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Leases | 12 Months Ended
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Feb. 01, 2020
Leases [Abstract] |
Leases | 3. Leases Effective February 3, 2019 (the “adoption date”), we adopted ASC 842 Leases (the “new standard”). The new standard requires lessees to recognize a liability for lease obligations and a corresponding right of use asset on the balance sheet. The guidance also requires disclosure of key information about leasing arrangements that is intended to give financial statement users the ability to assess the amount, timing and potential uncertainty of cash flows related to leases. We adopted the new standard using a modified retrospective transition method and applied the transition provisions at the beginning of the period of adoption through a cumulative-effect adjustment to retained earnings. We did not restate prior period financial statements. The new standard includes several transition practical expedients that were available to reduce the burden of implementing the standard.
| • | We elected the package of practical expedients, which among other things, allowed us to carry forward our historical lease classifications.
| • | We did not elect the hindsight practical expedient which would have allowed us to revisit key assumptions, such as lease term, that were made when we originally entered into the lease.
The following table summarizes changes in our Consolidated Balance Sheet upon adoption of the new standard:
(Dollars in Millions) |  |  |  |
Assets |  |  |  |
Property and equipment, net | $ | (174 | ) | (a)
Operating leases |  | 2,446 |  | (b)
Other assets |  | (32 | ) | (c)
Total assets | $ | 2,240 |  |
Liabilities and Shareholders' Equity |  |  |  |
Finance lease and financing obligations | $ | (237 | ) | (a)
Operating leases |  | 2,771 |  | (b)
Accrued and other liabilities |  | (413 | ) | (c)
Deferred taxes |  | 31 |  | (d)
Shareholders' equity |  | 88 |  | (d)
Total liabilities and shareholders' equity | $ | 2,240 |  |
(a) | The reductions are primarily due to historical failed sale-leaseback and build-to-suit arrangements where we were deemed the owner for accounting purposes. In accordance with ASC 842 transition provisions, they became operating or finance leases.
(b) | The increases include land and other operating leases which were not previously recorded on our balance sheet or were previously recorded as financing obligations.
(c) | The reductions are primarily due to the reclassification of lease-related assets and liabilities such as straight-line rent and reserves for closed stores to operating lease assets and liabilities.
(d) | The cumulative effect of lease adjustments, net of the deferred tax impact, was recorded as an adjustment to retained earnings. In addition, retained earnings includes a $26 million lease impairment charge.
These adjustments represent non-cash activities for Statement of Cash Flow purposes. The adoption of the new lease accounting standard did not have a material impact on our net income. Finance and Operating Leases We lease certain property and equipment used in our operations. Some of our store leases include additional rental payments based on a percentage of sales over contractual levels or which are adjusted periodically for inflation. Our typical store lease has an initial term of 20 to 25 years and four to eight five-year renewal options. Lease assets represent our right to use an underlying asset for the lease term. Lease assets are recognized at commencement date based on the value of the lease liability and are adjusted for any lease payments made to the lessor at or before commencement date, minus any lease incentives received and any initial direct costs incurred by the lessee. Lease liabilities represent our contractual obligation to make lease payments. At the commencement date, the lease liabilities equal the present value of minimum lease payments over the lease term. As the implicit interest rate is not readily identifiable in our leases, we estimate our collateralized borrowing rate to calculate the present value of lease payments. For leases that commenced prior to the adoption date, we used the February 3, 2019 rate for a term consistent with the original lease term for operating leases and the rate on the lease commencement date for finance leases. For leases with terms of 12 months or less, we elected the practical expedient to exclude them from the balance sheet and recognize expense on a straight-line basis over the lease term. For leases beginning, modified, or reassessed in 2019 and later, we elected the practical expedient to combine lease and non-lease components. The following tables summarize our operating and finance leases and where they are presented in our Consolidated Financial Statements:
Consolidated Balance Sheet | February 1, 2020
(Dollars in Millions) | Classification
Assets |  |  |  |
Operating leases | Operating leases | $ | 2,391 |
Finance leases | Property and equipment, net |  | 672 |
Total operating and finance leases |  |  | 3,063 |
Liabilities |  |  |  |
Current |  |  |  |
Operating leases | Current portion of operating leases |  | 158 |
Finance leases | Current portion of finance lease and financing obligations |  | 88 |
Noncurrent |  |  |  |
Operating leases | Operating leases |  | 2,619 |
Finance leases | Finance lease and financing obligations |  | 877 |
Total operating and finance leases |  | $ | 3,742 |
Consolidated Statement of Income | 2019 |
(Dollars in Millions) | Classification |
Operating leases | Selling, general, and administrative | $ | 314 |
Finance leases |  |  |  |
Amortization of leased assets | Depreciation and amortization |  | 72 |
Interest on lease liabilities | Interest expense, net |  | 98 |
Total operating and finance leases |  | $ | 484 |
Rent expense charged to operations was $301 million for 2018 and $293 million for 2017.
