7.  LEASES

 

We have operating leases for our installation branch locations, distribution centers, our Branch Support Center in Daytona, Florida, vehicles and certain equipment.  As of March 31, 2019, we did not have any finance leases.  At the inception of a contract, we determine whether the contract is, or contains, a lease based on the unique facts and circumstances present.  Our facilities operating leases have lease and non-lease fixed cost components, which we account for as one single lease component in calculating the present value of minimum lease payments.   Variable lease and non-lease cost components are expensed as incurred and are included in selling, general and administrative expenses on the accompanying unaudited condensed consolidated statement of operations.

 

Operating lease payments are recognized as an expense in the unaudited condensed consolidated statements of operations on a straight-line basis over the lease term, including future option periods the Company reasonably expects to exercise, whereby an equal amount of rent expense is attributed to each period during the term of the lease, regardless of when actual payments are made.  This generally results in rent expense in excess of cash payments during the early years of a lease and rent expense less than cash payments in later years.  The difference between rent expense recognized and actual rental payments is typically represented as the spread between the ROU asset and lease liability.

 

We recognize a ROU asset and a lease liability at the lease commencement date.  Our leases may include options to extend or terminate the lease, which will be reflected in the calculation of the lease liability and corresponding ROU asset when it is reasonably certain that we will exercise that option. We do not recognize ROU assets and lease liabilities for short-term leases that have an initial lease term of 12 months or less.  We recognize the lease payments associated with short-term leases as an expense on a straight-line basis over the lease term.

 

The lease liability is initially measured as the present value of the unpaid lease payments as of the lease commencement date. The lease liability is discounted based on our IBR at the time of initial adoption of ASU 2016-02 for all exiting leases and at the time of lease commencement for all future leases.  For existing leases, our IBR included significant assumptions regarding our secured borrowing rates obtained on equipment note issuances and adjustments for differences in the remaining lease term, underlying assets and market conditions for companies with similar credit qualities as well as interest rate index fluctuations.

 

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 less any lease incentives received.  The ROU asset is subsequently measured throughout the lease term as 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.  Certain vehicle lease agreements have residual value guarantees at the end of the lease which require us to return the asset with a specified percentage of the original or other calculated value. 

 

The components of lease expense were as follows and are included in selling, general and administrative expenses on the accompanying unaudited condensed consolidated statement of operations:

 

 

Future minimum lease payments under non-cancellable operating leases as of March 31, 2019 were as follows:

 

 

As of March 31, 2019, the weighted average remaining lease term was 3.5 years and the related lease liability was calculated using a weighted average discount rate of 4.4%.

The amount below is included in the cash flows provided by (used in) operating activities section on the accompanying unaudited condensed consolidated statement of cash flows: