ANALYSIS OF COCA-COLA COMPANY`S LEASES 6
Analysisof Coca-Cola Company`s Leases
Analysisof Coca-Cola Company`s Leases
TheCoca-Cola Company is the world’s leading beverage company whichrefreshes customers with over 500 glittering and still marques. Thecompany’s portfolio features many different beverage brandsincluding Fanta, Powerade, Minute Maid, vitamin water, Dasani, DietCoke, FUZE TEA, Coca-Cola Zero, Simply, Georgia, Sprite and DelValle. Coca-Cola is the leading distributor of juices and juicedrinks, ready-to-drink coffee and sparkling beverages. The company iscommitted in building sustainable communities as well as improvingeconomic development (Wahlen et al., 2016). For a propersustainability, Coca-Cola Company has various strategies includingleasing properties for its operations such as manufacturing, storage,selling and distribution. The operating lease and other types ofcontracts that Coca-Cola Company currently has will be inclusivelydiscussed in the paper.
Anoperating lease is a contract that enables a business owner to use anasset, but does not convey rights to own the asset (Wahlen et al.,2016). An operating lease represents an off balance sheet financingof an asset. Therefore, it is not recorded on a balance sheet. Anoperating lease has a shorter duration period. During the rentalperiod, the lessee has no restriction on the use of the asset, butthe company is responsible for the condition of the property at theend of the contract when it is returned to the lessor. An operatinglease is efficient, particularly when the company needs to replacethe old machines with new ones regularly or on a recurrent basis. Theasset under the operating lease is recorded in a book as a fixedasset by the lessor, and its value keeps on depreciating dependingwith durability.
Anoperating lease can be easily understood by a business proprietorbecause it is regarded as a rental contract the same way a companymay rent a retail shop or warehouse to do business. The leased assetsor the associated liabilities are accounted on the lease statementrecords, but the rights are preserved similar to those of the owner.Lease payments are, therefore, recorded as rental expenses in thecompany’s income statement.
OtherTypes of Leases in Coca-Cola Company
Capitallease is the second type of lease that the company has afterconsidering the operating lease as the first one. Coca-Cola Companyconducts capital leasing of assets which are later acquired duringthe long-term. Capital lease obligations are the amount of money duefor an extended period asset agreement, which is almost equal topurchasing the same asset (Wahlen et al., 2016). The lessee takes thebenefits or risks of the asset ownership after leasing contract ends.Capital lease obligations are paid in installments which includeprincipal payments and the interest for the asset. The capital leaseis treated as a long-term liability on the company’s balance sheetand categorized as an interest expense in the income statement.
Acapital lease is almost equal to asset purchase if certain conditionsare met. The first condition is that the asset should be transferredto the lessee at the end of the contract. The second condition isthat the lease should have a bargain purchase option to acquire theasset at a lower value than that in the market. The other conditionis that the terms of leasing should be equal to or exceeds 75% of theasset’s durability. Finally, the present worth of the leasepayments should exceed 90% of the original estimated price of leasedproperty in the global market.
Thecompany also have a master lease in which the lessee would not onlyacquire the presently needed properties, but can also lease otherassets in future while the basic terms and conditions remain constantsuch that no need of renewing the contract. Therefore, the companycan control its future equipment purchases. Master lease is aprincipal tool for the company’s plans of expanding their financialinfrastructure. Leasehold improvement is the final but not least typeof lease in Coca-Cola Company. The finances provided are essential ininfrastructure development to appropriate applications such as plantexpansion, franchise update and renewal, office extension and retailchain store modernization and expansion.
TheValue of the Company’s Operating Lease
Thepresent value of operating lease is treated as equivalent to the debtand is added to the current debt of a firm. The current value of thesum of the future operating lease payments which are undiscounted is$716 million for the year ended 31st December 2015. When the discountrate of 1.35% is deducted, then the total present value accrued to$679 million. It was an improvement as compared to the previousfuture operating lease payments for the year ended 31st December,2014, which were $965 million while undiscounted. After a discountrate of 1.29% was deducted, the total value accrued to $919 million.The trend curve for the operating lease payments for the last threeyears was recorded to be decreasing.
Calculationsfor the year ended 31st December, 2015 was computed from estimatedvalue of future operating lease payments for the subsequent yearsbetween 2015 and 2025. For example, the estimated future operatinglease payments was $171 million while undiscounted and the presentvalue accrued to $169 million at a discount rate of 1.35% in the year2016. The estimated lease payments for the year 2017 were $109million and $106 million respectively. The grand totals for theestimates in all years were done giving the future operating leasepayments for the year 2015. According to Stock Analysis on Net, theestimated present value at a discount rate of 1.35% is $169 millionfor the year 2016. It is the total minimum payments that Coca-ColaCompany intends to have at the end of the year. The values contributemuch in reducing expenses involving operating leases and sequentiallygenerate revenue for the company.
TheCompany`s Future Plans for New Operating Leases
Accordingto the reported future operating payments from the year 2016 to theyear 2024, the company aims at continually decreasing the amount upto $38 million in the year 2024. The decreasing trend shows that thecompany aims at reducing its operation leases to zero in the oncomingyears. It means that the corporation would operate independentlywithout the involvement of operating leases. The company will,therefore, acquire wholly owned assets to expand its performance.
Coca-ColaCompany is the leading beverage company globally. In many businesses,various strategies are embarked to ensure their sustainability andeconomic development in the market. One of the strategies thatCoca-Cola Company uses is leasing the possessions. Operating lease isone of the major types of leasing that the company employs to acquireassets from a lessor and repay for a short period. The machines aremostly leased under to improve operational activities of producingdifferent beverages. The company can operate efficiently if all typesof leases are eliminated which can be achieved in the long-run.
Wahlen,J. M., Bradshaw, M. T., & Baginski, S. P. (2016). FinancialReporting,Financial Statement Analysis, and Valuation.Mason:Cengage Learning.