Notes to Consolidated Financial Statements

Note 8

Leasing Arrangements

As Lessor

We are the lessor in leveraged and direct financing lease agreements for commercial aircraft, power generating facilities, telecommunications equipment, real estate property and other equipment. These leases have remaining terms of up to 40 years as of December 31, 2010. In addition, we lease space on certain of our cell towers to other wireless carriers. Minimum lease payments receivable represent unpaid rentals, less principal and interest on third-party nonrecourse debt relating to leveraged lease transactions. Since we have no general liability for this debt, which holds a senior security interest in the leased equipment and rentals, the related principal and interest have been offset against the minimum lease payments receivable in accordance with GAAP. All recourse debt is reflected in our consolidated balance sheets.

At each reporting period, we monitor the credit quality of the various lessees in our portfolios. Regarding the leveraged lease portfolio, external credit reports are used where available and where not available we use internally developed indicators. These indicators or internal credit risk grades factor historic loss experience, the value of the underlying collateral, delinquency trends, industry and general economic conditions. The credit quality of our lessees vary from AAA to B-. All accounts are current as of the end of this reporting period. For each reporting period the leveraged leases within the portfolio are reviewed for indicators of impairment where it is probable the rent due according to the contractual terms of the lease will not be collected. Currently there are no impaired leases.

Finance lease receivables, which are included in Prepaid expenses and other and Other assets in our consolidated balance sheets are comprised of the following:

(dollars in millions)

At December 31,

2010

 

2009

 

 

Leveraged
Leases

 

Direct
Finance
Leases

 

Total

 

Leveraged
Leases

 

Direct
Finance
Leases

 

Total

 

Minimum lease payments receivable

$

2,360

 

$

155

 

$

2,515

 

$

2,504

 

$

166

 

$

2,670

 

Estimated residual value

 

1,305

 

 

7

 

 

1,312

 

 

1,410

 

 

12

 

 

1,422

 

Unearned income

 

(1,140

)

 

(20

)

 

(1,160

)

 

(1,251

)

 

(19

)

 

(1,270

)

Total

$

2,525

 

$

142

 

$

2,667

 

$

2,663

 

$

159

 

$

2,822

 

Allowance for doubtful accounts

             

(152

)

             

(158

)

Finance lease receivables, net

           

$

2,515

             

$

2,664

 

Prepaid expenses and other

           

$

59

             

$

72

 

Other assets

           

 

2,456

               

2,592

 
             

$

2,515

             

$

2,664

 

Accumulated deferred taxes arising from leveraged leases, which are included in Deferred income taxes, amounted to $2.0 billion at December 31, 2010 and $2.1 billion at December 31, 2009.

The following table is a summary of the components of income from leveraged leases:

(dollars in millions)

Years Ended December 31,

2010

 

2009

 

2008

 

Pretax income

$

74

 

$

83

 

$

74

 

Income tax expense

 

32

 

 

34

 

 

30

 

The future minimum lease payments to be received from noncancelable capital leases (direct financing and leveraged leases), net of nonrecourse loan payments related to leveraged leases and allowances for doubtful accounts, along with payments relating to operating leases for the periods shown at December 31, 2010, are as follows:

(dollars in millions)

Years

Capital
Leases

 

Operating
Leases

 

2011

$

194

 

$

109

 

2012

 

156

 

 

89

 

2013

 

151

 

 

71

 

2014

 

129

 

 

51

 

2015

 

85

 

 

26

 

Thereafter

 

1,800

 

 

40

 

Total

$

2,515

 

$

386

 

As Lessee

We lease certain facilities and equipment for use in our operations under both capital and operating leases. Total rent expense under operating leases amounted to $2.5 billion in 2010 and 2009, and $2.2 billion in 2008.

Amortization of capital leases is included in Depreciation and amortization expense in the consolidated statements of income. Capital lease amounts included in Plant, property and equipment are as follows:

(dollars in millions)

At December 31,

 

2010

 

 

2009

 

Capital leases

$

321

 

$

357

 

Less accumulated amortization

 

79

 

 

126

 

Total

$

242

 

$

231

 

The aggregate minimum rental commitments under noncancelable leases for the periods shown at December 31, 2010, are as follows:

(dollars in millions)

Years

Capital
Leases

 

Operating
Leases

 

2011

$

97

 

$

1,898

 

2012

 

74

 

 

1,720

 

2013

 

70

 

 

1,471

 

2014

 

54

 

 

1,255

 

2015

 

42

 

 

1,012

 

Thereafter

 

81

 

 

5,277

 

Total minimum rental commitments

 

418

 

$

12,633

 

Less interest and executory costs

 

86

 

 

 

 

Present value of minimum lease payments

 

332

 

 

 

 

Less current installments

 

75

 

 

 

 

Long-term obligation at December 31, 2010

$

257

 

 

 

 

As of December 31, 2010, the total minimum sublease rentals to be received in the future under noncancelable operating subleases was not significant.