3. Leases

The majority of our lease obligations are real estate operating leases from which we conduct the majority of our retail and distribution operations. Our finance leases are primarily equipment-related. For any lease with an initial term in excess of 12 months, the related lease assets and liabilities are recognized on the Condensed Consolidated Balance Sheets as either operating or finance leases at the inception of an agreement where it is determined that a lease exists. We have lease agreements that contain both lease and non-lease components. For lease agreements entered into or reassessed after the adoption of ASC 842, Leases, we have elected to combine lease and non-lease components for all classes of assets. Leases with an initial term of 12 months or less are not recorded on our Condensed Consolidated Balance Sheets; we recognize lease expense for these leases on a straight-line basis over the lease term.

Operating lease assets represent the right to use an underlying asset for the lease term, and operating lease liabilities represent the obligation to make lease payments arising from the lease. These assets and liabilities are recognized based on the present value of future payments over the lease term at commencement date. We use a collateralized incremental borrowing rate based on the information available at commencement date, including lease term, in determining the present value of future payments. Our operating leases also typically require payment of real estate taxes, common area maintenance and insurance. These components comprise the majority of our variable lease cost and are excluded from the present value of our lease obligations. In instances where they are fixed, they are included due to our election to combine lease and non-lease components. Operating lease assets also include prepaid lease payments and initial direct costs, and are reduced by lease incentives. Our lease terms generally do not include options to extend or terminate the lease unless it is reasonably certain that the option will be exercised. Fixed payments may contain predetermined fixed rent escalations. We recognize the related rent expense on a straight-line basis from the commencement date to the end of the lease term.

Supplemental balance sheet information as of May 4, 2019, related to our leases was as follows ($ in millions):



	Balance Sheet Location	May 4, 2019
Assets
Operating leases	Operating lease assets	$	2,708
Finance leases	Property and equipment, net(1)		41
Total lease assets		$	2,749
Liabilities
Current:
Operating leases	Current portion of operating lease liabilities	$	639
Finance leases	Current portion of long-term debt		14
Non-current:
Operating leases	Long-term operating lease liabilities		2,173
Finance leases	Long-term debt		27
Total lease liabilities		$	2,853

(1)

Finance leases are recorded net of accumulated depreciation of $41 million as of May 4, 2019.

The components of our total lease cost for the three months ended May 4, 2019, were as follows ($ in millions):



	Statement of Earnings Location	Three Months Ended May 4, 2019
Operating lease cost(1)	Cost of goods sold and SG&A(2)	$	195
Finance lease cost:
Depreciation of lease assets	Cost of goods sold and SG&A(2)		3
Interest on lease liabilities	Interest expense		1
Variable lease cost	Cost of goods sold and SG&A(2)		67
Sublease income	SG&A		(4)
Total lease cost		$	262

(1)

Includes short-term leases, which are immaterial.

(2)

Supply chain-related amounts are included in Cost of goods sold.

Other information related to our leases for the three months ended May 4, 2019, was as follows ($ in millions):



	Three Months Ended May 4, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	201
Operating cash flows from finance leases		1
Financing cash flows from finance leases		4
Lease assets obtained in exchange for new lease liabilities:
Operating leases		147
Finance leases		2

Weighted average remaining lease term:
Operating leases		5.4 years
Finance leases		5.3 years
Weighted average discount rate:
Operating leases		3.4	%
Finance leases		4.4	%

Future lease payments under our non-cancellable leases as of May 4, 2019, were as follows ($ in millions):



	Operating Leases(1)		Finance Leases(1)
Remainder of fiscal 2020	$	539	$	11
Fiscal 2021		708		13
Fiscal 2022		570		8
Fiscal 2023		418		4
Fiscal 2024		293		3
Fiscal 2025		187		2
Thereafter		378		5
Total future undiscounted lease payments		3,093		46
Less imputed interest		(281)		(5)
Total reported lease liability	$	2,812	$	41

(1)

Lease payments exclude $51 million of legally binding fixed costs for leases signed but not yet commenced, primarily related to operating leases.

In accordance with the prior guidance, ASC 840, Leases, our leases were previously designated as either capital, financing or operating. Previously designated capital leases are now considered finance leases under the new guidance, ASC 842, Leases, while our previously existing financing leases have been derecognized and reclassified as operating leases. The designation of operating leases remains substantially unchanged under the new guidance. The future minimum lease payments by fiscal year as determined prior to the adoption of ASC 842, Leases, under our previously designated capital, financing and operating leases (not including contingent rent) as disclosed in our Annual Report on Form 10-K for the fiscal year ended February 2, 2019, were as follows ($ in millions):



	Capital Leases		Financing Leases		Operating Leases(1)
Fiscal 2020	$	14	$	48	$	700
Fiscal 2021		11		42		648
Fiscal 2022		7		35		513
Fiscal 2023		4		24		371
Fiscal 2024		2		16		253
Thereafter		7		40		476
Total minimum lease payments		45		205	$	2,961
Less amount representing interest		(6)		(24)
Present value of minimum lease payments		39		181
Less current maturities		(12)		(43)
Present value of minimum lease maturities, less current maturities	$	27	$	138

(1)

Operating lease obligations do not include payments to landlords covering real estate taxes and common area maintenance. These charges, if included, would have increased total operating lease obligations by $0.8 billion at February 2, 2019.