Accumulated depreciation 9,224 (3,914) 5,310 7,814 (3,330) 4,484 Ground property and equipment Less: Accumulated depreciation 1,020 (549) 471 1,018 (589) 429 947 962 6,728 5,875 Advance and progress payments Total Source: Company Annual Reports. Exhibit 7 Singapore Airlines: March 31, 1993 Aircraft Fleet Type of aircraft as of In operation B747-400 (MEGATOP) B747-300 (BIG TOP) B747-300 (COMBI) B747-200 B747-200 Freighter B737-200 Freighter B737-300 Freighter A310-300 A310-200 18 11 3 3 1 2 1 12 6 Total 57 Source: Note: Company Annual Reports. Singapore owned all of its aircraft; it did not operate any under \"operating leases.\" (Confirmed by company in June 6, 1997 phone conversation.) 9 This document is authorized for use only in Financial Statement Analysis - Jan 2016 by Dr. Ding Ding / Ms. Yong Wee En Audrey, SIM University from January 2016 to May 2016. 198-001 Depreciation at Delta Air Lines and Singapore Airlines (A) Exhibit 8 Singapore Airlines' Depreciation Policy Excerpt from Singapore Airlines' \"Notes to the Accounts\" (for fiscal year 1993) Depreciation of Fixed AssetsThe Company depreciates its new aircraft, spares and spare engines over 10 years to 20% residual values. . . . For used aircraft less than 5 years old, the Company depreciates them over the remaining life (10 years less age of aircraft) to 20% residual value. In the case of used aircraft more than 5 years old, they are depreciated over 5 years to 20% residual value. Excerpt from Singapore Airlines' \"Notes to the Accounts\" (for fiscal year 1990) Depreciation of Fixed Assets[Prior to April 1, 1989], the operational lives of the aircraft fleet were estimated to be 8 years with 10% residual values. . . . [Effective] April 1, 1989, the Company depreciated its aircraft, spares and spare engines over 10 years to 20% residual values. . . . This arises from a review of the operational lives and residual values of the aircraft fleet. Note: Singapore's assumptions regarding the depreciable life and salvage value of fixed assets other than flight equipment were quite different and were, in any case, unchanged in 1993. 10 This document is authorized for use only in Financial Statement Analysis - Jan 2016 by Dr. Ding Ding / Ms. Yong Wee En Audrey, SIM University from January 2016 to May 2016. FIN365 Financial Statement Analysis Assignment 2 - Group-based Assignment January 2016 Presentation FIN365 Assignment 2 Group-based Assignment This assignment is worth 30% of the final mark for FIN365 Financial Statement Analysis. The cut-off date for this assignment is 10 March 2016, 2359hrs. This is a group-based assignment. You should form a group of 3 members from your seminar group. Each group is required to upload a single report to MyUniSIM via your respective seminar group. Please elect a group leader. The responsibility of the group leader is to upload the report on behalf of the group. It is important for each group member to contribute substantially to the final submitted work. All group members are equally responsible for the entire submitted assignment. If you feel that the work distribution is inequitable to either yourself or your group mates, please highlight this to your instructor as soon as possible. Your instructor will then investigate and decide on any action that needs to be taken. It is not necessary for all group members to be awarded the same mark. Please note that UniSIM takes a serious stance towards plagiarism. Please note that you are required to show your working clearly to facilitate marking. Solutions presented without working will be regarded as copied work. Please endeavour to phrase the answers on your own instead of lifting entire paragraphs from online sources. The final report must be neat and well-organized. A penalty applies for non-compliance with the above and poor report presentation. In this assignment, you are expected to: Develop analytical skills necessary for reading and understanding financial statements Demonstrate the essential knowledge and interpersonal skills to work effectively in a team Demonstrate proficiency in writing ___________________________________________________________________________ This assignment is based on the case studies: \"Depreciation at Delta Air Lines and Singapore Airlines (A)\" and \"Depreciation at Delta Air Lines and Singapore Airlines (B)\". Answer all the following questions based on the information given in the case. Question 1 Analyse the annual depreciation expense that Delta Airlines and Singapore Airlines would record for each $100 gross value of aircraft. (a) For Delta Airlines, what was its annual depreciation expense (per $100 of gross aircraft value) prior to July 1, 1986; from July 1, 1986 through March 31, 1993; and from April 1, 1993 on? (b) For Singapore Airlines, what was its annual depreciation expense (per $100 of gross aircraft value) prior to April 1, 1989; and from April 1, 1989 on? (10 marks) SIM UNIVERSITY Assignment 2 - Page 2 of 3 FIN365 Assignment 2 Question 2 From the information provided in the case, we see that Singapore Airlines employ more conservative depreciation assumptions than Delta. Discuss and analyse if the useful depreciable aircraft life of 10 years that Singapore Airlines uses is reasonable. (Please limit your answer to 5 paragraphs or less.) (20 marks) Question 3 Singapore Airlines employs depreciation assumptions that are very different from Delta. Discuss and analyse how Singapore Airlines may gain or lose by using such assumptions, and explain how this may relate to the company's overall strategy. (Please limit your answer to 5 paragraphs or less.) (20 marks) Question 4 (a) Analyse the possible reasons to explain why Delta Airlines operates almost half of its aircraft fleet under operating leases. Also, discuss the disadvantages of using such operating leases. (10 marks) (b) Delta Airlines operates almost half of its aircraft fleet under operating leases, whilst Singapore Airlines operates no aircraft under operating leases. Suppose an analyst wants to make Delta's financial figures more comparable with Singapore Airlines' financial figures, what is an appropriate discount rate that he or she can use to capitalize Delta's operating leases given the case facts? Explain. (10 marks) Question 5 The financial statements of Delta and Singapore Airlines are not directly comparable given the differences between the financial structures of the two companies' aircraft fleets. Suppose an analyst decide to make Delta's financial figures more comparable with Singapore Airlines by capitalizing Delta's operating leases. From the information provided in the case, demonstrate how to calculate Delta's adjusted figures for the following items (for the years ended June 1992 and June 1993): (a) Capitalized lease assets/liabilities (b) Depreciation expense (Assume no residual value) (c) Interest expense incurred in the current accounting period due to the recognized capitalized liability (30 marks) ---- END OF ASSIGNMENT ---- SIM UNIVERSITY Assignment 2 - Page 3 of 3