Leases

12 Months Ended

Dec. 31, 2019

NOTE 17. Leases

The Company adopted ASU No. 2016-02 and related standards (collectively ASC 842, Leases), which replaced previous lease accounting guidance, on January 1, 2019 using the modified retrospective method of adoption. 3M elected the transition method expedient which allows entities to initially apply the requirements by recognizing a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. As a result of electing this transition method, prior periods have not been restated. Due to the cumulative net impact of adopting ASC 842, the January 1, 2019 balance of retained earnings was increased by $14 million, primarily relating to previously deferred gains from sale-leaseback transactions. In addition, adoption of the new standard resulted in the recording of right of use assets and associated lease liabilities of $0.8 billion each as of January 1, 2019. The Company’s accounting for finance leases (previously called capital leases) remains substantially unchanged. ASC 842 did not have a material impact on 3M’s consolidated income statement. 3M elected the package of practical expedients permitted under the transition guidance within ASC 842, which includes not reassessing lease classification of existing leases. The Company did not elect the hindsight practical expedient.

The components of lease expense are as follows:


	Year ended
(Millions)	December 31, 2019
Operating lease cost	$	308
Finance lease cost:
Amortization of assets		20
Interest on lease liabilities		2
Variable lease cost		93
Total net lease cost	$	423

Short-term lease cost and income related to sub-lease activity is immaterial for the Company.

Supplemental balance sheet information related to leases is as follows:


	Location on Face of		As of:
(Millions unless noted)	Balance Sheet	December 31, 2019
Operating leases:
Operating lease right of use assets	Operating lease right of use assets	$	858

Current operating lease liabilities	Operating lease liabilities – current	$	247
Noncurrent operating lease liabilities	Operating lease liabilities		607
Total operating lease liabilities		$	854

Finance leases:
Property and equipment, at cost	Property, plant and equipment	$	239
Accumulated amortization	Property, plant and equipment (accumulated depreciation)		(102)
Property and equipment, net		$	137

Current obligations of finance leases	Other current liabilities	$	21
Finance leases, net of current obligations	Other liabilities		111
Total finance lease liabilities		$	132

Weighted average remaining lease term (in years):
Operating leases			5.7
Finance leases			9.0
Weighted average discount rate:
Operating leases			3.2	%
Finance leases			3.8	%

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


	Year ended
(Millions)	December 31, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	309
Operating cash flows from finance leases		2
Financing cash flows from finance leases		18

Right of use assets obtained in exchange for lease liabilities:
Operating leases		326
Finance leases		61

In the first quarter of 2019, 3M sold and leased-back certain recently constructed machinery and equipment in return for municipal securities, which in aggregate, were recorded as a finance lease asset and obligation of approximately $9 million. During 2019, the Company sold and leased-back an office location and a manufacturing site resulting in a combined gain of $82 million.

Maturities of lease liabilities were as follows:


	December 31, 2019
(Millions)	Finance Leases		Operating Leases
2020	$	21	$	267
2021		17		191
2022		16		138
2023		15		97
2024		14		65
After 2024		55		173
Total	$	138	$	931
Less: Amounts representing interest		6		77
Present value of future minimum lease payments		132		854
Less: Current obligations		21		247
Long-term obligations	$	111	$	607

As of December 31, 2019, the Company has additional operating lease commitments that have not yet commenced of approximately $23 million. These commitments pertain to 3M’s right of use buildings.

Disclosures related to periods prior to adoption of new lease standard:

Capital and Operating Leases:

Rental expense under operating leases was $393 million in 2018 and $343 million in 2017. Accumulated depreciation for capital leases totaled $54 million as of December 31, 2018. It is 3M’s practice to secure renewal rights for leases, thereby giving 3M the right, but not the obligation, to maintain a presence in a leased facility. 3M has the following primary capital leases:

●

In 2003, 3M recorded a capital lease asset and obligation of approximately 34 million British Pound (GBP), or approximately $43 million at December 31, 2018, exchange rates, for a building in the United Kingdom (with a lease term of 22 years).

●

3M sold and leased-back certain recently constructed machinery and equipment in return for municipal securities, which in aggregate, were recorded as a capital lease asset and obligation of approximately $13 million in 2018 and $13 million in 2017, with an average remaining lease term remaining of 15 years at December 31, 2018.

Minimum lease payments under capital and operating leases with non-cancelable terms in excess of one year as of December 31, 2018, were as follows:



			Operating
(Millions)	Capital Leases		Leases
2019	$	18	$	283
2020		16		208
2021		14		153
2022		12		122
2023		12		92
After 2023		32		253
Total	$	104	$	1,111
Less: Amounts representing interest		12
Present value of future minimum lease payments		92
Less: Current obligations under capital leases		17
Long-term obligations under capital leases	$	75