Leases

9 Months Ended

Feb. 29, 2020

NOTE 13 — LEASES

The Company primarily leases retail store space, certain distribution and warehouse facilities, office space, equipment and other non-real estate assets. The Company determines if an arrangement is a lease at inception and begins recording lease activity at the commencement date, which is generally the date in which the Company takes possession of or controls the physical use of the asset. ROU assets and lease liabilities are recognized based on the present value of lease payments over the lease term with lease expense recognized on a straight-line basis. The Company's incremental borrowing rate is used to determine the present value of future lease payments unless the implicit rate is readily determinable. As of and for the nine months ended February 29, 2020, finance leases were not a material component of the Company's lease portfolio.

Lease agreements may contain rent escalation clauses, renewal or termination options, rent holidays or certain landlord incentives, including tenant improvement allowances. ROU assets include amounts for scheduled rent increases and are reduced by the amount of lease incentives. The lease term includes the non-cancelable period of the lease and options to extend or terminate the lease when it is reasonably certain the Company will exercise those options. Certain lease agreements include variable lease payments, which are based on a percent of retail sales over specified levels or adjust periodically for inflation as a result of changes in a published index, primarily the Consumer Price Index.

Lease expense is recognized in Cost of sales or Operating overhead expense within the Unaudited Condensed Consolidated Statements of Income, based on the underlying nature of the leased asset. For the three months ended February 29, 2020, lease expense primarily consisted of operating lease costs of $137 million, and $83 million primarily related to variable lease costs which includes an immaterial amount of short-term lease costs. For the nine months ended February 29, 2020, lease expense primarily consisted of operating lease costs of $425 million, and $270 million primarily related to variable lease costs which includes an immaterial amount of short-term lease costs.

Amounts of future undiscounted cash flows related to operating lease payments over the lease term are as follows and are reconciled to the present value of the operating lease liabilities as recorded on the Unaudited Condensed Consolidated Balance Sheets:



(Dollars in millions)	AS OF FEBRUARY 29, 2020⁽¹⁾
Remainder of Fiscal 2020	$	139
Fiscal 2021	538
Fiscal 2022	478
Fiscal 2023	420
Fiscal 2024	381
Thereafter	1,672
Total undiscounted future cash flows related to lease payments	$	3,628
Less: Interest	448
Present value of lease liabilities	$	3,180


(1)	Excludes $292 million of future operating lease payments for lease agreements signed but not yet commenced.

Amounts of minimum future annual commitments under non-cancelable operating and capital leases in accordance with Topic 840 were as follows:



	AS OF MAY 31, 2019
(Dollars in millions)	OPERATING LEASES		CAPITAL LEASES AND OTHER FINANCING OBLIGATIONS⁽¹⁾		TOTAL
Fiscal 2020	$	553	$	32	$	585
Fiscal 2021	513		34		547
Fiscal 2022	441		40		481
Fiscal 2023	386		37		423
Fiscal 2024	345		34		379
Thereafter	1,494		197		1,691
TOTAL	$	3,732	$	374	$	4,106


(1)	Capital leases and other financing obligations include payments related to build-to-suit lease arrangements.

The following table includes the weighted average remaining lease terms, in years, and the weighted average discount rate used to calculate the present value of operating lease liabilities:



	AS OF FEBRUARY 29,
	2020
Weighted-average remaining lease term (years)	8.6
Weighted-average discount rate	2.6	%

The following table includes supplemental cash and non-cash information related to operating leases:



	NINE MONTHS ENDED
(Dollars in millions)	FEBRUARY 29, 2020
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	407
Operating lease right-of-use assets obtained in exchange for new operating lease liabilities⁽¹⁾	$	368

(1)

Excludes the amount initially capitalized in conjunction with the adoption of Topic 842.