Here we are given a part complete model for Nike, a company which has a significant operating lease portfolio, which includes its leased retail stores.

We are gonna complete the model by including the appropriate income statement, balance sheet, and cashflow statement entries in respect to these leases.

Let's start by taking a quick look at the information provided in the assumptions.

We are given an assumption for the lease expense as a percentage of revenue, and that's been held constant throughout our forecast.

So we're implicitly assuming that lease rentals will increase in line with revenues each year.

We're also given an assumption for the lease capitalization multiple.

Again, this is being held constant through our forecasts.

So we are assuming here that the lease term and the company's cost of borrowing will remain unchanged throughout the forecasts.

In the calculation section, we have an empty calculation for lease liabilities and right of use assets.

The income statement is almost complete, but is missing the operating lease expense Line.

Note also that the analyst has already forecasted EBITDA.

That's EBITDA before lease rentals.

So once lease rentals are forecast, the model will show a completed figure for EBITDA.

Below the balance sheet is also nearly complete, but it's missing the lease liabilities and right of use asset lines.

The cashflow statement is already complete as we don't need to make any cashflow statements adjustments for operating leases.

However, because we haven't yet forecast changes in lease assets and lease liabilities, the balance sheet doesn't yet balance.

So let's create the lease entries needed to complete this model.

We're gonna start by forecasting the lease expense in the income statement.

This uses the lease expense assumption provided at the top of the model multiplied by revenue.

Once we've calculated this for the first forecast year, we can copy it over to the right.

Now that we've calculated the lease expense, we can now calculate the lease liability.

We do this in the first forecast year by taking the lease capitalization multiple from our assumptions above, and we then multiply this by the lease expense that we've just calculated.

We can now calculate the right of use asset by assuming that the Change in this line is equal to the change in the lease liability each year.

This means that any new leases are added to both the asset and liability line each year, and any lease repayments are deducted from the asset and liability line each year.

This linkage therefore relies on us assuming that lease repayments are the same as the lease expense each year.

Now that we've completed these calculations for the first forecast year, we can copy this the right for subsequent forecast years.

The next step is to take the right of use asset and lease liability from these calculations and include them in our balance sheet.

Once we do this, notice that the balance sheet now balances.

Why is this? Well, let's take a look at the cashflow statement.

The cashflow statement starts with net income, which includes the operating lease expense.

So the lease rentals are included in our operating cash flows.

In addition to this, the change in the lease liability is equal to the change in the right of use asset each year.

So the change in these items nets off each year, so there are no other entries required in our cashflow statement, and our model is now complete.

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