Quarterly report pursuant to Section 13 or 15(d)

Adoption of ASC Topic 842 - Lease Accounting

v3.19.3
Adoption of ASC Topic 842 - Lease Accounting
9 Months Ended
Sep. 30, 2019
Leases [Abstract]  
Adoption of ASC Topic 842 - Lease Accounting

3.

Adoption of ASC Topic 842 – Lease Accounting

The Company adopted ASC Topic 842 as of January 1, 2019 under the modified retrospective approach that resulted in the recognition of a cumulative-effect adjustment to the opening balance of retained earnings with an option to elect certain practical expedients.  The Company elected the following practical expedients, as allowed by ASC Topic 842:

 

The Company chose not to separate nonlease components from lease components, accounting for lease components and nonlease components associated with a lease as a single lease component.  More specifically, for theatre leases, the Company elected not to separate fixed common area maintenance costs from lease costs when calculating lease liabilities and assets.

 

The Company also elected the following practical expedients:

 

o

The Company did not reassess whether existing contracts in effect as of the transition date of January 1, 2019 were, or contained, a lease.

 

o

The Company did not reassess the classification of existing leases as operating or finance as of the transition date.  

 

o

The Company did not reassess whether any initial direct costs were incurred for any of its existing leases.  

 

o

The Company did not elect to apply the recognition requirements of ASC 842 to short-term leases.


The adoption of ASC Topic 842 included the following primary impacts:

 

1.

The Company recorded a right-of-use asset and lease liability for all of its operating leases as required by the standard.   The lease liability for each lease was determined based on the present value of future minimum lease payments.  The right-of-use asset was based on the lease liability value, adjusted for offsets that existed as of adoption, including deferred rent liabilities of ($39,235), net favorable and unfavorable lease intangibles of ($5,780), deferred lease incentive liabilities of ($12,960) and long-term prepaid rents of $7,707.  The Company recorded operating lease right-of-use assets of $1,491,245 and operating lease liabilities of $1,545,210 upon adoption.

 

2.

Certain of the Company’s existing lease assets and liabilities, which were accounted for under prior sale-leaseback accounting guidance, were derecognized in accordance with ASC Topic 842 and reevaluated for classification per the new accounting guidance.  Several of these leases have been reestablished as operating leases based on ASC Topic 842.

 

a.

For those leases that are now classified as operating leases in accordance with ASC Topic 842, approximately $110,442 and $126,376 of lease assets and liabilities, respectively, were recorded as an adjustment to beginning retained earnings.  The related net deferred income tax asset for these accounts was also recorded as an adjustment to beginning retained earnings.  See additional impact discussed in item 3 below.

 

b.

The Company recognized finance lease assets and liabilities in the amount of $57,440 as of January 1, 2019 for the remaining leases that were determined to be finance leases under ASC Topic 842.    

 

3.

For the leases noted in item 2a above, the Company will now record the related operating lease payments as facility lease expense, compared to prior periods in which the capitalized asset was depreciated and lease payments were recorded as a reduction of a lease liability and interest expense.  

Real Estate Leases - The Company conducts a significant part of its theatre operations in leased properties under noncancelable operating and finance leases with terms generally ranging from 10 to 25 years. In addition to fixed lease payments, some of the leases provide for variable lease payments and some require the payment of taxes, insurance and other costs applicable to the property. Variable lease payments include payments based on a percentage of retail sales over contractual levels or payments adjusted periodically for inflation or changes in attendance. The Company can renew, at its option, a substantial portion of the leases at defined or then market rental rates for various periods.  Some leases also provide for escalating rent payments throughout the lease term.  The Company also leases certain office and warehouse facilities in the U.S. and in international locations.  The lease terms for these facilities generally only include fixed payments.  The Company recognizes fixed lease expense for the operating leases on a straight-line basis over the lease term.  The Company’s real estate lease agreements do not contain any residual value guarantees or restrictive covenants.

