XML 26 R15.htm IDEA: XBRL DOCUMENT

Leases

6 Months Ended

Jun. 30, 2019

As discussed in Note 2, “Recently Issued Accounting Pronouncements,” Xylem adopted the new guidance on accounting for leases.

Leasing Arrangements

We lease certain offices, manufacturing buildings, transportation equipment, machinery, computers and other equipment. Our most significant lease liabilities relate to real estate leases. These leases include renewal, termination or purchase options, and we have assessed these to determine whether it is reasonably certain for us to exercise any of the previously mentioned options. All periods relating to options that are reasonably certain to be exercised have been included in the lease term of the respective leases.

We have recorded ROU assets for lease arrangements that are reasonably certain to extend beyond 12 months. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments under the lease. ROU assets and liabilities are recognized at lease commencement date based on the present value of lease payments over the lease term. The implicit rate within our leases is generally not determinable, and we use our incremental borrowing rate at the lease commencement date to determine the net present value of lease payments. The determination of the appropriate incremental borrowing rate requires judgment. We determine the appropriate incremental borrowing rate for each lease using our current borrowing rate, adjusted for various factors including geographic region, level of collateralization and term, to align with the term of the underlying lease.

Many of our leases are subject to payment adjustments to reflect annual changes in price indexes, such as the Consumer Price Index. While associated lease liabilities are not re-measured as a result of changes in the applicable price indexes, changes to required lease payments are treated as variable lease payments and recognized in the period in which the obligation for those payments was incurred.

Leases with a lease term of 12 months or less, including renewal options that are reasonably certain to be exercised, that also do not include an option to purchase the underlying asset that is reasonably certain of exercise, are not recorded on the balance sheet. Instead, lease payments for these leases are recognized as a lease cost on a straight-line basis over the lease term.

We elected the package of practical expedients, which among other things, does not require reassessment of lease classification. Additionally, we have made an accounting policy election whereby we chose not to separate non-lease components from lease components in agreements in all leases which we are the lessee.

We did not identify any events or conditions during the three and six month periods ended June 30, 2019 to indicate that a reassessment or re-measurement of our existing leases was required. There were also no

impairment indicators identified during the three and six month periods ended June 30, 2019 that required an impairment test for the Company’s ROU assets or other long-lived assets in accordance with ASC 360-10.

Our current lease liabilities of $63 million are included in "Accrued and other current liabilities" and our non-current lease liabilities of $193 million are included in "Other non-current accrued liabilities" as of June 30, 2019. Our ROU asset balances are included in "Other non-current assets". The net balance of our ROU assets as of June 30, 2019 was $257 million. These balances include an immaterial amount related to finance leases.

The components of our lease cost were as follows:



(in millions)	Three Months Ended June 30, 2019		Six Months Ended June 30, 2019
Lease cost
Operating lease cost	$	20	$	38
Short-term lease cost	2		5
Variable lease cost	4		10
Total lease cost	$	26	$	53

The supplemental cash flow information related to leases are as follows:



(in millions)	Six Months Ended June 30, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	37

Right-of-use assets obtained in exchange for lease obligations:
Operating leases	$	16

Information relating to the lease term and discount rate are as follows:



	Six Months Ended June 30, 2019
Weighted-average remaining lease term (years)
Operating leases	6

Weighted-average discount rate
Operating leases	2.7%

As of June 30, 2019, the maturities of operating lease liabilities were as follows:



(in millions)
2019	$	36
2020	61
2021	45
2022	33
2023	25
2024	20
Thereafter	57
Total lease payments	277
Less: Imputed interest	(22		)
Total	$	255

Disclosures related to periods prior to adoption of the New Lease Standard as reported and provided in our December 31, 2018 Form 10-K.

As of December 31, 2018, we were obligated to make minimum future rental payments under operating leases as follows:



(in millions)
2019	$	76
2020	61
2021	43
2022	33
2023	22
Thereafter	64
Total lease payments	299

Lessor arrangements

In addition to manufacturing and selling equipment, we also lease out equipment to customers in exchange for consideration. These arrangements are generally short term in nature and predominantly involve the rental of pumps and accessories within the Water Infrastructure segment. Rental arrangements generally do not provide the customer the right to purchase the equipment as Xylem’s strategy is to rent these items over their useful lives. Customers may be billed based on daily, weekly or monthly rates depending on the expected rental period. We assessed that these arrangements constitute a lease under ASC 842, and have recognized them as operating leases. In situations where arrangements contain both the sale of products and a leasing component, contract consideration is allocated based on relative standalone selling price.

Total revenue from lease arrangements were $64 million and $123 million for the three and six month periods ended June 30, 2019. Our gross assets available for rent and related accumulated amortization were $262 million and $169 million, respectively, as of June 30, 2019. Depreciation expense for these assets were $7 million and $14 million for the three and six month periods ended June 30, 2019.

Leases