In February 2016, the FASB issued ASU 2016-02, “Leases”. The ASU requires that companies recognize assets and liabilities for the rights and obligations created by the companies’ leases. The update was effective for the Company during the first quarter of 2019.

The FASB has provided companies with a transition option under which they can opt to continue to apply the legacy guidance, including its disclosure requirements, in the comparative periods presented in the year during which they adopt the new lease standard. Entities that elect the option only make annual disclosures for the comparative periods as legacy guidance does not require interim disclosures. The Company has elected this transition option.

Under the new standard, companies may elect the following practical expedients, which must be elected as a package and applied consistently to all leases:

1. An entity need not reassess whether any expired or existing contracts are or contain leases.

2. An entity need not reassess the lease classification for any expired or existing leases.

Under the new standard, an entity may also elect a practical expedient to use hindsight in determining the lease term and in assessing impairment of the entity’s right-of-use assets. The Company did not elect this practical expedient.

Additionally, under the new standard, lessees can make an accounting policy election (by class of underlying asset to which the right of use relates) to apply accounting similar to legacy accounting to leases that meet the new

standard’s definition of a “short-term lease” (a lease that, at the commencement date, has a lease term of twelve months or less and does not include an option to purchase the underlying asset that the lessee is reasonably certain to exercise). The Company has made this election for all classes of underlying assets.

Further, the new standard provides a practical expedient that permits lessees to make an accounting policy election (by class of underlying asset) to account for each separate lease component of a contract and its associated non-lease components as a single lease component. The Company has elected this expedient for all asset classes, with the exception of its real estate.

The Company’s lease portfolio is primarily comprised of real estate leases for its permanent Party City stores. The Company also leases manufacturing facilities, distribution facilities, warehouse space and office space. Additionally, the Company enters into short leases (generally less than four months) in order to operate its temporary stores. Further, the Company enters into leases of equipment, copiers, printers and automobiles.

The Company’s finance leases are immaterial. The right-of-use asset for the Company’s finance leases is included in Property, plant and equipment, net on the Company’s consolidated balance sheet. The liabilities for the Company’s finance leases are included in Current portion of long-term obligations and Long-term obligations, excluding current portion, on the Company’s consolidated balance sheet.

Additionally, for most store leases, the Company pays variable taxes and insurance.

Many of the Company’s store leases, and certain of the Company’s other leases, contain renewal options. However, the renewal periods are generally not included in the right-of-use assets and lease liabilities for such leases as exercise of the options is not reasonably certain.

The Company is unable to determine the discount rates that are implicit in its operating leases. Therefore, for such leases, the Company is utilizing its incremental borrowing rate.

For leases that existed as of January 1, 2019, the Company determined the applicable incremental borrowing rates for such leases based on the remaining lease terms for the leases as of such date.

During the years ended December 31, 2020 and 2019, the Company’s operating lease cost was $189,924and $204,466, respectively. Such amount excludes impairment charges recorded in conjunction with the Company’s store optimization program (see Note 3 - Store Impairment and Restructuring Charges).

The Company’s variable lease cost during the years ended December 31, 2019 and 2020 were $30,817 and $27,443.

During the years ended December 31, 2020 and 2019, cash paid for amounts included in the measurement of operating lease liabilities was $140,699 and $ 197,574, respectively.

During the years ended December 31, 2020 and 2019, right-of-use assets obtained in exchange for new operating lease liabilities were $70,460 and $195,687, respectively.

As of December 31, 2020 and 2019, the weighted-average remaining lease term for operating leases was six years and eight years, respectively, and the weighted-average discount rate for operating leases was 8.6% and 6.7%, respectively.

As of December 31, 2020, the future cash flows for the Company’s operating leases were:

	Future Minimum Operating Lease Payments
2021	$	243,250
2022		171,066
2023		155,929
2024		128,406
2025		112,903
Thereafter		336,348
Total Undiscounted Cash Flows		1,147,902
Less: Interest		(317,128	)
Total Operating Lease Liability		830,774
Less: Current Operating Lease Liability		(176,045	)
Long-Term Operating Lease Liability	$	654,729