Leases

3 Months Ended

Sep. 30, 2019

5. Leases

We primarily have operating leases for corporate offices, distribution facilities, vehicles, and equipment. We determine if an arrangement is a lease at inception by evaluating whether the arrangement conveys the right to use an identified asset and whether we obtain substantially all of the economic benefits from and have the ability to direct the use of the asset. Our lease agreements generally do not contain any material residual value guarantees or material restrictive covenants.

Beginning July 1, 2019, operating leases are included in other assets, other accrued liabilities, and deferred income taxes and other liabilities in our condensed consolidated balance sheet. Operating lease right-of-use assets and corresponding operating lease liabilities are recognized at commencement date based on the present value of lease payments over the lease term. Operating lease expense for operating lease assets is recognized on a straight-line basis over the lease term. As most of our leases do not provide an implicit rate, we use our collateralized incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. We use the implicit rate if it is readily determinable.

Finance leases are included in property and equipment, net, current portion of long-term obligations and other short-term borrowings, and long-term obligations, less current portion in our condensed consolidated balance sheet.

Our lease agreements include leases that contain lease components and non-lease components. For all asset classes, we have elected to account for both of these provisions as a single lease component. We also, from time to time, sublease portions of our real estate property, resulting in sublease income. Sublease income and the related assets and cash flows are not material to the condensed

consolidated financial statements at or for the three months ended September 30, 2019.

We also have elected to apply a practical expedient for short-term leases whereby we do not recognize a lease liability and right-of-use asset for leases with a term of less than 12 months. Short-term lease expense recognized in the three months ended September 30, 2019 was not material. In addition, we elected the package of three practical expedients permitted under the transition guidance, which include the carry forward of our leases without reassessing 1) whether any contracts are leases or contain leases, 2) lease classification and 3) initial direct costs.

Our leases have remaining lease terms from less than 1 year up to approximately 23 years. Our lease terms may include options to extend or terminate the lease when it is reasonably certain and there is a significant economic incentive to exercise that option.

The following table summarizes the components of lease cost:



	Three Months Ended September 30,
(in millions)	2019
Operating lease cost	$	31
Finance lease cost
Amortization of right-of-use assets	4
Total finance lease cost	4
Variable lease cost	1
Total lease cost	$	36

The following tables summarizes supplemental balance sheet information related to leases:



(in millions)	September 30, 2019
Operating Leases
Operating lease assets	$	394

Current portion of operating lease liabilities	103
Operating lease liabilities	312
Total operating lease liabilities	415

Finance Leases
Property and equipment, net	18

Current portion of long-term obligations	5
Long-term obligations, less current portion	12
Total finance lease liabilities	$	17

The following tables summarizes supplemental cash flow information related to leases:



	Three Months Ended September 30,
(in millions)	2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows paid for operating leases	$	31
Financing cash flows paid for finance lease	2
Non-cash right-of-use assets obtained in exchange for lease obligations:
New operating leases	15
New finance leases	17
Amended lease standard adoption impact as of July 1, 2019 ⁽¹⁾	400


(1)	Includes the effect of $22 million from reclassifying deferred rent as an offset in accordance with the transition guidance.

Our operating leases had a weighted-average remaining lease term of 6.2 years and a weighted-average discount rate of 3.0 percent.

Future lease payments under non-cancellable leases as of September 30, 2019 were as follows:



(in millions)	Operating Leases		Finance Leases		Total
Years Ending September 30,
Remainder of 2020	$	91	$	4	$	95
2021	101		6		107
2022	79		4		83
2023	58		4		62
2024	41		1		42
Thereafter	149		—		149
Total future lease payments	519		19		538
Less: leases not yet commenced ⁽¹⁾	61		—		61
Less: imputed interest	43		2		45
Total lease liabilities	$	415	$	17	$	432


(1)	As of September 30, 2019, we had certain leases that were executed but did not have control of the underlying assets; therefore, the lease liabilities and right-of-use assets are not recorded in the condensed consolidated balance sheets.

As previously disclosed in our fiscal 2019 Form 10-K under the prior accounting guidance, the future minimum rental payments for operating leases having initial or remaining non-cancelable lease terms in excess of one year at June 30, 2019 for fiscal 2020 through 2024 and thereafter were as follows: $126 million, $100 million, $76 million, $54 million, $33 million and $94 million.