Wal-Mart Stores, Inc.

Question: Presented in Illustration 21-31 are the financial statement disclosures from the January 31, 2015, annual report of Wal-Mart Stores, Inc.

Wal-Mart Stores, Inc. (dollar amounts in millions) Jan. 31, 2015 Jan. 31, 2014 Current Liabilities Obligations under capital leases due within one year \( 287 \) 309 Noncurrent Liabilities Long-term obligations under capital leases \(2,606 \)2,788

Note 12: Commitments The Company has long-term leases for stores and equipment. Rentals (including amounts applicable to taxes, insurance, maintenance, other operating expenses and contingent rentals) under operating leases and other short-term rental arrangements were \(2.8 billion in both fiscal 2015 and 2014. Aggregate minimum annual rentals at January 31, 2015, under non-cancelable leases are as follows (dollar amounts in millions): Operating LeasesCapital Leases 2016\)1,759 \( 504 20171,615 476 20181,482 444 20191,354 408 20201,236 370 Thereafter10,464 3,252 Total minimum rentals 17,910\)5,454 Less estimated executory costs 49 Net minimum lease payments \(5,405 Less imputed interest 2,512 Present value of minimum lease payments \)2,893 Certain of the Company’s leases provide for the payment of contingent rentals based on a percentage of sales. Such contingent rentals were immaterial for fiscal 2015 and 2014. Substantially all of the Company’s store leases have renewal options, some of which may trigger an escalation in rentals. The Company has future lease commitments for land and buildings for approximately 282 future locations. These lease commitments have lease terms ranging from 1 to 30 years and provide for certain minimum rentals. If executed, payments under operating leases would increase by $58 million for fiscal 2016, based on current cost estimates. Instructions Answer the following questions related to these disclosures. (c) Estimate the off-balance-sheet liability due to Wal-Mart’s operating leases at January 31, 2015.

Step by step solution

01

Step 1:Meaning of Accounting Disclosure

An "accounting disclosure" is a declaration that acknowledges the financial practices of a firm or business. This detail shows how much money was spent and how much money was made at one point in time. For both current and future investors in the firm, an accounting policy statement is given.

02

Estimation of the off-balance-sheet liability due to Wal-Mart’s operating leases on January 31, 2015

The same amount of interest to net minimum lease payments under capital leases must be computed to assess the current value of operational leases. As of January 31, 2015, the following proportion for capital leases was 46.5% ($2,512/$5,405). Since the total payments under operating leases are $17,910, the amount reflecting interest might be approximated as $8,328.Thus, the present value of the net operating payments might be $9,582.

Working notes:-

Total operating lease payments due	$17,910
Less estimated interest	8,328
Estimated present value of net operating lease payments	$9,582

This answer is an approximation. Since the share of payments after five years may fluctuate between an operating and a capital lease agreement, this answer is slightly wrong. Another option is to discount the operating lease payments in the future.

However, based on the information supplied, determining the payment schedules beyond five years is challenging, however, operational leases are expected to have shorter payment schedules and hence larger current values. Furthermore, deciding on the right discount rate necessitates judgment. Some businesses report the current value of operating leases to avoid conjecture about what this figure should be.

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