Leases

9 Months Ended

Sep. 30, 2019

NOTE 20 – Leases:

Leases prior to the adoption of the new Lease Standard

Teva leases real estate, cars and equipment for use in its operations, which are classified as operating leases. In addition to rent, the leases may require Teva to pay directly for fees, insurance, maintenance and other operating expenses. Rental expense for the nine months ended September 30, 201

and the 12 months ended December 31, 201

, was $131 million and $175 million, respectively. The Company also has capital leases for properties.

Leases following the adoption of the new Lease Standard

Teva adopted the new accounting standard ASC 842 “Leases” and all the related amendments on January 1, 2019 and used the effective date as Teva’s date of initial application.

Teva determines if an arrangement is a lease at inception. Lease classification is governed by five criteria in ASC 842-10-25-2. If any of these five criteria is met, Teva classifies the lease as a finance lease. Otherwise, Teva classifies the lease as an operating lease. When determining lease classification, Teva’s approach in assessing two of the mentioned criteria is: (i) generally 75% or more of the remaining economic life of the underlying asset is a major part of the remaining economic life of that underlying asset; and (ii) generally 90% or more of the fair value of the underlying asset comprises substantially all of the fair value of the underlying asset.

Operating leases are included in operating lease

right-of-use

(“ROU”) assets, other current liabilities, and operating lease liabilities in the consolidated balance sheets. Finance leases are included in property, plant and equipment, other current liabilities, and other long-term liabilities in the consolidated balance sheets. Finance leases of land include long-term leasehold rights in various locations, with useful lives between 30 and 99 years.

ROU assets represent Teva’s right to use an underlying asset for the lease term and lease liabilities represent Teva’s obligation to make lease payments arising from the lease. Operating and finance lease ROU assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. Teva uses its incremental borrowing rate based on the information available at the commencement date to determine the present value of the lease payments.

For finance leases, Teva recognizes interest on the lease liability separately from amortization of the ROU assets in the statement of comprehensive income. For operating leases, lease expenses are recognized on a straight-line basis over the lease term.

The new standard also provides practical expedients for an entity’s ongoing accounting. Teva elected the short-term lease recognition exemption for all leases with a term shorter than 12 months. This means that for those leases, Teva does not recognize ROU assets or lease liabilities, including not recognizing ROU assets or lease liabilities for existing short-term leases of those assets in transition, but recognizes lease expenses over the lease term on a straight line basis. Teva also elected the practical expedient to not separate lease and

non-lease

components for all of Teva’s leases, other than leases of real estate.

Lease terms will include options to extend or terminate the lease when it is reasonably certain that Teva will exercise or not exercise the option to renew or terminate the lease.

Teva’s lease agreements have remaining lease terms ranging from 1 year to 80 years. Some of these agreements include options to extend the leases for up to 15 years and some include options to terminate the leases immediately. Certain leases also include options to purchase the leased property.

The depreciable life of leasehold improvements is limited by the expected lease term, unless there is a transfer of title or a purchase option for the leased asset reasonably certain of exercise.

Some of Teva’s vehicle lease agreements include rental payments based on the actual usage of the vehicles and other lease agreements include rental payments adjusted periodically for inflation. Teva’s lease agreements do not contain any material residual value guarantees.

The new Lease Standard will have no impact on Teva’s debt-covenant compliance under its RCF.

Teva rents out or subleases certain real estate to third parties, which has an immaterial impact on Teva’s consolidated financial statements.

The components of operating lease cost for the three months ended and nine months ended September 30, 2019 were as follows:


	Three months ended September 30,		Nine months ended September 30,
	2019
	(U.S. $ in millions)
Operating lease cost:
Fixed payments and variable payments that depend on an index or rate	$	45	$	123
Variable lease payments not included in the lease liability		—		4
Short-term lease cost		1		4

Total operating lease cost	$	46	$	131

Supplemental cash flow information related to operating leases was as follows:


	Nine months ended
	September 30, 2019
	(U.S. $ in millions)
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	130
Right-of-use assets obtained in exchange for lease obligations (non-cash):
Operating leases	$	70

Supplemental balance sheet information related to operating leases was as follows:


	September 30, 2019
	(U.S. $ in millions)
Operating leases:	$
Operating lease ROU assets		468
Other current liabilities		116
Operating lease liabilities		394

Total operating lease liabilities	$	510



	September 30, 2019
Weighted average remaining lease term
Operating leases		7.4 years
Weighted average discount rate
Operating leases		5.9	%

Maturities of operating lease liabilities were as follows:


	September 30, 2019
	(U.S. $ in millions)
2019 (excluding the nine months ended September 30, 2019)	$	38
2020		128
2021		98
2022		73
2023		51
2024 and thereafter		253

Total operating lease payments	$	641
Less: imputed interest		131

Present value of lease liabilities	$	510


	December 31, 2018
	(U.S. $ in millions)
2019	$	193
2020		154
2021		118
2022		91
2023		66
2024 and thereafter		283

Total lease payments	$	905

As of September 30, 2019, Teva has additional operating leases for office space which have yet to commence, with undiscounted future payments of $92 million. These operating leases will commence during fiscal year

2020

with lease terms of 9 to 12 years.

On October 10, 2019, Teva entered into an agreement to sell and lease back the land and building of its distribution center in Israel. Net proceeds from the asset sale amounted to $

128

million.

As of September 30, 2019, Teva’s total finance lease assets and finance lease liabilities are $77 million and $29 million, respectively. The difference between those amounts is mainly due to prepaid payments.