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LEASES

9 Months Ended

Jun. 30, 2020

NOTE 6 LEASES

ASC 842 Adoption

On October 1, 2019, we adopted ASC 842, retrospectively through a cumulative-effect adjustment without restating comparative periods for the 2019 and 2018 fiscal years as permitted under the specific transitional provisions in ASC 842. The reclassifications and the adjustments arising from the new leasing rules are therefore recognized in the opening balance sheet on October 1, 2019.

Upon the adoption of ASC 842, we recognized lease liabilities in relation to leases that had previously been classified as operating leases under the principles of ASC 840. These liabilities were measured at the present value of the remaining lease payments, discounted using the lessee’s incremental borrowing rate as of October 1, 2019, as most of our contracts do not provide an implicit rate. The weighted average lessee’s incremental borrowing rate applied to the operating lease liabilities on October 1, 2019 was approximately 2.9%.

The change in accounting policy affected the following items in the balance sheet on October 1, 2019:



(in thousands)	September 30, 2019		Adjustments		October 1, 2019
Other Noncurrent Assets:
Operating lease right-of-use asset	$	—	$	56,071	$	56,071
Current Liabilities:
Accrued liabilities	—		16,277		16,277
Noncurrent Liabilities:
Other	—		39,794		39,794

As of June 30, 2020, segment assets and liabilities have all increased from September 30, 2019 as a result of the change in accounting policy. All reportable segments were affected by the change in policy.

In applying ASC 842 for the first time, we have used the following practical expedients permitted by the topic:


•	The use of a single discount rate to a portfolio of leases with reasonably similar characteristics,


•	Not to reassess whether a contract is, or contains a lease at the date of initial application; instead, for contracts entered into before the transition date, we relied on our assessment in which we applied ASC 840 prior to the adoption date,


•	The option to not reassess initial direct cost for existing leases, and


•	The use of hindsight in determining the lease term where the contract contains options to extend or terminate the lease.

We have made the accounting policy election to not recognize a right-of-use asset and corresponding liability for leases with a term of 12 months or less and leases of low-value. Additionally, ASC 842 provides lessors with a practical expedient, by class of underlying asset, to not separate lease and non-lease components and account for the combined component under ASC 606 when the non-lease component is the predominant element of the combined component. The lessor practical expedient is limited to circumstances in which the lease, if accounted for separately, would be classified as an operating lease under ASC 842.

With respect to our drilling service contracts that commenced or were amended during the nine months ended June 30, 2020, we concluded that our drilling contracts contain a lease component and that the non-lease component is the predominant element of the combined component of such contracts. As such, we elected to apply the practical expedient to not separate the lease and non-lease components and account for the combined component under ASC 606. Therefore, we do not expect any change in our revenue recognition patterns or disclosures as a result of our adoption of ASC 842.

Lease Position



(in thousands)	October 1, 2019			June 30, 2020
Operating lease commitments disclosed	$	62,218		$	54,333

Discounted using the lessee's incremental borrowing rate at the date of initial application	$	57,323		$	53,107
(Less): short-term leases recognized on a straight-line basis as expense	(1,252		)	(5,602		)
Lease liability recognized	$	56,071		$	47,505

Of which:
Current lease liabilities	$	16,277		$	11,792
Non-current lease liabilities	39,794			35,713

The recognized right-of-use assets relate to the following types of assets:



(in thousands)	October 1, 2019		June 30, 2020
Properties	$	52,188	$	44,413
Equipment	3,652		2,606
Other	231		515
Total right-of-use assets	$	56,071	$	47,534

The right-of-use assets were measured at the amount equal to the lease liability, adjusted for the amount of any prepaid or accrued lease payments recognized on the balance sheet at September 30, 2019.

Lease Costs

The following table presents certain information related to the lease costs for our operating leases:



(in thousands)	Three Months Ended June 30, 2020		Nine Months Ended June 30, 2020
Operating lease cost	$	4,085	$	12,642
Short-term lease cost	234		1,303
Total lease cost	$	4,319	$	13,945

Lease Terms and Discount Rates

The table below presents certain information related to the weighted average remaining lease terms and weighted average discount rates for our operating leases as of June 30, 2020.



	June 30, 2020
Weighted average remaining lease term	5.1
Weighted average discount rate	2.6	%

Lease Obligations

Future minimum rental payments required under operating leases having initial or remaining non-cancelable lease terms in excess of one year at June 30, 2020 (in thousands) are as follows:



Fiscal Year	Amount
2020	$	6,186
2021	12,218
2022	9,011
2023	7,696
2024	7,311
Thereafter	11,911
Total	$	54,333

Total rent expense was $4.3 million and $3.9 million for the three months ended June 30, 2020 and 2019, respectively, and $13.9 million and $11.6 million for the nine months ended June 30, 2020 and 2019, respectively. The future minimum lease payments for our Tulsa corporate office and our Tulsa industrial facility represent a material portion of the amounts shown in the table above. The lease agreement for our Tulsa corporate office commenced on May 30, 2003 and has subsequently been amended, most recently on March 12, 2018. The agreement will expire on January 31, 2025; however, we have two five-year renewal options, which were not recognized as part of our right-of-use assets and lease liabilities. The lease agreement for our Tulsa industrial facility, where we perform maintenance and assembly of FlexRig components commenced on December 21, 2018 and will expire on June 30, 2025; however, we have two two-year renewal options which were recognized as part of our right-of-use assets and lease liabilities.