Consolidated Statement of Cash Flows | 2019
(Dollars in Millions) |
Cash paid for amounts included in the measurement of lease liabilities |  |  |
Operating cash flows from operating leases | $ | 320 |
Operating cash flows from finance leases |  | 98 |
Financing cash flows from finance leases |  | 76 |
The following table summarizes future lease payments by fiscal year:
| February 1, 2020
(Dollars in Millions) | Operating Leases | Finance Leases | Total
2020 | $ | 303 |  | $ | 181 |  | $ | 484 |
2021 |  | 303 |  |  | 162 |  |  | 465 |
2022 |  | 291 |  |  | 145 |  |  | 436 |
2023 |  | 276 |  |  | 124 |  |  | 400 |
2024 |  | 241 |  |  | 110 |  |  | 351 |
After 2024 |  | 3,426 |  |  | 1,750 |  |  | 5,176 |
Total lease payments |  | 4,840 |  |  | 2,472 |  |  | 7,312 |
Amount representing interest |  | (2,063 | ) |  | (1,507 | ) |  | (3,570 | )
Lease liabilities | $ | 2,777 |  | $ | 965 |  | $ | 3,742 |
Total lease payments include $3.0 billion related to options to extend operating lease terms that are reasonably certain of being exercised and $1.5 billion related to options to extend finance lease terms that are reasonably certain of being exercised, and excludes $16.5 million of legally binding lease payments for leases signed, but not yet commenced. The following table summarizes weighted-average remaining lease term and discount rates:
| February 1, 2020
Weighted-average remaining term (years) |  |  |
Operating leases |  | 20 |
Finance leases |  | 17 |
Weighted-average discount rate |  |  |
Operating leases |  | 6 | %
Finance leases |  | 11 | %
Financing Obligations Historical failed sale-leasebacks that did not qualify for sale-leaseback accounting upon adoption of ASC 842 continue to be accounted for as financing obligations. The following tables summarize our financing obligations and where they are presented in our Consolidated Financial Statements:
Consolidated Balance Sheet | February 1, 2020
(Dollars in Millions) | Classification
Assets |  |  |  |
Financing obligations | Property and equipment, net | $ | 76 |
Liabilities |  |  |  |
Current | Current portion of finance lease and financing obligations |  | 36 |
Noncurrent | Finance lease and financing obligations |  | 490 |
Total financing obligations |  | $ | 526 |
Consolidated Statement of Income | 2019
(Dollars in Millions) | Classification
Amortization of financing obligation assets | Depreciation and amortization | $ | 11 |
Interest on financing obligations | Interest expense, net |  | 37 |
Total financing obligations |  | $ | 48 |
Consolidated Statement of Cash Flows | 2019
(Dollars in Millions) |
Cash paid for amounts included in the measurement of financing obligations |  |  |
Operating cash flows from financing obligations | $ | 37 |
Financing cash flows from financing obligations |  | 37 |
Other financing obligations cash activity |  |  |  |
Proceeds from financing obligations |  |  | 11 |
(Gain) on extinguishment of debt |  |  | (9 | )
In 2019, we purchased leased equipment that was accounted for as a financing obligation resulting in recognition of a $9 million gain on extinguishment of debt. The following table summarizes future financing obligation payments by fiscal year:
(Dollars in Millions) | February 1, 2020
2020 | $ | 69 |
2021 |  | 71 |
2022 |  | 68 |
2023 |  | 66 |
2024 |  | 60 |
After 2024 |  | 197 |
Total financing obligations payments |  | 531 |
Non-cash gain on future sale of property |  | 225 |
Amount representing interest |  | (230 | )
Financing obligation liability | $ | 526 |
Total payments exclude $16 million of legally binding payments for contracts signed, but not yet commenced. The following table summarizes the weighted-average remaining term and discount rate for financing obligations:
| February 1, 2020
Weighted-average remaining term (years) |  | 9 |
Weighted-average discount rate |  | 7 | %

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