Leases

6 Months Ended

Jun. 30, 2019

Leases [Abstract]

Leases

Note 4 – Leases

The Company adopted ASU No. 2016-02 and related ASUs (“ASC 842”) as of January 1, 2019 using the cumulative effect method. Upon adoption, the Company recorded right-of-use (“ROU”) assets of $195.2 million and additional operating liabilities of approximately $190.7 million for existing operating leases. Also as part of the initial adoption, the Company wrote off the carrying value of favorable lease intangible assets of $2.1 million and increased the ROU assets by the same amount. The cumulative effect adjustment recorded to opening retained earnings was not material. The adoption of this ASU did not have a material impact on the Company’s results of operations or cash flows.

Description of leases and lease policies - lessee

TSYS enters into leases for datacenters, facilities, computer equipment and certain other equipment. Leases with an initial term of 12 months or less are not recorded on the balance sheet. TSYS recognizes lease expense

or depreciation expense for leases on a straight-line basis over the lease term. Variable lease expense primarily relates to maintenance and other monthly expenses that do not depend on an index or rate.

TSYS determines if an arrangement is a lease at contract inception. Operating leases are included in operating lease ROU assets, other current liabilities, and operating lease liabilities in our Consolidated Balance Sheet. Finance leases are included in property and equipment, net and current and long-term obligations under finance leases in our Consolidated Balance Sheet.

ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent its obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at the commencement date based on the present value of the future lease payments. As most of its leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. TSYS uses the implicit rate when readily determinable. The operating lease ROU asset also includes any lease payments made and excludes lease incentives received. TSYS’ lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option.

TSYS has lease agreements with lease and non-lease components, which are combined and accounted for as a single lease component for all asset classes excluding computer equipment. For computer equipment leases, the Company accounts for the lease and non-lease components as separate components. The majority of computer equipment lease commitments come with a renewal option or an option to terminate the lease. These lease commitments may be replaced with new leases, which allow the Company to continually update its computer equipment.

Practical expedients and policy elections

The Company has elected to utilize the following practical expedients and accounting policy elections:

● Electing as a package, the Company did not reassess: (a) whether expired or existing contracts contain leases under the new definition of a lease, (b) lease classification for expired or existing leases, and (c) whether previously capitalized initial direct costs would qualify for capitalization under ASU No. 2016-02.

● The Company did not evaluate land easements that existed or expired before the Company’s adoption of ASU No. 2016-02 and that were not previously accounted for as leases.

● From a lessee perspective, the Company has elected to combine lease and non-lease components for all classes of assets except for computer equipment. Accordingly, for all asset classes excluding computer equipment, the Company accounts for the combined lease and non-lease components as a single lease component. For computer equipment, the Company accounts for lease and non-lease components, such as maintenance, separately.

● From a lessee perspective, the Company has elected, as an accounting policy election by class of underlying asset, not to recognize ROU assets and lease liabilities for short-term leases.

● From a lessor perspective, the Company has elected to utilize the practical expedient in ASU No. 2018-11 to not separate non-lease components from the associated lease component for arrangements including point-of-sale (“POS”) terminals. Since the predominant component in these arrangements is service revenue and not the POS terminal, the combined components in these arrangements will be accounted for under ASC 606 and not ASC 842.

● The Company utilized incremental borrowing rates in transition (as of January 1, 2019) based on the remaining lease payments and remaining lease term.

The Company decided not to elect the use of hindsight in determining the lease term and in assessing impairment of the Company’s ROU assets.

