
Note 5		Leases

The Company, as a lessor, originates retail and commercial leases either directly to the consumer or indirectly through dealer networks. Retail leases, primarily automobiles, have 3 to 5 year terms. Commercial leases may include high dollar assets such as aircraft or lower cost items such as office equipment.

At lease inception, retail lease customers are provided with an end-of-term purchase option, which is based on the expected fair value of the automobile at the expiration of the lease. Automobile leases do not typically contain options to extend or terminate the lease. Equipment leases may contain various types of purchase options. Some option amounts are a stated value, while others are determined using the fair market value at the time of option exercise.

Residual values on leased assets are reviewed regularly for other-than-temporary impairment. Residual valuations for retail leases are based on independent assessments of expected used automobile sale prices at the end of the lease term. Impairment tests are conducted based on these valuations considering the probability of the lessee returning the asset to the Company, re-marketing efforts, insurance coverage and ancillary fees and costs. Valuations for commercial leases are based upon external or internal management appraisals. When there is impairment of the Company’s interest in the residual value of a leased asset, the carrying value is reduced to the estimated fair value with the write-down recognized in the current period.

The Company manages its risk to changes in the residual value of leased vehicles, office and business equipment, and other assets through disciplined residual valuation setting at the inception of a lease, diversification of its leased assets, regular residual asset valuation reviews and monitoring of residual value gains or losses upon the disposition of assets. Retail lease residual value risk is mitigated further by the purchase of residual value insurance coverage and effective end-of-term marketing of off-lease vehicles.

The components of the net investment in sales-type and direct financing leases were as follows:


(Dollars in Millions)	March 31, 2019		December 31, 2018
Lease receivables	$	12,204	$	12,207
Unguaranteed residual values accruing to the lessor’s benefit		1,898		1,877
Total net investment in sales-type and direct financing leases	$	14,102	$	14,084

The Company, as a lessor, recorded $239 million of revenue on its Consolidated Statement of Income for the three months ended March 31, 2019, primarily consisting of interest income on sales-type and direct financing leases.

The contractual future lease payments to be received by the Company at March 31, 2019, were as follows:


(Dollars in Millions)	Sales-type and direct finance leases			Operating leases
One Year or Less	$	4,463		$	181
Over One Through Two Years		3,998			145
Over Two Through Three Years		2,630			103
Over Three Through Four Years		1,286			68
Over Four Through Five Years		367			48
Thereafter		530			68
Total lease payments		13,274		$	613
Amounts representing interest		(1,070	)
Lease receivables	$	12,204

The Company, as lessee, leases certain assets for use in its operations. Leased assets primarily include retail branches, operations centers and other corporate locations, and, to a lesser extent, office and computer equipment. For each lease with an original term greater than 12 months, the Company records a lease liability and a corresponding right of use (“ROU”) asset. The lease liability is determined as the present value of the consideration to be paid attributable to the lease component(s) in the contract. The discount rate used by the Company is determined at commencement of the lease using a secured rate for a similar term as the period of the lease. The Company’s leases do not include significant variable lease payments.

Certain of the Company’s real estate leases include options to extend. Lease extension options are generally exercisable at market rates. Such option periods do not provide a significant incentive, and their exercise is not reasonably certain. Accordingly, the Company does not recognize payments occurring during option periods in the calculation of its ROU assets and lease liabilities. The Company’s leases do not impose significant covenants or other restrictions on the Company.

Total costs incurred by the Company, as a lessee, were $95 million for the three months ended March 31, 2019, and principally related to contractual lease payments on operating leases.

The following table presents amounts relevant to the Company’s assets leased for use in its operations for the three months ended March 31, 2019:


(Dollars in Millions)
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	75
Operating cash flows from finance leases		2
Financing cash flows from finance leases		3
Right of use assets obtained in exchange for new operating lease liabilities		36
Right of use assets obtained in exchange for new finance lease liabilities		1
Weighted-average remaining lease term of operating leases (in years)		7.8
Weighted-average remaining lease term of finance leases (in years)		10.7
Weighted-average discount rate of operating leases		3.3	%
Weighted-average discount rate of finance leases		17.3	%

The contractual future lease obligations of the Company at March 31, 2019, were as follows:


(Dollars in Millions)	Operating leases			Finance leases
One Year or Less	$	286		$	17
Over One Through Two Years		260			15
Over Two Through Three Years		228			12
Over Three Through Four Years		191			10
Over Four Through Five Years		148			9
Thereafter		466			36
Total lease payments		1,579			99
Amounts representing interest		(183	)		(34	)
Lease liabilities	$	1,396		$	65