Quarterly report pursuant to Section 13 or 15(d)

Leases, Codification Topic 842

Leases, Codification Topic 842
6 Months Ended
Jun. 30, 2020
Leases [Abstract]  
Leases of Lessee Disclosure [Text Block]
11. Lease Accounting
The majority of our leases are related to dealership properties that are subject to long-term lease arrangements. In addition, we have certain equipment leases and contracts containing embedded leased assets that have been evaluated and included in the recorded ROU asset and lease liabilities as appropriate.
As a result of the adoption of ASC 842, “Leases,” on January 1, 2019, we are required to recognize a ROU asset and a lease liability in the accompanying unaudited condensed consolidated balance sheets at the lease commencement date. For operating leases, the lease liability is initially and subsequently measured at the present value of the unpaid lease payments at the lease commencement date. For finance leases, the lease liability is initially measured in the same manner and date as for operating leases and is subsequently measured at reduced cost using the effective interest method.
The ROU asset is initially measured at cost, which comprises the initial amount of the lease liability adjusted for lease payments made at or before the lease commencement date, plus any initial direct costs incurred or previously recognized favorable lease assets, less any lease incentives received or previously recognized lease exit accruals. For operating leases, the ROU asset is subsequently measured throughout the lease term at the carrying amount of the lease liability, plus initial direct costs, plus (minus) any prepaid (accrued) lease payments, less the unamortized balance of lease incentives received. Lease expense for lease payments is recognized on a straight-line basis over the lease term. For finance leases, the ROU asset is reduced using the straight-line method from the lease commencement date to the earlier of the end of its useful life or the end of the lease term unless the lease transfers ownership of the underlying asset to us or we are reasonably certain to exercise an option to purchase the underlying asset. In those cases, the ROU asset is reduced over the expected useful life of the underlying asset. Expense related to the reduction of the ROU asset is recognized and presented separately from interest expense on the lease liability.
Variable lease payments associated with our leases are recognized when the event, activity or circumstance in the lease agreement on which those payments are assessed occurs. Variable lease payments are presented as operating expense in our unaudited condensed consolidated statements of operations in the same line item as expense arising from fixed lease payments (operating leases) or expense related to the reduction of the ROU asset (finance leases).
ROU assets for operating and finance leases are periodically reduced by impairment losses. We use the long-lived assets impairment guidance in ASC 360, “Property, Plant, and Equipment,” to determine whether the ROU asset is impaired and, if so, the amount of the impairment loss to recognize.
We regularly monitor events or changes in circumstances that may require a reassessment of one of our leases. When a reassessment results in the remeasurement of a lease liability, a corresponding adjustment is made to the carrying amount of the corresponding ROU asset unless doing so would reduce the carrying amount of the ROU asset to an amount less than zero. In that case, the amount of the adjustment that would result in a negative ROU asset balance is recorded in profit or loss.
Key estimates and judgments related to the measurement and recording of ROU assets and lease liabilities include how we determine: (1) the discount rate used to discount the unpaid lease payments to present value; and (2) the expected lease term, including any extension options.
ASC 842, “Leases,” requires a lessee to discount its unpaid lease payments using the interest rate implicit in the lease or, if that rate cannot be readily determined, its incremental borrowing rate. Generally, we cannot determine the interest rate implicit in the lease because we do not have access to the lessor’s estimated residual value or the amount of the lessor’s deferred initial direct costs. Therefore, we generally use our incremental borrowing rate as the discount rate for the lease. We determined the discount rate for our leases based on the risk-free rate as of the measurement date for varying maturities corresponding to the remaining lease term, adjusted for the risk-premium attributed to Sonic’s corporate credit rating for a secured or collateralized instrument.
Many of our lease arrangements have one or more existing renewal options to extend the lease term (typically in five- to ten-year increments), which were considered in the calculation of the ROU assets and lease liabilities if we determined that it was reasonably certain that an extension option would be exercised. The lease term for all the Company’s leases includes the non-cancelable period of the lease plus any additional periods covered by our option to extend the lease that we are reasonably certain to exercise. We determined the probability of the exercise of a lease extension option based on our long-term strategic business outlook and the condition and remaining useful life of the fixed assets at the location subject to the lease agreement, among other factors.
The majority of our lease agreements require fixed monthly payments (subject to either specific or index-based escalations in future periods) while other agreements require variable lease payments based on changes in LIBOR or any replacement thereof. Lease payments included in the measurement of the lease liability comprise the: (1) fixed lease payments, including in-substance fixed payments, owed over the lease term, which include termination penalties we would owe if the estimated lease term assumes that we would be likely to exercise a termination option prior to the earliest expiration date; (2) variable lease payments that depend on an index or rate, initially measured using the index or rate at the lease commencement date; and (3) the exercise price of our option to purchase the underlying asset if we are reasonably certain to exercise the option. Our leases do not typically contain residual value guarantees.