Supplemental Information

Supplemental balance sheet information related to leases is as follows:

(in thousands)	June 30, 2019		December 31, 2018
Lease assets:
Operating lease right-of-use assets, net:
Computer equipment	$	68,179	na
Facilities		130,162	na
Other		198	na
Total operating lease right-of-use assets, net		198,539	na
Finance lease right-of-use assets:
Computer and other equipment		62,896	91,526
Furniture and other equipment		3,894	6,104
Total finance lease assets		66,790	97,630
Less accumulated depreciation:
Computer and other equipment		(24,605)	(47,903)
Furniture and other equipment		(3,000)	(4,859)
Total accumulated depreciation		(27,605)	(52,762)
Total finance lease right-of-use assets, net		39,185	44,868
Total lease assets	$	237,724	44,868
Lease liabilities:
Current portion of operating lease liabilities	$	43,346	na
Operating lease liabilities, excluding current portion		167,102	na
Current portion of obligations under finance leases		5,986	5,934
Obligations under finance leases, excluding current portion		28,247	31,243
Total lease liabilities	$	244,681	37,177
na = not applicable since TSYS adopted ASC 842 as of January 1, 2019

As of June 30, 2019, finance lease assets and finance lease accumulated depreciation decreased by approximately $30.8 million and $25.2 million, respectively, when compared to December 31, 2018. This decrease is related to the execution of purchase options for certain finance leases, the retirement of certain assets no longer in use as well as the expiration of certain leases at the end of their lease term. The balances of any finance leases subject to purchase options exercised during the six months ended June 30, 2019 were subsequently moved to Property and Equipment.

Lease expense

The components of lease expense are as follows:

	Three months ended		Six months ended
(in thousands)	June 30, 2019		June 30, 2019
Operating lease expense:
Fixed lease expense	$	15,050	30,025
Variable lease expense		1,726	3,695
Short-term lease expense		1,715	3,084
Total operating lease expense		18,491	36,804
Finance lease expense:
Amortization of ROU assets		2,836	5,727
Interest on finance lease liabilities		375	763
Total finance lease expense		3,211	6,490
Total lease expense	$	21,702	43,294

Total rental expense under all operating leases for the year ended December 31, 2018 was $128.6 million.

Other lease information

Supplemental cash flow information related to leases is as follows:

	Six months ended
(in thousands)	June 30, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	41,703
Operating cash flows from finance leases		765
Financing cash flows from finance leases		2,927

	Six months ended June 30,
(in thousands)	2019		2018
Right-of-use assets obtained in exchange for lease obligations:
Operating leases	$	44,125	na
Finance leases		-	7,382
na = not applicable since TSYS adopted ASC 842 as of January 1, 2019

The weighted-average remaining lease term and weighted-average discount rate are as follows:

	Six months ended
	June 30, 2019
Weighted-average remaining lease term (years):
Operating leases	5.29
Finance leases	5.56
Weighted-average discount rate:
Operating leases	4.21	%
Finance leases	8.49	%

Maturity of lease liabilities

The future minimum lease payments under noncancelable operating and finance leases with remaining terms greater than one year for the next five years and thereafter and in the aggregate as of June 30, 2019 and December 31, 2018, are as follows:

	June 30, 2019			December 31, 2018
(in thousands)	Operating Leases		Finance Leases	Operating Leases	Finance Leases
20191	$	23,552	3,714	54,818	7,393
2020		55,056	7,381	54,738	7,319
2021		52,898	7,145	50,794	7,085
2022		44,350	7,111	42,048	7,051
2023		20,990	6,719	19,089	6,658
Thereafter		41,107	6,930	32,894	6,868
Total lease payments		237,953	39,000	254,381	42,374
Less imputed interest		(24,582)	(4,488)	na	(5,197)
Total	$	213,371	34,512	254,381	37,177
na = not applicable since TSYS adopted ASC 842 as of January 1, 2019

1 For the six months ended June 30, 2019, this row represents the remaining payments from July to December 2019.

In 2019, the Company entered into operating and finance leases for certain computer equipment as well as an operating lease for a facility, whose commencement dates range from July 2019 to August 2019. Amounts related to these operating and finance leases totaling $3.5 million are not reflected on the Company’s consolidated balance sheet as of June 30, 2019. However, amounts related to these operating and finance leases are reflected in the above disclosure of future lease commitments as of June 30, 2019.