NOTE 9 - LEASES

On January 1, 2020, we adopted Topic 842. Results for reporting periods beginning January 1, 2020 are presented in accordance with Topic 842, while prior period amounts are reported in accordance with Topic 840 – Leases. The Company used the optional transition method to the modified retrospective approach, which eliminates the requirement to restate the prior period financial statements. On January 1, 2020, we recognized approximately $72.7 million in right-of-use (“ROU”) assets and approximately $78.3 million in lease liabilities related to the Company’s operating leases. The adoption of Topic 842 did not materially impact the Company’s consolidated net income or consolidated cash flows, and did not result in a cumulative-effect adjustment to the opening balance of retained earnings. We do not have any finance leases, nor are we the lessor in any leasing arrangements.

The Company determines if an arrangement is or contains a lease at inception, which is the date on which the terms of the contract are agreed to and the agreement creates enforceable rights and obligations. The Company also considers whether its service arrangements include the right to control the use of an asset.

The Company leases office space under operating lease agreements that have initial terms ranging from 1 to 12 years.  Some leases include one or more options to exercise renewal terms, generally at our sole discretion, that can extend the lease term. Certain leases contain rights to terminate whereby those termination options are held by either the Company, the lessor, or both parties. These options to extend or terminate a lease are included in the lease term only when it is reasonably certain that the Company will exercise that option. The Company’s leases generally do not contain any material restrictive covenants.

A number of practical expedients and policy elections are available under the new guidance to reduce the burden of adoption and ongoing compliance with Topic 842. The Company elected the “package of practical expedients”, which permitted the Company to retain lease classification and initial direct costs for any identified leases that exist prior to adoption of Topic 842. Under this transition guidance, the Company also has not reassessed whether any existing contracts at January 1, 2020 are or contain leases and has carried forward its initial determination under legacy lease guidance.  The Company has not elected to adopt the “hindsight” practical expedient, and therefore will measure the ROU asset and lease liability using the remaining portion of the lease term at adoption on January 1, 2020.  

The Company made an accounting policy election available under the new lease standard to not recognize lease assets and lease liabilities for leases with a term of 12 months or less.  For all other leases, the initial measurement of the ROU asset and lease liability is based on the present value of future lease payments over the lease term at the commencement date of the lease (or January 1, 2020 for existing leases upon the adoption of Topic 842).  Lease payments may include fixed rent escalation clauses or payments that depend on an index or a rate (such as the consumer price index) measured using the index or applicable rate at lease commencement. Subsequent changes in the index or rate and any other variable payments, such as market-rate base rent adjustments, are recognized as variable lease expense in the period incurred. Payments for terminating a lease are included in lease payments only when it is probable they will be incurred.  To determine the present value of lease payments, the Company uses its incremental borrowing rate, as the leases generally do not have a readily determinable implicit discount rate. The Company applies judgement in assessing factors such as Company-specific credit risk, lease term, nature and quality of the underlying collateral and the economic environment in determining the lease-specific incremental borrowing rate. The ROU assets also adjusted for any initial direct costs incurred and lease payments made at or before the commencement date and are reduced by lease incentives.  

The Company’s leases generally include a non-lease component representing additional services transferred to the Company, such as common area maintenance for real estate. The Company has made an accounting policy election to account for lease and non-lease components in its contacts as a single lease component for all asset classes. The non-lease components are usually variable in nature and recorded in variable lease expense in the period incurred.

All leases recognized in our Consolidated Balance Sheet as of December 31, 2020 are classified as operating leases, which include leases related to the asset classes reflected in the table below. ROU assets are included in Other assets in our Consolidated Balance Sheet:

We recognize lease expense on a straight-line basis excluding short-term and variable lease payments which are recognized as incurred. Short-term lease cost represents payments for leases with a lease term of twelve months or less, excluding leases with a term of one month or less.

The following table summarizes the components of our gross operating lease costs incurred during the year ended December 31, 2020:

Rent expense amounted to $29.6 million for the year ended December 31, 2019 and is included within occupancy, equipment and communication expense in the Consolidated Statement of Income.

Our weighted-average lease term and discount rate used are as follows:

The following table summarizes supplemental cash flow information related to operating leases:  

Minimum future commitments by year for our long-term operating leases as of December 31, 2020 are presented in the table below. Such commitments are reflected at undiscounted values and are reconciled to the discounted present value recognized in the balance sheet as follows:

Future minimum rental payments under the noncancelable operating leases are as follows at December 31, 2019: