Quarterly report pursuant to Section 13 or 15(d)

Leases

v3.19.2
Leases
6 Months Ended
Jun. 30, 2019
Leases  
Leases

(8) Leases

In February 2016 and subsequently, the FASB issued new guidance which revises the accounting for leases (“ASC 842”). Under the new guidance, entities that lease assets are required to recognize assets and liabilities on the balance sheet related to the rights and obligations created by those leases regardless of whether they are classified as finance or operating leases.  In addition, new disclosures are required to meet the objective of enabling users of the financial statements to better understand the amount, timing, and uncertainty of cash flows arising from leases. The Company adopted this guidance on January 1, 2019 and elected the optional transition method that allowed for a cumulative-effect adjustment in the period of adoption.  Results for reporting periods beginning after January 1, 2019 are presented under the new guidance, while prior period amounts were not adjusted and continue to be reported under the accounting standards in effect for those periods.  

The Company elected certain of the available transition practical expedients, including those that permit it to not reassess (1) whether any expired or existing contracts are or contain leases, (2) the lease classification for any expired or existing leases, and (3) any initial direct costs for any existing leases as of the effective date.  The Company did not elect the hindsight practical expedient, which permits entities to use hindsight in determining the lease term and assessing impairment.  The most significant impact of the new guidance was the recognition of right-of-use (“ROU”) assets and lease liabilities for operating leases.  In addition, the Company elected the practical expedient to account for the lease and non-lease components as a single lease component and will not recognize right-of-use assets or lease liabilities for short-term leases, which are those leases with a term of twelve months or less at the lease commencement date.  

The Company recognized $287 million of operating lease ROU assets, $51 million of short term operating lease liabilities and $259 million of long term operating lease liabilities on the condensed consolidated balance sheet upon adoption of the new standard.  The operating lease liabilities were determined based on the present value of the remaining rental payments and the operating lease ROU asset was determined based on the value of the lease liabilities, adjusted primarily for deferred rent, net of prepaid rent of $23 million.

The Company has finance lease agreements with transponder and transmitter network suppliers for the right to transmit its signals in the U.S. and Germany. The Company is also party to a finance lease agreement for data processing hardware and a warehouse.  The Company also leases data processing equipment, facilities, office space, retail space and land. These leases are classified as operating leases. Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future lease payments using our incremental borrowing rate.

Our leases have remaining lease terms of less than one year to 15 years, some of which may include the option to extend for up to 14 years, and some of which include options to terminate the leases within less than one year.

The components of lease cost during the three and six months ended June 30, 2019 were as follows:

Three months ended

Six months ended

June 30, 2019

June 30, 2019

in millions

Operating lease cost

$

18

35

Finance lease cost

Depreciation of leased assets

$

5

10

Interest on lease liabilities

2

4

Total finance lease cost

$

7

14

The remaining weighted-average lease term and the weighted-average discount rate were as follows:

June 30, 2019

Weighted-average remaining lease term (years):

Finance leases

9.3

Operating leases

8.9

Weighted-average discount rate:

Finance leases

5.0%

Operating leases

4.9%

Supplemental balance sheet information related to leases was as follows:

June 30,

2019

in millions

Operating leases:

Operating lease ROU assets (1)

$

326

Current operating lease liabilities (2)

$

53

Operating lease liabilities (3)

302

Total operating lease liabilities

$

355

Finance Leases:

Finance lease ROU assets (4)

$

277

Finance lease ROU asset accumulated depreciation (4)

(128)

Finance lease ROU assets, net

$

149

Current finance lease liabilities (2)

$

20

Finance lease liabilities (3)

158

Total finance lease liabilities

$

178

(1) Included within the Other assets, at cost, net of accumulated amortization line item on the condensed consolidated balance sheets.
(2) Included within the Other current liabilities line item on the condensed consolidated balance sheets.
(3) Included within the Other liabilities line item on the condensed consolidated balance sheets.
(4) Included within the Property and equipment, net line item on the condensed consolidated balance sheets.

Supplemental cash flow information related to leases was as follows:

Six months ended

June 30, 2019

in millions

Cash paid for amounts included in the measurement of lease liabilities:

Operating cash flows from operating leases

$

33

Operating cash flows from finance leases

$

4

Financing cash flows from finance leases

$

10

Right-of-use assets obtained in exchange for lease obligations

Operating leases

$

72

Finance leases

$

Future lease payments under finance leases and operating leases with initial terms of one year or more at June 30, 2019 consisted of the following:

Finance Leases

Operating Leases

in millions

Remainder of 2019

$

15

36

2020

27

69

2021

25

59

2022

23

50

2023

22

44

Thereafter

117

207

Total lease payments

$

229

465

Less: imputed interest

51

110

Total lease liabilities

$

178

355

On October 5, 2018, QVC entered into a lease (“ECDC Lease”) for an East Coast distribution center. The 1.7 million square foot rental building is located in Bethlehem, Pennsylvania and will be leased to QVC for an initial term of 15 years. QVC obtained access to a portion of the ECDC Lease during March 2019 and recorded a ROU asset of $68 million and an operating lease liability of $69 million. The Company expects the remaining portion of the lease to commence during the third quarter of 2019. Under the ECDC Lease, QVC is required to pay an initial base rent of approximately $10 million per year, with payments expected to begin in the fourth quarter of 2019, and increasing to approximately $14 million per year, as well as all real estate taxes and other building operating costs. QVC also has the option to extend the term of the ECDC Lease for up to two consecutive terms of 5 years each and one final term of 4 years.