LEASES AND OFF BALANCE SHEET ITEMS

9 Months Ended

Sep. 30, 2019

Commitments and Contingencies Disclosure [Abstract]

LEASES AND OFF BALANCE SHEET ITEMS

Leases

On January 1, 2019, Eastman adopted ASU 2016-02 Leases and related releases under the modified retrospective optional transition method such that prior period financial statements have not been adjusted to reflect the impact of the new standard. The new standard establishes two types of leases: finance and operating. Both types of leases have associated right-to-use assets and lease liabilities that have been valued at the present value of the lease payments and recognized on the Unaudited Consolidated Statement of Financial Position which did not result in an impact to retained earnings. The discount rate used in the measurement of a right-to-use asset and lease liability is the rate implicit in the lease whenever that rate is readily determinable. If the rate implicit in the lease is not readily determinable, the collateralized incremental borrowing rate is used.

Upon adoption, the Company elected the practical expedient package wherein: expired or existing contracts were not reassessed as to whether these contracts are or contained a lease; expired or existing contracts were not reassessed for operating or financing classification; and initial direct costs for existing leases were not reassessed. The Company also elected the practical expedient not to assess whether existing or expired land easements that were not previously accounted for under the prior standard are or contain a lease. Lastly, the Company elected the accounting policy not to apply the recognition and measurement requirements to short-term leases with a term of 12 months or less and do not include a bargain purchase option.

The Company has operating leases, as a lessee, with customary terms that do not include: significant variable lease payments; significant reasonably certain extensions or options required to be included in the lease term; restrictions; or other covenants for real property, rolling stock, and machinery and equipment. Real property leases primarily consist of office space and rolling stock leases primarily for railcars and fleet vehicles. At September 30, 2019, operating right-to-use assets of $205 million are included as a part of "Other noncurrent assets" in the Unaudited Consolidated Statement of Financial Position and includes $8 million of assets previously classified as lease intangibles. Operating lease liabilities are included as a part of "Payables and other current liabilities" and "Other long-term liabilities" in the Unaudited Consolidated Statement of Financial Position. There have been no material changes to the future minimum lease payments as of December 31, 2018 as accounted for under the previous lease standard, for these obligations, see Note 11, "Commitments and Off Balance Sheet Arrangements", to the consolidated financial statements in Part II, Item 8 of the Company's 2018 Annual Report on Form 10-K. As of September 30, 2019, reconciliation of minimum lease payments and operating lease liabilities is provided below:



(Dollars in millions)	Operating lease liabilities
Remainder of 2019	$	17
2020	58
2021	46
2022	36
2023	24
2024 and beyond	39
Total minimum lease payments	220
Less: amounts of lease payments representing interest	23
Present value of future minimum lease payments	197
Less: current obligations under leases	55
Long-term lease obligations	$	142

The Company has operating leases, primarily leases for railcars, with terms that require the Company to guarantee a portion of the residual value of the leased assets upon termination of the lease that will expire beginning in first quarter 2020. Residual guarantee payments that become probable and estimable are recognized as rent expense over the remaining life of the applicable lease. Management's current expectation is that the likelihood of material residual guarantee payments is remote.

Lease costs during the period and other information is provided below:



		Third Quarter		First Nine Months
(Dollars in millions)		2019		2019
Lease costs:
	Operating lease costs	$	17	$	49
	Short-term lease costs	10		30
	Sublease income	—		(1		)
	Total	$	27	$	78

Other operating lease information:
	Cash paid for amounts included in the measurement of lease liabilities	$	17	$	52
	Right-to-use assets obtained in exchange for new lease liabilities	15		36

	Weighted-average remaining lease term, in years			5
	Weighted-average discount rate			4.1		%

Off Balance Sheet Items

Supplier Purchase Obligations

The Company had various purchase obligations at September 30, 2019, totaling approximately $2.8 billion over a period of approximately 30 years for materials, supplies, and energy incident to the ordinary conduct of business.

Guarantees

Guarantees and claims also arise during the ordinary course of business from relationships with customers, suppliers, joint venture partners, and other parties when the Company undertakes an obligation to guarantee the performance of others if specified triggering events occur. Non-performance under a contract could trigger an obligation of the Company. The Company's current other guarantees include guarantees relating to intellectual property, environmental matters, and other indemnifications and have arisen through the normal course of business. The ultimate effect on future financial results is not subject to reasonable estimation because considerable uncertainty exists as to the final outcome of these claims, if they were to occur. These other guarantees have terms up to 30 years with maximum potential future payments of approximately $30 million in the aggregate, with none of these guarantees being individually significant to the Company's operating results, financial position, or liquidity. Management's current expectation is that future payment or performance related to non-performance under other guarantees is remote.

Accounts Receivable Factoring

The Company has uncommitted accounts receivable factoring agreements under which entire invoices may be sold, without recourse, to third-party financial institutions. Under these agreements, the Company sells the invoices at face value, less a transaction fee, which substantially equals the carrying value and fair value with no gain or loss recognized and no credit loss exposure is retained. Available capacity under these agreements, which the Company uses as a source of working capital funding, is dependent on the level of accounts receivable eligible to be sold and the financial institutions' willingness to purchase such receivables. In addition, certain agreements also require that the Company continue to service, administer, and collect the sold accounts receivable at market rates. The total amount of receivables sold in third quarter 2019 and 2018 were $190 million and $38 million, respectively, and $460 million and $123 million in first nine months 2019 and 2018, respectively.