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Adoption of ASC Topic 842 - Lease Accounting | 6 Months Ended
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Jun. 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.
Theatre 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 the 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 recognizes fixed lease expense for the operating leases on a straight-line basis over the lease term. The Company’s theatre lease agreements do not contain any material residual value guarantees or material 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 June 30, 2019.
|  |  | As of |
Leases | Classification |  | June 30, 2019 |
Assets (1) |  |  |  |  |
Operating lease assets | Operating lease assets |  | $ | 1,429,451 |
Finance lease assets | Theatre properties and equipment, net of accumulated depreciation and amortization (2) |  |  | 122,759 |
Total lease assets |  |  | $ | 1,552,210 |
Liabilities (1) |  |  |  |  |
Current |  |  |  |  |
Operating | Current portion of operating lease obligations |  | $ | 215,060 |
Finance | Current portion of finance lease obligations |  |  | 15,233 |
Noncurrent |  |  |  |  |
Operating | Operating lease obligations, less current portion |  |  | 1,274,599 |
Finance | Finance lease obligations, less current portion |  |  | 130,311 |
Total lease liabilities |  |  | $ | 1,635,203 |
(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 $54,243 as of June 30, 2019.
As of June 30, 2019, the Company had signed lease agreements with total noncancelable lease payments of approximately $215,998 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 June 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 six months ended June 30, 2019.
|  | Three Months Ended |  |  | Six Months Ended |
Lease Cost | Classification | June 30, 2019 |  |  | June 30, 2019 |
Operating lease costs |  |  |  |  |  |  |  |
Equipment (1) | Utilities and other | $ | 1,861 |  |  | $ | 3,604 |
Theatres (2)(3) | Facility lease expense |  | 89,849 |  |  |  | 174,634 |
Total operating lease costs |  | $ | 91,710 |  |  | $ | 178,238 |
Finance lease costs |  |  |  |  |  |  |  |
Amortization of leased assets | Depreciation and amortization | $ | 3,739 |  |  | $ | 7,479 |
Interest on lease liabilities | Interest expense |  | 1,984 |  |  |  | 4,005 |
Total finance lease costs |  | $ | 5,723 |  |  | $ | 11,484 |
(1) | Includes approximately $736 and $1,356 of short-term lease payments for the three and six months ended June 30, 2019, respectively.
(2) | Includes approximately $20,344 and $35,618 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 six months ended June 30, 2019
(3) | Approximately $382 and $784 of lease payments are included in general and administrative expenses primarily related to office leases for the three and six months ended June 30, 2019, respectively.
The following table represents the maturity of lease liabilities, by lease classification, as of June 30, 2019.
|  | Operating |  | Finance |  |  |  |
Years Ending |  | Leases |  | Leases |  | Total |
2019 |  | $ | 141,043 |  | $ | 11,150 |  | $ | 152,193 |
2020 |  |  | 275,089 |  |  | 22,373 |  |  | 297,462 |
2021 |  |  | 257,560 |  |  | 18,661 |  |  | 276,221 |
2022 |  |  | 227,987 |  |  | 17,925 |  |  | 245,912 |
2023 |  |  | 196,942 |  |  | 17,236 |  |  | 214,178 |
After 2023 |  |  | 697,076 |  |  | 101,109 |  |  | 798,185 |
Total lease payments |  | $ | 1,795,697 |  | $ | 188,454 |  | $ | 1,984,151 |
Less: Interest |  |  | 306,038 |  |  | 42,910 |  |  | 348,948 |
Present value of lease liabilities |  | $ | 1,489,659 |  | $ | 145,544 |  | $ | 1,635,203 |
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 June 30, 2019.
|  | As of |
Lease Term and Discount Rate |  | June 30, 2019 |
Weighted-average remaining lease term (years) (1) |  |  |  |
Operating leases - equipment |  |  | 4.4 |
Operating leases - theatres |  |  | 8.1 |
Finance leases - equipment |  |  | 6.1 |
Finance leases - theatres |  |  | 10.7 |
Weighted-average discount rate (2) |  |  |  |
Operating leases - equipment |  |  | 4.3 | %
Operating leases - theatres |  |  | 4.8 | %
Finance leases - equipment |  |  | 5.5 | %
Finance leases - theatres |  |  | 5.3 | %
| (1) | The 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 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 that the Company would incur to borrow on a collateralized basis over a similar term and amount equal to 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 six months ended June 30, 2019.
|  | Six Months Ended |
Other Information |  | June 30, 2019 |
Cash paid for amounts included in the measurement of lease liabilities |  |  |  |
Cash outflows for operating leases |  | $ | 141,264 |
Cash outflows for finance leases - operating activities |  | $ | 3,893 |
Cash outflows for finance leases - financing activities |  | $ | 7,131 |
Non-cash amount of leased assets obtained in exchange for: |  |  |  |
Operating lease liabilities - theatres |  | $ | 37,582 |
Operating lease liabilities - equipment |  | $ | 339 |
Finance lease liabilities |  | $ | — |

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