 

Equipment Leases - The Company has certain equipment operating leases primarily including projectors, trash compactors and various other equipment used in the day-to-day operation of the business.  Certain of the leases require fixed lease payments to be made over the duration of the lease term, while others are variable in nature based on usage or sales.  Certain of these leases are month-to-month, while others are noncancelable with terms generally ranging from 5 to 12 years.  The Company’s equipment lease agreements do not contain any residual value guarantees or restrictive covenants.

The following table represents the operating and finance right-of-use assets and lease liabilities as of September 30, 2019.

 

 

 

 

As of

 

Leases

Classification

 

September 30, 2019

 

Assets (1)

 

 

 

 

 

Operating lease assets

Operating lease assets

 

$

1,384,019

 

Finance lease assets

Theatre properties and equipment, net of accumulated depreciation and amortization (2)

 

 

103,059

 

Total lease assets

 

 

$

1,487,078

 

 

 

 

 

 

 

Liabilities (1)

 

 

 

 

 

Current

 

 

 

 

 

Operating

Current portion of operating lease obligations

 

$

215,015

 

Finance

Current portion of finance lease obligations

 

 

15,501

 

Noncurrent

 

 

 

 

 

Operating

Operating lease obligations, less current portion

 

 

1,230,152

 

Finance

Finance lease obligations, less current portion

 

 

126,344

 

Total lease liabilities

 

 

$

1,587,012

 

 

(1)

The operating lease right-of-use assets and liabilities recorded on the Company’s condensed consolidated balance sheet generally do not include renewal options that have not yet been exercised.  The Company does not consider a lease renewal as reasonably certain until immediately before the necessary notification is provided to the landlord.

(2)

Finance lease assets are net of accumulated amortization of $57,506 as of September 30, 2019.

As of September 30, 2019, the Company had signed lease agreements with total noncancelable lease payments of approximately $258,453 related to theatre leases that had not yet commenced.  The timing of lease commencement is dependent on the completion of construction of the related theatre facility.  Additionally, these amounts are based on estimated square footage and costs to construct each facility and may be subject to adjustment upon final completion of each construction project.  In accordance with ASC Topic 842, fixed minimum lease payments related to these theatres are not included in the right-of-use assets and lease liabilities as of September 30, 2019.  There were no significant noncancelable lease agreements signed, but not yet commenced, related to equipment leases.  

The following table represents the Company’s aggregate lease costs, by lease classification, for the three and nine months ended September 30, 2019.

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

Lease Cost

Classification

September 30, 2019

 

 

September 30, 2019

 

Operating lease costs

 

 

 

 

 

 

 

 

Equipment (1)

Utilities and other

$

1,569

 

 

$

5,173

 

Real Estate (2)(3)

Facility lease expense

 

88,149

 

 

 

262,783

 

Total operating lease costs

 

$

89,718

 

 

$

267,956

 

 

 

 

 

 

 

 

 

 

Finance lease costs

 

 

 

 

 

 

 

 

Amortization of leased assets

Depreciation and amortization

$

3,703

 

 

$

11,182

 

Interest on lease liabilities

Interest expense

 

1,922

 

 

 

5,927

 

Total finance lease costs

 

$

5,625

 

 

$

17,109

 

(1)

Includes approximately $452 and $1,808 of short-term lease payments for the three and nine months ended September 30, 2019, respectively.  

(2)

Includes approximately $18,591 and $54,209 of variable lease payments based on a change in index, such as CPI or inflation, variable payments based on revenues or attendance and variable common area maintenance costs for the three and nine months ended September 30, 2019

(3)

Approximately $400 and $1,184 of lease payments are included in general and administrative expenses primarily related to office leases for the three and nine months ended September 30, 2019, respectively.  

The following table represents the maturity of lease liabilities, by lease classification, as of September 30, 2019.

