notes to consolidated financial statements

Note 7

Leasing Arrangements

As Lessor

We are the lessor in leveraged and direct financing lease agreements for commercial aircraft and power generating facilities, which comprise the majority of our leasing portfolio along with telecommunications equipment, real estate property and other equipment. These leases have remaining terms of up to 39 years as of December 31, 2011. 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 is secured by 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, and industry and general economic conditions. The credit quality of our lessees primarily varies from AAA to CCC-. 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. All significant accounts, individually or in the aggregate, are current and none are classified as impaired.

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,

2011

 

2010

 

 

Leveraged
Leases

 

Direct
Finance
Leases

 

Total

 

Leveraged
Leases

 

Direct
Finance
Leases

 

Total

 

Minimum lease payments receivable

$

1,610

 

$

119

 

$

1,729

 

$

2,360

 

$

155

 

$

2,515

 

Estimated residual value

 

1,202

 

 

9

 

 

1,211

 

 

1,305

 

 

7

 

 

1,312

 

Unearned income

 

(874

)

 

(19

)

 

(893

)

 

(1,140

)

 

(20

)

 

(1,160

)

Total

$

1,938

 

$

109

 

$

2,047

 

$

2,525

 

$

142

 

$

2,667

 

Allowance for doubtful accounts

 

 

 

 

 

 

 

(137

)

 

 

 

 

 

 

 

(152

)

Finance lease receivables, net

 

 

 

 

 

 

$

1,910

 

 

 

 

 

 

 

$

2,515

 

Prepaid expenses and other

 

 

 

 

 

 

$

46

 

 

 

 

 

 

 

$

59

 

Other assets

 

 

 

 

 

 

 

1,864

 

 

 

 

 

 

 

 

2,456

 

 

 

 

 

 

 

 

$

1,910

 

 

 

 

 

 

 

$

2,515

 

Accumulated deferred taxes arising from leveraged leases, which are included in Deferred income taxes, amounted to $1.6 billion at December 31, 2011 and $2.0 billion at December 31, 2010.

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

(dollars in millions)

Years Ended December 31,

2011

 

2010

 

2009

 

Pretax income

$

61

 

$

74

 

$

83

 

Income tax expense

 

24

 

 

32

 

 

34

 

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 expected receipts relating to operating leases for the periods shown at December 31, 2011, are as follows:

(dollars in millions)

Years

Capital
Leases

 

Operating
Leases

 

2012

$

130

 

$

171

 

2013

 

115

 

 

157

 

2014

 

94

 

 

140

 

2015

 

67

 

 

119

 

2016

 

148

 

 

95

 

Thereafter

 

1,175

 

 

102

 

Total

$

1,729

 

$

784

 

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 2011, 2010 and 2009, respectively.

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,

 

2011

 

 

2010

 

Capital leases

$

362

 

$

321

 

Less accumulated amortization

 

132

 

 

130

 

Total

$

230

 

$

191

 

The aggregate minimum rental commitments under noncancelable leases for the periods shown at December 31, 2011, are as follows:

(dollars in millions)

Years

Capital
Leases

 

Operating
Leases

 

2012

$

92

 

$

2,004

 

2013

 

88

 

 

1,779

 

2014

 

66

 

 

1,558

 

2015

 

53

 

 

1,298

 

2016

 

47

 

 

1,004

 

Thereafter

 

130

 

 

4,746

 

Total minimum rental commitments

 

476

 

$

12,389

 

Less interest and executory costs

 

124

 

 

 

 

Present value of minimum lease payments

 

352

 

 

 

 

Less current installments

 

66

 

 

 

 

Long-term obligation at December 31, 2011

$

286