Leases

At the beginning of our fiscal year 2020, we adopted new accounting guidance (“ASC 842”) regarding leases on a prospective basis. This guidance requires lessees to record right-of-use assets and corresponding lease liabilities on the balance sheet. The effects of the initial application did not result in a cumulative adjustment to retained earnings. We recognize lease liabilities at the lease commencement date based upon the present value of the remaining lease payments. Right-of-use assets are based on the lease liability adjusted for prepaid rent, deferred rent, and tenant allowances received. Lease liabilities are amortized based upon the effective interest method, while right-of-use assets are amortized based upon the straight line expense less interest on the lease liability. Lease expense for lease payments is recognized on a straight-line basis over the lease term, except for impaired leases for which the lease expense is recognized on a declining basis over the remaining lease term. Variable lease expense associated with our leases is dependent upon the occurrence of events, activities, or circumstances in lease agreements, such as warehouse square footage utilized, property taxes assessed, and other non-lease component charges. Variable lease expense is presented as operating expense in our Condensed Consolidated Statements of Income and Comprehensive Income in the same line item as expense arising from fixed lease payments for operating leases.

We have operating leases for showrooms, manufacturing facilities, warehouses, certain offices, and other facilities to support our operations in addition to select equipment that expire at various dates through 2028. We have no financing leases. Certain operating lease agreements include rental payments adjusted periodically for inflationary indexes. Additionally, some leases include options to renew or terminate the leases which can be exercised at our discretion. Lease terms include the noncancellable portion of the underlying leases along with any reasonably certain lease periods associated with available renewal periods. Our leases do not contain residual value guarantees or material restrictive covenants. As the rate implicit in our lease contracts cannot be readily determined, we use an estimated incremental borrowing rate based on the information available at the lease commencement date in determining the present value of the lease payments. The estimated incremental borrowing rate represents the estimated rate of interest we would have to pay to borrow an amount equal to the lease payments for a similar period of time on a collateralized basis.

The components of our lease expenses are as follows:



	Three Months Ended		Six Months Ended
(Amounts in Millions)	December 31, 2019		December 31, 2019
Operating lease expense	$	0.8	$	1.6
Variable lease expense	0.6		1.3
Total lease expense	$	1.4	$	2.9

Right-of-use assets for operating leases are tested for impairment in the same manner as long-lived assets used in operations. During the first quarter of fiscal year 2020, we recorded $2.2 million of right-of-use asset and associated leasehold improvement impairment resulting from ceasing use of four furniture showrooms after the implementation of ASC 842 as part of our transformation restructuring plan. The impairment is included in the Restructuring Expense line item on our Condensed Consolidated Statements of Income.

Supplemental cash flow and other information related to leases are as follows:



	Six Months Ended
(Amounts in Millions)	December 31, 2019
Cash flow information:
Operating lease payments impacting lease liability	$	2.4
Leased assets obtained in exchange for operating lease liabilities	$	0.1


	As of
(Amounts in Millions)	December 31, 2019
Other information:
Weighted-average remaining term (in years)	6.0
Weighted-average discount rate	4.6		%

The following table summarizes the future minimum lease payments as of December 31, 2019:



	Fiscal Year Ended
(Amounts in Millions)	June 30⁽¹⁾
2020	$	2.2
2021	4.5
2022	4.3
2023	3.8
2024	3.1
Thereafter	6.2
Total lease payments	$	24.1
Less interest	$	3.1
Present value of lease liabilities	$	21.0

(1) Lease payments include options to extend lease terms that are reasonably certain of being exercised. The payments exclude legally binding minimum lease payments for leases signed but not yet commenced. At December 31, 2019, we have an additional operating lease that has not yet commenced for which we will record a right-of-use asset and lease liability of $1.6 million. The lease will commence in our third quarter of fiscal year 2020 with a lease term of approximately 7 years.

The following table summarizes the future minimum lease payments as of June 30, 2019 before adoption of ASC 842:



	Fiscal Year Ended
(Amounts in Millions)	June 30
2020	$	4.6
2021	4.2
2022	4.1
2023	3.6
2024	2.5
Thereafter	3.8
Total lease payments	$	22.8

Practical Expedients Elected

We elected the following practical expedients as a result of adopting ASC 842:


•	We elected not to separate non-lease components of a contract from the lease components to which they relate for all classes of lease assets.


•	We elected the package of practical expedients available for transition which allowed us not to reassess (1) whether any expired or existing contracts contain leases, (2) the classification of the leases as operating or finance and (3) the amount of initial direct costs associated with the leases.


•	We elected that our date of initial application be the beginning of our period of adoption which was July 1, 2019.


•	We elected not to recognize a right-of-use asset or lease liability for short-term leases that have a lease term of twelve months or less.


•	We elected not to assess whether land easements that were not previously accounted for as leases are or contain a lease.


•	We did not elect to use hindsight in determining the lease term and in assessing the likelihood that a lessee purchase option will be exercised.