 

 

 

Operating

 

Finance

 

 

 

 

Years Ending

 

Leases

 

Leases

 

Total

 

2019

 

$

70,137

 

$

5,588

 

$

75,725

 

2020

 

 

276,114

 

 

22,373

 

 

298,487

 

2021

 

 

258,827

 

 

18,661

 

 

277,488

 

2022

 

 

229,272

 

 

17,925

 

 

247,197

 

2023

 

 

198,799

 

 

17,236

 

 

216,035

 

After 2023

 

 

704,440

 

 

101,110

 

 

805,550

 

Total lease payments

 

$

1,737,589

 

$

182,893

 

$

1,920,482

 

Less: Interest

 

 

292,422

 

 

41,048

 

 

333,470

 

Present value of lease liabilities

 

$

1,445,167

 

$

141,845

 

$

1,587,012

 

 

The following table represents future minimum lease payments under noncancelable operating and capital leases at December 31, 2018 as presented in the Company’s Annual Report on Form 10-K filed February 28, 2019:

 

 

 

Operating

 

 

Capital

 

Years Ending

 

Leases

 

 

Leases

 

2019

 

$

253,323

 

 

$

42,434

 

2020

 

 

242,336

 

 

 

41,502

 

2021

 

 

230,396

 

 

 

34,589

 

2022

 

 

204,628

 

 

 

32,462

 

2023

 

 

176,802

 

 

 

28,534

 

Thereafter

 

 

677,091

 

 

 

166,375

 

Total

 

$

1,784,576

 

 

 

345,896

 

Amounts representing interest payments

 

 

 

 

 

 

(86,364

)

Present value of future minimum payments

 

 

 

 

 

 

259,532

 

Current portion of finance and capital lease obligations

 

 

 

 

 

 

(27,065

)

Capital lease obligations, less current portion

 

 

 

 

 

$

232,467

 

 

The following table represents the weighted-average remaining lease term and discount rate, disaggregated by lease classification, as of September 30, 2019.

 

 

As of

 

Lease Term and Discount Rate

 

September 30, 2019

 

Weighted-average remaining lease term (years) (1)

 

 

 

 

Operating leases - equipment

 

 

4.1

 

Operating leases - real estate

 

 

7.9

 

Finance leases - equipment

 

 

5.9

 

Finance leases - real estate

 

 

10.6

 

 

 

 

 

 

Weighted-average discount rate (2)

 

 

 

 

Operating leases - equipment

 

 

4.3

%

Operating leases - real estate

 

 

4.8

%

Finance leases - equipment

 

 

5.5

%

Finance leases - real estate

 

 

5.2

%

 

(1)

The lease assets and liabilities recorded on the Company’s condensed consolidated balance sheet generally do not include renewal options that have not yet been executed.  The Company does not consider a lease renewal exercise as reasonably certain until immediately before the necessary notification is provided to the landlord.

 

 

(2)

The discount rate for each lease represents the incremental borrowing rate at which the Company would borrow, on a collateralized basis, over a similar term and at an amount equal to the lease payments in a similar economic environment.

 

The following table represents the minimum cash lease payments included in the measurement of lease liabilities and the non-cash addition of right-of-use assets for the nine months ended September 30, 2019.

 

 

 

Nine Months Ended

 

Other Information

 

September 30, 2019

 

Cash paid for amounts included in the measurement of lease liabilities

 

 

 

 

Cash outflows for operating leases

 

$

211,940

 

Cash outflows for finance leases - operating activities

 

$

5,756

 

Cash outflows for finance leases - financing activities

 

$

10,830

 

Non-cash amount of leased assets obtained in exchange for:

 

 

 

 

Operating lease liabilities - real estate

 

$

53,526

 

Operating lease liabilities - equipment

 

$

668

 

Finance lease liabilities

 

$

 

 

Lessor Arrangements

 

As noted above, the Company did not reassess whether existing contracts in effect as of the transition date of January 1, 2019 were, or contained, a lease.  However, effective September 17, 2019, the Company amended its Exhibitor Services Agreement (“ESA”) with National CineMedia, LLC (“NCM”) and, as a result of this amendment, the Company reassessed the ESA under ASC Topic 842.  The Company’s assessment resulted in the determination that the nonconsecutive periods of use of the theatre screens by NCM under the ESA qualify as a lease in accordance with ASC Topic 842.  See further discussion in Note 8.

 

The Company rents its theatre auditoriums for corporate meetings, screenings, education and training sessions and other private events.  These rentals, which are not significant to the Company, are generally one-time events and the related revenue is reflected as other revenue on condensed consolidated statement of income.