Electronic Arts develops, markets, publishes, and distributes interactive software games. An abridged “lease commitments” footnote from the company’s 2002 annual report reads:

In 2001, we renewed the lease on our headquarters facility in Redwood City, California and account for this arrangement as an operating lease. We have an option to purchase the property (land and facilities)
for \($145.0\) million, or, at the end of the lease in 2006, to arrange for (1) an additional extension of the lease or (2) sale of the property to a third party. In December 2000, we entered into a second lease for a five-year term to expand our Redwood Shores, California headquarters facilities and develop adjacent property. We also accounted for this arrangement as an operating lease and have an option to purchase this property for \($127.0\) million.
Operating leases are “off-balance-sheet” obligations, meaning that GAAP does not include the debt among the liabilities shown on a company’s balance sheet. Operating lease obligations are only disclosed in the financial statement footnotes. Capital leases, on the other hand, are included among balance sheet liabilities. This liability increase is offset by a corresponding increase to a balance sheet asset representing the leased property or equipment. (Chapter 12 provides the details.)

Required:
1. Suppose that Electronic Arts had entered into a capital lease rather than an operating lease.
Describe in qualitative terms how this change would alter the company’s balance sheet.
2. Describe in qualitative terms what impact a capital lease would have on the company’s ROA and long-term debt to assets ratios.
3. Would the changes in these ratios, if any, be favorable from managements perspective?
Why or why not?

Electronic Arts ($ in thousands) Selected financial data EBI Average assets 2002 $ 110,374 1,539,146 Long-term debt ROA (EBI/Average assets) 0 7.17%