In certain situations, we have entered into sublease agreements whereby we sublease all or a portion of a leased real estate asset to a third party. To the extent that we have a sublease related to a lease agreement for an asset that we are no longer using in operations, we have reduced the ROU asset by any applicable net deficiency in expected cash flows from that sublease (either due to partial monthly sublease proceeds or a sublease term less than the remaining master lease term).
Following is information related to changes in our ROU asset and lease liability balances and other financial information for the six months ended June 30, 2020:
December 31, 2019 New
Modifications (1) Reduction / Amortization June 30, 2020
(In thousands)
ROU Assets:
Finance Leases $ 34,691    $ —    $ 5,305    $ (1,483)   $ 38,513   
Operating Leases 337,842    23    25,293    (21,748)   341,410   
Total ROU Assets $ 372,533    $ 23    $ 30,598    $ (23,231)   $ 379,923   
Current Lease Liabilities:
Finance Leases $ 1,564    $ —    $ 18,566    $ (18,887)   $ 1,243   
Operating Leases 43,332    70    1,504    (167)   44,739   
Total Current Lease Liabilities $ 44,896    $ 70    $ 20,070    $ (19,054)   $ 45,982   
Long-Term Lease Liabilities:
Finance Leases $ 36,313    $ —    $ 4,694    $ (733)   $ 40,274   
Operating Leases 304,151    —    24,604    (21,227)   307,528   
Total Long-Term Lease Liabilities $ 340,464    $ —    $ 29,298    $ (21,960)   $ 347,802   
(1)Includes the impact of remeasurements related to lease terminations and changes in assumptions around the probability of exercise of extension options.
Three Months Ended June 30, Six Months Ended June 30,
2020 2019 2020 2019
(In thousands)
Lease Expense:
Finance lease expense:
Reduction of ROU assets $ 727    $ 862    $ 1,483    $ 1,572   
Interest on lease liabilities 1,337    1,339    2,681    2,515   
Operating lease expense (1) 16,546    17,057    33,156    35,054   
Short-term lease expense (1) 337    473    757    900   
Variable lease expense 244    683    962    797   
Sublease income (3,074)   (3,806)   (6,174)   (7,384)  
Total $ 16,117    $ 16,608    $ 32,865    $ 33,454   
(1)Included in operating cash flows in the accompanying unaudited condensed consolidated statement of cash flows as of June 30, 2020.
Three Months Ended June 30, Six Months Ended June 30,
2020 2019 2020 2019
(In thousands)
Other Information:
Cash paid for amounts included in the measurement of lease liabilities
Financing cash flows for finance leases $ 19,283    $ 502    $ 19,620    $ 782   
Operating cash flows for finance leases $ 1,337    $ 1,339    $ 2,681    $ 2,515   
Operating cash flows for operating leases $ 16,049    $ 18,315    $ 32,801    $ 36,784   
ROU assets obtained in exchange for lease liabilities
Finance leases $ 7,359    $ 9,290    $ 14,088    $ 19,273   
Operating leases (1) $ 8,172    $ 1,541    $ 35,397    $ (9,170)  

(1)Includes the impact of reclassification of ROU assets from operating leases to finance leases due to remeasurement.
June 30, 2020 June 30, 2019
Other Information:
Weighted-average remaining lease term (in years)
Finance leases 11.5 11.2
Operating leases 9.4 9.7
Weighted-average discount rate
Finance leases 17.57  % 18.33  %
Operating leases 6.59  % 6.87  %

Undiscounted Lease Cash Flows Under ASC 842 as of June 30, 2020
Finance Operating Receipts from Subleases
Year Ending December 31, (In thousands)
Remainder of 2020 $ 3,469    $ 33,143    $ (6,036)  
2021 7,069    62,679    (8,811)  
2022 7,077    56,081    (6,103)  
2023 7,138    54,206    (6,103)  
2024 7,257    48,783    (5,042)  
Thereafter 49,430    225,538    (4,270)  
Total $ 81,440    $ 480,430    $ (36,365)  
Less: Present value discount (39,923)   (128,163)  
Lease liabilities $ 41,517    $ 352,267