Leases

12 Months Ended

Jun. 30, 2020

5. Leases

Our operating leases are primarily for corporate offices, distribution facilities, vehicles, and equipment. We determine if an arrangement is a lease at its inception by evaluating whether the arrangement conveys the right to use an identified asset and whether we obtain substantially all of the economic benefits from and have the ability to direct the use of the asset. Our lease agreements generally do not contain any material residual value guarantees or material restrictive covenants.

Beginning July 1, 2019, operating lease right-of-use assets and corresponding operating lease liabilities are recognized in our consolidated balance sheet at lease commencement date based on the present value of lease payments over the lease term. Operating lease expense for operating lease assets is recognized on a straight-line basis over the lease term. As most of our leases do not provide an implicit rate, we use our collateralized incremental borrowing rate based on the information available at the lease commencement date in determining the present value of lease payments. We use the implicit rate if it is readily determinable.

Our lease agreements contain lease components and non-lease components. For all asset classes, we have elected to account for both of these components as a single lease component. We also, from time to time, sublease portions of our real estate property, resulting in sublease income. Sublease income and the related assets and cash flows are not material to the consolidated financial statements at or for the fiscal year ended June 30, 2020.

We also have elected to apply a practical expedient for short-term leases whereby we do not recognize a lease liability and right-of-use asset for leases with a term of less than 12 months. Short-term lease expense recognized in fiscal 2020 was not material. In addition, upon adoption of the new lease standard, we elected the package of three practical expedients permitted under the transition guidance, which include the carry forward of our leases without reassessing 1) whether any contracts are leases or contain leases, 2) lease classification and 3) initial direct costs.

Our leases have remaining lease terms from less than 1 year up to approximately 22 years. Our lease terms may include options to extend or terminate the lease when it is reasonably certain and there is a significant economic incentive to exercise that option.

The following table summarizes the components of lease cost:



(in millions)	2020
Operating lease cost	$	134
Finance lease cost	13
Variable lease cost	17
Total lease cost	$	164

Variable lease cost primarily includes payments for property taxes, maintenance and insurance. Our rental expense relating to operating leases was $153 million and $172 million in fiscal 2019 and 2018, respectively.

The following table summarizes supplemental balance sheet information related to leases at June 30:



(in millions)	2020
Operating Leases
Operating lease right-of-use assets	$	426

Current portion of operating lease liabilities	104
Long-term operating lease liabilities	341
Total operating lease liabilities	445

Finance Leases
Finance lease right-of-use assets	33

Current portion of finance lease liabilities	9
Long-term finance lease liabilities	25
Total finance lease liabilities	$	34

Operating leases are included in other assets, other accrued liabilities, and deferred income taxes and other liabilities in our consolidated balance sheet. Finance leases are included in property and equipment, net, current portion of long-term obligations and other short-term borrowings, and long-term obligations, less current portion in our consolidated balance sheet.

The following tables summarizes supplemental cash flow information related to leases:



(in millions)	2020
Cash paid for lease liabilities:
Operating cash flows paid for operating leases	$	125
Financing cash flows paid for finance leases	7
Non-cash right-of-use assets obtained in exchange for lease obligations:
New operating leases	150
New finance leases	40
Amended lease standard adoption impact as of July 1, 2019 ⁽¹⁾	400


(1)	Includes the effect of $22 million from reclassifying deferred rent as an offset to the lease right-of-use asset in accordance with the transition guidance.

Our operating leases had a weighted-average remaining lease term of 6.4 years and a weighted-average discount rate of 2.9 percent. Our finance leases had a weighted-average remaining lease term of 4.3 years and a weighted-average discount rate of 2.4 percent .

Future lease payments under non-cancellable leases as of June 30, 2020 were as follows:



(in millions)	Operating Leases		Finance Leases		Total
2021	$	117	$	10	$	127
2022	96		9		105
2023	72		9		81
2024	51		4		55
2025	44		2		46
Thereafter	123		2		125
Total future lease payments	503		36		539
Less: leases not yet commenced ⁽¹⁾	4		—		4
Less: imputed interest	54		2		56
Total lease liabilities	$	445	$	34	$	479


(1)	As of June 30, 2020, we had certain leases that were executed but did not have control of the underlying assets; therefore, the lease liabilities and right-of-use assets are not recorded in the consolidated balance sheet.

The future minimum rental payments for operating leases having initial or remaining non-cancelable lease terms in excess of one year at June 30, 2019 for fiscal 2020 through 2024 and thereafter were as follows: $126 million, $100 million, $76 million, $54 million, $33 million and $94 million.