Leases, Codification Topic 842

12 Months Ended

Aug. 31, 2020

Note 19 Leases

We adopted ASC Topic 842 on September 1, 2019, using the modified retrospective approach. In addition, we used the additional optional transition method and package of practical expedients in the period of adoption without retrospective adjustment to previous periods presented, although we elected not to apply the hindsight practical expedient. As a result of using the additional optional transition method and following a modified retrospective approach, prior periods have not been restated, and a $25.3 million cumulative-effect adjustment, including the deferred income tax impact, was recorded to increase the opening balance of capital reserves as of the adoption date related to recognition of previously deferred gains associated with the sale-leaseback of our primary corporate office building located in Inver Grove Heights, Minnesota. Our accounting for finance leases (previously referred to as capital leases) remains substantially unchanged; however, adoption of ASC Topic 842 resulted in recognition of operating lease right of use assets and associated lease liabilities of $268.4 million and $267.0 million, respectively, as of September 1, 2019. Adoption of ASC Topic 842 did not have a material impact on our Consolidated Statements of Operations or Consolidated Statements of Cash Flows.

We assess arrangements at inception to determine whether they contain a lease. An arrangement is considered to contain a lease if it conveys the right to control the use of an asset for a period of time in exchange for consideration. The right to control the use of an asset must include both (a) the right to obtain substantially all economic benefits associated with an identified asset and (b) the right to direct how and for what purpose the identified asset is used. Certain arrangements provide us with the right to use an identified asset; however, most of these arrangements are not considered to represent a lease as we do

not control how and for what purpose the identified asset is used. For example, our supply agreements, warehousing and distribution services agreements, and transportation services agreements generally do not contain leases.

We lease property, plant and equipment used in our operations primarily under operating lease agreements and, to a lesser extent, under finance lease agreements. Our operating leases are primarily for railcars, equipment, vehicles and office space, many of which contain renewal options and escalation clauses. Renewal options are included as part of the right of use asset and liability when it is reasonably certain that we will exercise the renewal option; however, renewal options are generally not included as we are not reasonably certain to exercise such options.

Operating lease right of use assets and liabilities for operating leases are recognized at the lease commencement date for leases in excess of 12 months based on the present value of lease payments over the lease term. For measurement and classification of lease agreements, lease and nonlease components are grouped into a single lease component for all asset classes. Variable lease payments are excluded from measurement of right of use assets and liabilities and generally include payments for nonlease components such as maintenance costs, payments for leased assets beyond their noncancelable lease term and payments for other nonlease components such as sales tax. The discount rate used to calculate present value is our collateralized incremental borrowing rate or, if available, the rate implicit in the lease. The incremental borrowing rate is determined for each lease based primarily on its lease term. Certain lease arrangements include rental payments adjusted annually based on changes in an inflation index. Our lease arrangements generally do not contain residual value guarantees or material restrictive covenants.

Lease expense is recognized on a straight-line basis over the lease term. The components of lease expense recognized in our Condensed Consolidated Statements of Operations are as follows:


	Year Ended August 31, 2020
	(Dollars in thousands)
Operating lease expense	$	71,541
Finance lease expense:
Amortization of assets	8,205
Interest on lease liabilities	1,060
Short-term lease expense	15,991
Variable lease expense	3,674
Total net lease expense*	$	100,471

*Income related to sub-lease activity is not material and has been excluded from the table above.

Supplemental balance sheet information related to operating and finance leases is as follows:


	Balance Sheet Location	August 31, 2020
		(Dollars in thousands)
Operating leases
Assets
Operating lease right of use assets	Other assets	$	257,834
Liabilities
Current operating lease liabilities	Accrued expenses	57,200
Long-term operating lease liabilities	Other liabilities	203,691
Total operating lease liabilities		$	260,891

Finance leases
Assets
Finance lease assets	Property, plant and equipment	$	44,860
Liabilities
Current finance lease liabilities	Current portion of long-term debt	7,993
Long-term finance lease liabilities	Long-term debt	23,467
Total finance lease liabilities		$	31,460

Weighted average remaining lease term (in years)
Operating leases		8.3
Finance leases		6.0

Weighted average discount rate
Operating leases		3.11		%
Finance leases		3.33		%

Supplemental cash flow and other information related to operating and finance leases is as follows:


	Year Ended August 31, 2020
	(Dollars in thousands)
Cash paid for amounts included in measurement of lease liabilities:
Operating cash flows from operating leases	$	71,003
Operating cash flows from finance leases	1,060
Financing cash flows from finance leases	7,949

Supplemental noncash information:
Right of use assets obtained in exchange for lease liabilities	56,461
Right of use asset modifications	7,333

Maturities of lease liabilities as of August 31, 2020, were as follows:


	August 31, 2020
	Finance Leases		Operating Leases
	(Dollars in thousands)
Fiscal 2021	$	8,845	$	64,379
Fiscal 2022	7,017		50,398
Fiscal 2023	6,053		40,269
Fiscal 2024	3,443		32,195
Fiscal 2025	2,046		23,034
Thereafter	7,933		95,553
Total maturities of lease liabilities	35,337		305,828
Less amounts representing interest	3,877		44,937
Present value of future minimum lease payments	31,460		260,891
Less current obligations	7,993		57,200
Long-term obligations	$	23,467	$	203,691

Disclosures Related to Periods Prior to Adoption of New Lease Standard

The following pertains to previously disclosed information in our Annual Report on Form 10-K for the fiscal year ended August 31, 2019, which incorporates information about leases now in the scope of ASC Topic 842. Total rental expense for operating leases was $113.3 million, $88.5 million and $81.3 million for the years ended August 31, 2019, 2018 and 2017, respectively. Various leases under capital lease totaled $62.7 million and $50.0 million as of August 31, 2019 and 2018, respectively. Accumulated amortization on assets under capital leases was $20.6 million and $18.9 million as of August 31, 2019 and 2018, respectively. Minimum future lease payments required under noncancelable capital and operating leases as of August 31, 2019, were as follows:


	August 31, 2019
	Finance Leases		Operating Leases
	(Dollars in thousands)
Fiscal 2020	$	6,761	$	87,168
Fiscal 2021	6,199		57,381
Fiscal 2022	5,021		43,665
Fiscal 2023	4,548		34,328
Fiscal 2024	2,638		26,793
Thereafter	6,517		92,653
Total minimum future lease payments	31,684		$	341,988
Less amount representing interest	3,445
Present value of net minimum lease payments	$	28,239